This week I got a call from an agent to go look at a potential deal. It was a 5-bedroom/ 3-bath house with over 3,000 square feet located in a very desirable area priced at only $100,000. When you see deals like that, you stop what you are doing and get to the house as soon as humanly possible.
It wasn’t hard to spot which house I was going to when I turned into the neighborhood. It was the only one with high grass, dilapidated mailbox and a random tire in the driveway inches from the road.
Ya’ll, this house was rough.
The property had been through a pretty severe fire. You could see from the outside where the decking on the roof had burned and fallen through, leaving what remained of the rafters hanging in a large portion of the roof.
Now, I’m pretty comfortable with walking around areas and checking out structures. As a matter of fact, I’ve inspected many burnouts in the past. But after poking my head in, I didn’t feel confident going any further on this one.
My first question to my real estate agent concerned what the property would sale for fixed up? She felt it would bring $200,000.
With this one being as bad as it was, we may have to tear the whole thing down and rebuild it. With that scenario in mind, I told her we would really just be purchasing the lot. She agreed and said neighborhood lots were going for $35,000.
When formulating your offer, you have to take lots of variables into consideration. Remember that this house had been listed for $100,000. If it did sale for $200,000, after paying selling commission and closing costs, we would have been left with a net $180,000. If we purchased it for $100,000, that means we’d have $80,000 left to rehab a 3,000-square-foot, badly damaged house and make a profit.
I’ll go ahead and tell you that the rehab would be more than $80,000 on this one if we could even keep the shell.
Even if we just bought it for the lot, we can’t compare prices with new neighborhood lots because they’re clean and ready to go. On this one, we’d have to tear down the house, clean up the area and then start. Those costs have to be deducted when trying to compare it to a new lot.
At the end of the day, our offer was going to be somewhere around $20,000. The seller wouldn’t even consider it.
Why is that?
I think it’s because people have gotten accustomed to looking at only one side of the equation in our appreciating market. They see what houses are selling for, and they’re either overvaluing what they have, underestimating the cost of rehab, or forgetting that flippers need to make a profit worth the risk of purchasing the houses.
But because so many people are “looking to get into real estate,” everyone seems to be an authority.
Take this other listing I saw yesterday. It was a 2/1, 1,200-square-foot house situated on .41 acres and was built in 1935. That is an 85-year-old house. Looking at it another way, this house has been standing for almost a century.
It has no floor coverings, no HAVC, and a fuse panel. In other words, this one is going to need a ton of work.
The agent’s remarks were interesting to me. They said that it was a fixer upper that was “priced right” at $75,000. Well… if it were fixed up, it would sale for around $110,000. After paying selling commission and closing costs, you’d be left with a net $99,000. That means you’d have $24,000 to install HVAC, update the panel and then do a cosmetic rehab.
Considering all that, where is the profit? It’s not there.
One of the last agent remarks said, “… another added value tip, add another bath.”
Sure, adding another bath would increase the sales price. But on this house, the increase in value would just cover the cost of the new bath. In other words, you’d make no money doing it (which is called working for free.)
It seems to me that these listings are only taking into account one side of the equation, meaning these houses will probably sit for a long time. Or an inexperienced person will get in trouble after they purchase them. As you are making your offers, make sure you see both sides of the equation so that you get paid for not only doing the work, but for taking all the risk, as well.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.
Love this article! I think every person “looking to get into real estate” should read this! And then re-read it before submitting any offers. 🙂