Is this rehab. worth it? - Posted by Ben (FL)

Real Estate Investing
#1

Posted by Ben (FL) on January 17, 2001 at 15:31:25:

Sorry for the confusion…unless $10,000 in back payments, fees, etc. are paid, the house is auctioned at the courthouse. I was thinking of getting a loan to pay that off and do the $2,000 in cosmetics to make the house marketable and stop the foreclosure, then do the “subject to.”

And, of course you’re right about the guy (or girl…my attorney-wife has trained me well) buying the $200k house. To this point I have dealt with houses worth no more than $90k so this feels like a different sort of deal, but it’s realy not.
Thanks for your help and input.

#2

Is this rehab. worth it? - Posted by Ben (FL)

Posted by Ben (FL) on January 17, 2001 at 08:13:18:

I have purchased plenty of nice houses and either flipped or sold on Lease/Purchases, but I haven’t tried the rehab/retail flip market yet and could use some advice.

Here are the numbers:

FMV = $190,000
First mortgage balance of $145,000 is in foreclosure. It will take about $10,000 to bring it current and call off the lawyers. Sale date is set for February 7. PITI on the mortgage is around $1200. It needs about $2,000 in painting and cleaning to make it perfect.

I just found a bank that will give me a line of cresit secured by equity in other investment property.

To bring the house current and fix it up would take 12,000, and to hold it for 6 months would take another $7,200. That puts me in for $164,200 with a potential profit of $25,800. What am I missing, and does that sound worth doing?

#3

Re: Is this rehab. worth it? - Posted by JPiper

Posted by JPiper on January 17, 2001 at 10:03:31:

First Ben, just to clarify, around here we wouldn?t call that a ?rehab?. $2000 for some painting and cleaning sounds like a pretty house to me, and therefore really shouldn?t be much different that what you?ve already done.

What I like about what you did was you figured it might take 6 months to sell. I think this was wise on your part. It does take longer to sell retail (for cash) typically, and my perception right now is that things are slowing.

Here?s some considerations that you need to think about:

  1. You have no reflection of ongoing utility costs. Don?t have a clue what these would be in Florida for 6 months.
  2. Yard maintenance? You want this place to be looking sharp?so there?s some type of a cost for that.
  3. Realtor fee. This could be $13,000+?..half of your project profit. Understand something here: Realtors sell by far and away most of the houses that sell for cash. That?s because the MLS is a powerful tool. And Realtors have most of the qualified buyers.
  4. Marketing costs. Without a Realtor you?re going to have things like newspaper ads. You might have that even WITH a Realtor. Here that might cost me $100 per week.
  5. You might have to carry a second to broaden your market, and help the property move quicker. This isn?t strictly speaking a ?cost??.but it?s less money in your pocket. Carrying just 5% of your deal is $10K.
  6. You might have to pay some/all closing costs to do your deal.
  7. This all presumes that you?re numbers are right. Let?s assume for a second that you have to reduce the price 5% to move it?.there went $10K.
  8. Insurance costs? Vacant house insurance is not cheap.
  9. Have you considered title seasoning issues? This can present a problem in the subprime area unless you have a solution for it.

Hopefully you don?t find this list too daunting?.but they?re all things that I would think about. And I think they illustrate that your $25K ?profit? could evaporate rather quickly. That?s because your deal is tighter than you think.

But here?s another possibility. Why not sell this thing on terms for $200K? Now Ben, you said your payment is $1200. If you sell this thing for say $10K down, and finance $190K, your monthly P&I payment is around $1800 at 11% interest. Add taxes and insurance to this. Looks like your cashflow is $600+ per month depending on whether that $1200 payment on the existing loan includes taxes and insurance. If it does, your cash flow is higher by that amount.

Something to think about.

JPiper

#4

Re: Is this rehab. worth it? - Posted by Ben (FL)

Posted by Ben (FL) on January 17, 2001 at 11:50:46:

I was thinking about financing. The exisiting mortgage is a qualifying assumable loan, after all. My one hesitation is this: Are there really that many people that can make that kind of house payment that would not qualify with a bank? I have a hard enough time finding a T/B’er that can pay $900 per month for some of my other houses.

#5

Re: Is this rehab. worth it? - Posted by JPiper

Posted by JPiper on January 17, 2001 at 14:57:57:

OK Ben, now I?m confused. You?re thinking about putting a new loan on the house, and this is where you got the $1200 payment? Or you?re thinking about financing a new buyer? And what does it have to do with anything if the existing loan is a ?qualifying assumable??

First, if your idea was to put a new loan on the house so that you could sell it retail over the course of the next six months??WHY??? Loans cost money Ben?.money that you didn?t reflect in your profit projection?so add that to the list. Why not take the loan over subject to??? Use a land trust to do it. I know you?ve been here at the newsgroup for a while, so I assume you?ve seen the technique mentioned a few times.

As far as your concern over a potential buyer?.I don?t know your market. I don?t know if a house is cheap or expensive at the $190K level in your market. I assume you do. In fact, what you?re proposing to do is sell the house retail?.so evidently you must have reason to believe that it will sell for $190K (you did see comps didn?t you?). Assuming you did see comps, then clearly someone is buying those houses Ben, and can afford a payment higher than $900 per month.

I?m not suggesting that you lease/option the house. I?m suggesting that you use a form of owner financing to SELL the house. 5% down puts $10K back in your pocket. 10% down puts $20K back in our pocket. Something between those numbers is going to put everything you took out of your pocket back into your pocket to get into the house to begin with?..assuming you took the loan over subject to.

But financing $190K with $10K down Ben, at 10% interest the PI payment is $1650. Is there anyone who might want a deal like that??? Can?t tell you Ben?.I don?t know your area. And I wouldn?t suggest that you attempt this UNLESS YOU know your area. But imagine the guy who buys the $200K house for a moment. He has to get a new loan?.it might cost him 10% down PLUS closing costs. Your deal doesn?t have the same closing costs. Granted, your rate is higher?.but maybe to someone self-employed this rate won?t look so high. Subprime loans might be this high, or even higher?.perhaps 11%-12%.

Your call Ben?I?m just showing you another way to do the deal that might make the deal sell a whole lot quicker. Again, I don?t know your market. And by the way, I wouldn?t be getting a new loan to do your deal. I don?t think your deal is good enough to warrant the extra risk exposure or costs.

JPiper