Greenhorn has question about possible deal... - Posted by Harley E. Dufek

Posted by GL(ON) on April 04, 2002 at 14:43:27:

I don’t believe in putting more into a property than I can get out.
Adding rooms and major work of that kind doesn’t pay as a rule. Speaking
of rules, mine is that if I spend a dollar I want to add $2 to the value
of the property. In other words if it adds $40,000 it has to cost
$20,000 or less. That is if I hire it done. If I do the work it has to
cost $10,000 or less. That is, $4 for each $1 spent. I’m not in business
for my health or to keep real estate salesmen happy.

I would look at the deal like this:

A) Value of house, fixed up = ???

B) I can afford to spend 70% of A

C) My cost = B - fixup cost.

D) I can afford to pay the owner C.

If I pay C then spend money on fixup cost the total of the two,
(purchase price + fixup cost),should equal no more than B which is 70% of FMV.

In your case you have the extra complication of the double lot. How much
does that add to the value? Around here surprisingly little. If a vacant
lot is worth $65,000 a house with a double lot would only cost $10,000
or $20,000 more than the same house on a single lot.

I don’t mind paying the going rate if I have to but I won’t pay more.
In fact I prefer to buy at a discount. If he wants more let him get the
severance. See also rule B above, don’t pay more than 70% of market
value. If you can get $65000 for the lot make sure you don’t have more
than $45500 in it including legal fees, severance, deed, selling cost ,
and carrying costs.

I hope this helps. I have gone into the details to show you how to
figure it out for yourself. Notice that there are 2 different rules, one is not to have more than 70% of FMV tied up in a property, the other is not to spend over half as much on fix up as what it adds to the property. If it won’t pay you to do the fix up, discount the price and sell it as is. Once you understand that, you can apply it
to any property.

Greenhorn has question about possible deal… - Posted by Harley E. Dufek

Posted by Harley E. Dufek on April 03, 2002 at 22:15:36:

Hello all,

I have never done any real estate deals before other than buying my own house and turning the basement into a mother-in-law apartment. I have however done a lot of research and I feel have set myself up with good contacts and such.

Given that, here is the deal:

Seller is a real estate investor who is moving to the east coast and wants to to get rid of some properties. One of which I have first hand info on before it hit the market via my real estate/boker friend who is very savy. Seller is willing to do a 20% carry back and I can get the property for 0 down. Seller wants $160,000. The property is a single family home set on a double lot. The idea is to split the lot and sell the vacant one for about $85,000. The existing house needs a new foundation (the current one is a block foundation which is about half exposed and has cracks in it). The foundation is estimated to cost about $10,000 and it will cost about $5,000 for the lot survey. The interior of the house is a 2 bed 1 bath which was remodeled. Additionally one could put in two more bedrooms and a bath downstairs and possibly sell for $220,000. The house is located in a good neighborhood with currently two new houses being built and most all the others nicely remodeled. I have spoken with the city about splitting the lot and if they give the OK I think I will do it as is seems I could walk away with about $100,000.

Any feedback would be greatly appreciated!! Thanks


Re: Greenhorn has question about possible deal… - Posted by GL(ON)

Posted by GL(ON) on April 04, 2002 at 07:46:22:

I see some possible pitfalls. If it is so easy to sever the lot why hasn’t the investor already done it? Make sure you can get the severance before you count on it.

A double lot does not add much to the value of a house. Maybe $10,000 or $20,000 tops.

Forget about putting in extra bedrooms and bathrooms, it won’t pay you to do it.

What is the house worth in top shape? How much will it cost to put it in shape? Get prices from contractors, don’t trust anyone else’s estimates.

Take the FMV, deduct the cost of repairs, and that is the value of the place as it sits. Don’t pay more than 70% of that amount.

Re: Greenhorn has question about possible deal… - Posted by Harley Dufek

Posted by Harley Dufek on April 04, 2002 at 12:16:51:

Thank you for responding to my question!

I am currently finding out from the city if I can split the lot (short plot). If there are any problems with that I walk…just that simple. As far as why the investor did not do this himself, I don’t know, but I do know he is a master carpenter and remodled the inside and may have spent his time doing that while he had it. Also he is renting it currently so may be it wasn’t a pressing issue. I did find out however it is not really “easy” to split a lot, it can take several months and about $5,000 with a lot of paper work to do.

I agree with not putting in bedrooms and bathrooms to increase value. That was a suggestion by my real estate agent (who I have known and trust). Again I agree with you but I really don’t know “why” I agree with you. Could you explain your position on this?
I am assuming you believe the return on the investment just isn’t there. My agent told me he could sell that house with it fixed up for $220,000 if I added one bathroom and two bedrooms in the basement. I guess like you said I would really have to get esitmates done.

As far as how it sits verses fixed up I guess this is how I look at it (but will have to verify with contractor of course).

Price of house: $160,000
Cost to split lot: $5,000
Net earned on sale of lot: $65,000
Cost of repair:
New Basement(Foundation): $10,000
New Roof: $5,000
New Siding: $5,000
FMV of remodled house: $180,000 (this is my esimate I really don’t know, it could be a little higher)
Or I could just rent it.
Now this is where the agent told me to add the bedrooms and bathroom and then up the price by $40,000.

Any comments please! thanks you. Harley