Posted by Killer Joe on March 17, 2006 at 24:18:30:
Here is a perspective that you can use in your evaluations. Call it the human factor as opposed to the mathamatical factor. Try this…
Spend some time driving the streets where your buyers will drive. Park your car at various locations and walk the sidewalks. Shop at the local markets and talk to the local merchants. See who hangs out at the corner liquor store and pay attention to the caliber of the activity as well as the participants. This will tell you a good deal about the neighborhood. If you are uncomfortable dealing with the locals so may your potential buyers. If your plan is to rehab the property to bring it up to standards associated with modern neighborhoods compared to this one, that means you will need to bring in a buyer if one of the locals doesn’t raise their hand for the property.
Are you doing the work yourself? Will it be YOUR tools left on the job when you go home? Will you be able to find a contractor that will leave tools and/or supplies on the premisis? Most contractors price the job including the ‘risk’ factor. So do insurance companies, so should you.
Now let’s add the mathamatical. Materials are the same at the builders supply megastore for $35K houses as they are for $600K houses. Sometimes the cost of fixing a property like the ones you describe can cost more than the expensive house. Do yourself a favor. Find out what the cost per square foot for like kind properties are ‘selling’ for in that neighborhood vs what the cost of the rehab is.
If you’ve arrived at a reasonable ARV, divide that by the sqft. Example: a property sells for $65K and has 800 sqft or $65000/800 sqft= $81.25 per sqft. A second property sells for $575K and has 1100 sqft, or $575000/1100 sqft=$522.73 per sqft. These are extremes, but do you see what I mean? Now, which one of those properties can afford the cost of renovation per square foot IF the ‘new construction’ price is $105 a sqft, AND the cost of ripping all the old stuff out and THEN applying the ‘new constuction’ job costs associated with the rehab. There is no ‘tear out’ in new construction. If you have to play with the bones of the building over and above the cosmetics, your just doing charity work if you exceed the property’s potential.
Bottom line…if you’re comfortable with the neighborhood and the numbers make sense, you have a decision to make. If either of those fails the test then the decision is already made. You spell it NEXT!