Posted by Shell on March 09, 2006 at 10:12:55:
And it will take twice as long to complete as planned
Would the zoning in your area allow modular home?
I left message on your phone
Shell
Thoughts? (long) - Posted by Michael(KCMO)
Posted by Michael(KCMO) on March 09, 2006 at 06:13:59:
Hello all,
I have a HOUSE (not MH) under contract that I thought was going to be a pretty good deal, but now I’m not so sure due to the appraisal coming back a bit less that I had hoped. I wanted to get your input and see what kind of criteria some of you more experienced investors go by.
HERE’S THE BREAKDOWN:
3/2 in a nice, middle class neighborhood in the Kansas City area.
About 1,100 square feet 1st floor (all one level except basement).
About 760 square foot basement including the one car garage.
Lot size is 100’ x 400’ deep - this is an extra large lot for the neighborhood with a huge fenced back yard. That’s part of the appeal, as I have a 4 y/o daughter and it would be great for her to run around in.
Purchase price is $59,500 from bank foreclosure w/ seller(bank) paying $1,000 of closing costs.
Needs a complete gut/rehab including all sheetrock, new kitchen/baths, new plumbing & wiring. Same on exterior - rip off several layers old siding & redo w/ vinyl. Basically, we’re reusing the shell and building a new house from there out.
ARV appraised value just came back at $118,000
I have yet to receive back a bid on the rehab, but initial indications are putting it around $45,000-$50,000.
Given those numbers, there would be approx $10,000 equity more or less.
Ok, if this were strictly an investment I could tell you already that it’s NOT a deal. However, my intention is to live in the home and am wondering how much of a factor that should play. Even if it were strictly an investment, what kind of minumum equity do you guys look for to make it worth your while when you’re doing something like this? Would you guys walk (I’m beginning to lean that direction), or do you think there’s a way to make it work? My initial thinking was that if the numbers would allow about $20,000 equity it would be well worth it for me - especially since I’m planning on living there.
All input and advice is greatly appreciated.
Regards,
Michael(KCMO)
816-665-5408
UPDATE: - Posted by Michael(KCMO)
Posted by Michael(KCMO) on March 10, 2006 at 19:27:24:
First of all, let me extend a heartfelt “Thank you!” for everyone who responded by post, email and/or phone. Everyone’s input and perspectives really helped expand my viewpoint and lead me to a conclusion. Again, thank you.
So now for the update . . . what I’ve decided is that as it currently stands there is not enough equity potential to make the project worthwhile. I’m going to cancel the contract and am prepared to walk away if need be. I will let the bank(seller) know, though, that I’m still very much interested, just not at the same price. It just doesn’t work at those numbers.
I think I knew this in the back of my mind all along, but had already fallen in love w/ the house I was going to end up w/ and was having a hard time walking away from that. Thank you all for helping me get back on track.
Regards,
Michael(KCMO)
P.S.
I will keep you updated if the Seller and I reach a new agreement w/ new numbers. 
Re: Thoughts? (long) - Posted by Chris (WI)
Posted by Chris (WI) on March 10, 2006 at 11:00:25:
I recently passed on a house because it wasn’t a great deal. It was a good deal, but not a great deal. I regret not taking it because it was better than where I am now and it would have been a step up for my family. Either false pride (as a schrewd investor who has to have at least $30K in equity to buy) or just being cheap kept me from doing it. In hindsight, I need to put that baggage aside and do something for my wife and kids and not just my monetary criteria. If the neighborhood is THE neighborhood and wifey REALLY WANTS it, then do it. General the job yourself and get it done before you move in.
Re: Thoughts? (long) - Posted by Sailor
Posted by Sailor on March 09, 2006 at 20:31:32:
Chris had an excellent point about figuring the cost of marriage counseling in your rehab! I have lived through many remodelings & can attest that the 3 most difficult tests of a relationship are (1) boating, (2) teenage angst, & (3) remodeling. It is one thing for a singleton to live among the ruins, but it is H-E-Double Heck on family life.
I also agree that a live-in rehab can cause you to lose perspective on minimum quality standards, & if you upgrade for yourself you could lose all profit. This is a really small house, so your profit potential is already limited. If this is where you want to live for a number of years, it might be an opportunity to nest, but I fear you w/not only quickly outgrow this house, but your costs w/grow as fast as your family. It sounds like you are going to be @ the mercy of contractors instead of doing everything yourself, so it’s going to be difficult to keep a tight rein on expenses.
Post again when you get your estimates, & do put up some pics. I’m a sucker for a house w/good bones. If this is not a done deal yet, get the bank to cover ALL your closing costs. (When I am seller, I like buyers to pay closing costs; as buyer, I like sellers to pay.) Make sure they don’t throw in any garbage fees–banks & auto dealers always add nonsense fees, so cross them off the contract. I just flatly state “I don’t pay this.” Good luck!
Tye
Re: Thoughts? (long) - Posted by Lin (NC)
Posted by Lin (NC) on March 09, 2006 at 14:57:57:
I’ve always bought fixers to live in up until my last house. I made sure it didn’t need anything done to it, and that it was in the nicest neighborhood I could afford, but not the most expensive home in the neighborhood. I haven’t regretted it for a minute.
The neighbors are great, my kids have friends nearby, everything around us is kept up nicely, unless you count the bikes, skates, scooters, and misc. sports equipment all over my lawn. My neighbors know who belongs and who doesn’t, and keep an eye out for problems. Some pretty strict CC&R’s also keep people in check.
My experience with my fixers was not as good. We did the repairs, and cleaned up the place and discovered that while our place was worth $30k more than when we bought it 2 years before, the houses on the “right side” of town or in the more desirable neighborhoods had gone up $45k or more in value. That happened three times. And in the meantime we were living in a less desireable, or convenient, or nice place.
The the only things my current house could use are some updated fixtures (lighting and plumbing - since it was built in 1989 and they look dated) and I’ll replace vinyl with tile and some carpet with hard wood - under $10k in upgrades. I figure with those things done I’ll have increased my equity by $50k in a little over a year. And the beauty is that it’s tax free after 2 years.
I realize that the appreciation in the midwest doesn’t happen the way it does in other areas, but I can also say that it’s SO nice to live in a home that isn’t always nagging at you to finish fixing this and that. Good neighbors are worth their weight in gold, too.
Just another perspective.
Lin
Re: Thoughts? (long) - Posted by Chris Reuman (Maine)
Posted by Chris Reuman (Maine) on March 09, 2006 at 10:54:42:
As Howe Mandel would say, “Deal or No Deal”. In my opinion, NO DEAL. When I look at a total rehab, I want equity of around $30,000. That sounds like a lot, but you can lose $10,000 real quick, then you are down to $20,000. And below $20,000, for all the headaches, is too low. If you think dealing with deadbeat tenants is a pain, wait until you deal with deadbeat contractors. Actually, a lot of them are the same people. A lot of deadbeat tenants are contractors in between jobs. Here is the problem that I have run into, contractors break up into three groups: 1. excellent craftmen that are very expensive and booked for months, 2. poor to average contractors that still charge a lot, they will stack jobs: be doing two or three jobs at once, so you only get them 1-3 days a week. At the end of the day, all of their money goes to child support, alimony, drinking, and other activities. They can do the job, but they seem to come up with more work than they finish. 3. Retired or semi-retired men or women that can do constrution work. They may have renovated their own houses over the years, etc… They can do the work, they cost half of the average guy and they just want to keep busy. They may only want to work 2-3 days a week. Place an ad in your local paper: “Wanted Handyman: Prefer semi-retired or retired, can do carpentry, painting, etc… call Michael”. Now when I talk with them, I ask them what they want to be doing work wise and hours wise. Also, I ask them what they want to make an hour. I will pay a max of $12.50 below the table and $15.00 above. But you may get them for less. Some of them just want to be productive and don’t want to work at Wal-Mart. The key is that they don’t need the money, it just goes to extras. Also, these guys can do everything. Have them do the electrical, plumbing, heating, and then hire a licensed guy to approve the work. If you get quotes for a licensed guy to do these jobs entirely, your expense will be 2-3 times more money. My rough estimate on your total gut rehab is closer to $20-$30k. The one downside of going this path is that it will take longer. You have to be flexible with these guys. I plan on holding a home for 6 months to a year. Now that may seem long, but the extra holding costs, is off set by the much lower construction costs. Also, I am not stress to get the job done. I watch these flip my house shows and everyone is stressed out every day. No Thanks.
Now here is the reason I say “NO DEAL”. As a rehab, rent or flip with rehab costs and carrying cost around $30k, then OK, but you can’t live there. We make money on Lonnie Deals and Rehabs, because we don’t live there. Our rehab costs are to make the place clean, bright, fresh, so we use tinted KILZ $10 a gal., $1 a square laminate flooring, $.35 peel n stick vinyl squares, $1 a sq. carpet. For the entry level couple, the place looks great.
In you situation, you want to live there so you start your project and it is time to put the carpet in: do you pick the $1 a sq commercial carpet or do you go with the $3 a sq plush berber? Do you paint the walls with one coat of tinted KILZ or one coat of primer, two coats nice interior paint like Benjamin Moore - $30 a gal. Because you are living there every item will be doubled or tripled. So now you say, well we can do this and still maybe have $10,000 equity in it. So we should go for it. NO !!! That $10,000 will be completely eaten up in Marriage Counseling, flowers, blood pressure medicine, etc… This isn’t enough money for the stress. Go do a couple of slam dunk Lonnie Deals or Flip year rehab house for $70k and move on. If you do want to go this route, then make sure the house is truely your dream house and its value will appreciate with all the quality rehab you do.
I hope this information helps you. Please give me a call if you have any questions: (207) 350-1037.
Best Investing, Chris
Re: Thoughts? (long) - Posted by osupsycho (OK)
Posted by osupsycho (OK) on March 09, 2006 at 10:32:28:
Michael,
I know where you are coming from as I am in the same boat right now. I am looking for a house (or land home) for me and my family as we have been living with family and it is time to get out (way past time but that is another story).
I keep going back and forth on this issue as well as I would love to get a place that I can somehow make money on and be happy to live there (at least a little while). What I have come up with so far is that we (and when I say “WE” I really mean my wife 
am going to have to give a little on what we really want to get accomplish both goals. The thing I have noticed is that there are some really good homes in my area on the HUD listings but they all seem to be bought up by homeowners (ie before an investor can bid on them). So I am thinking that is one way to go as long as the home meets our minimum criteria. We would live in it till at least the minimum requirement for HUD and then rent it out and move on. This would allow us to get a home now as well as a future profit stream at a lower price (with less competition).
Another route I am contemplating is to go out and do a land home deal from scratch so that I can learn the ins and outs of this more (did one with my family years ago but was only partly involved), while having the financing based off of me living there (in other words easier to qualify). The other advantage of this for me is that I can split off a small portion of the land and set up my business on it so I can get my dealers license (real strict requirements here in OK in which you have to have a lot and sales office).
But I am looking at these places on the basis of future potential (and learning experience) and not equity up front like you are.
I guess my question to you is why are you concerned with the amount of equity you have in this house at the beginning? As I have heard somewhere before, you can’t eat an equity sandwich and you won’t be able to cash it out for a little while (even if it is a good idea which it may not be). Is it just because you feel you need to get a “good deal” on it? I only ask this because I catch myself thinking this when I try and buy a car (being a former car salesman) and sometimes I end up not getting what is best for me and my family because I have to have a “good deal”.
Just my thoughts on the matter and I would love to hear from some others,
Jad
Re: Thoughts? (long) - Posted by Tony Colella
Posted by Tony Colella on March 09, 2006 at 09:16:13:
Typically when we buy a home to live in (even as investors) we have to pay closer to retail to get what we want.
This is a reversal from the investor creed of “Find motivated seller’s not houses.” When buying to live in, we are typically buying the house, which in turn leads us to prices closer to retail. We can still use our negotiating experience to help the deal but let’s face it, if we don’t want to walk away, our ability to negotiate is deminished.
But if you want to decide if this deal is an “investment” vs. a “equity gain/ speculation” type deal then figure out how it would cash flow if you rented the property. Use our little income analysis sheet with this home. It will tell you if this is an investment or speculation. No problem either way if you really want to live there. It’s just best to be honest with yourself.
If you find you don’t really WANT to live there but were doing so to make the deal work then you may want to run the numbers, sleep on it and then decide.
Tony
Re: Thoughts? (long) - Posted by Anne_LLC
Posted by Anne_LLC on March 09, 2006 at 07:02:12:
Hi Michael,
I have done a total rehab- reusing the shell.
Depending on the age of the home, why not bulldoze and build new? I should have done that on my total rehab. In my experience, when you do a total gut, whatever the estimate for work was from your contractor, DOUBLE IT. Alot of the extra expense will be holding costs.
It sounds like the lot is what you like. The house is pretty small. Put a brand new house for what? $120K? Just be sure it’s not the biggest house in the neighborhood.
Just a thought…
Anne