I just looked this property up and the story gets worse in some ways. Apparently, the bank is into the property for $487k, so even if they sell at $390k they’re taking a loss of $100k.
The property does back to a canyon, so it would have some view, but everything else looks rough. It’s not a shell – the pics in the MLS listing show what appears to be the original kitchen.
I looked up sales from the last 4 months and they range from a low of about $420k (another bank-owned foreclosure) to $550k for the fabulous remodel with canyon location and very nice landscaping. I reckon our subject would require a solid $75k+ in hard costs to equal this one. There are a bunch of sales in the $460k ranges, so with the canyon view let’s call it an even $500k if refurbished to average condition at minimal expense.
At $500k we’re talking about replacing the dated 1959 kitchen and bathrooms with very average quality Home Depot replacement fixtures and appliances. Some minor drywall and celing repairs (at least) and possibly a new roof or some exterior repair – one or the other but not both. All new paint and average quality flooring, and a little landscaping, particularly in the rear. You might be able to get all this done for $35k in hard costs, although $50k could easily happen. Let’s split the difference and call it $40k in hard costs.
So the cost to cure is $40k; the costs of sale at $500k would be $20k if at 4%; the property tax payment that’s due in April would be $3,450 because it would be based on the prior sale price at $575k; and figure another $400 for insurance. If the property was financed with a construction loan to do the remodel (non-owner occupancy) we’re looking at probably a $300k loan with construction loan terms, so that would equal $2,200/month even if it was interest-only; and we can figure at least 30 days to complete the remodel and another 5 months to sell and close the property – that’s 6 months, or $13,300 by my reckoning.
So without considering any profit, here’s what a potential flipper is looking at: $40k (rehab) + $20k (cost of sale) + $3.5k (Tax/Ins)+ $13.3k in holding costs. All that adds up to $76,800.
But wait, there’s more: We’re in a declining market and we could easily be looking at another 3% (~$15,000 from $500k) decline over the next 6 months; and the above costs include no contingency for unforeseen expenses (~$6,000 at 15% of costs) that commonly occur with remodels. So that’s another $21,000 in addition to the $76.8k. So now we’re at $97,000 in combined costs. Our investor has already sunk $90,000 in down payment, has spent 30 days physically putting the house together and has sweated the declining market for another 5 months before closing. You KNOW an investor isn’t going to go through all this without a payday, and considering all the risk and effort and costs and lack of liquidity of their own down payment, you KNOW that payday has to be at least $50k to make this worth their while.
Bottom line here is that if anyone buys this property for less than $350k they’re either taking some big risks or… well, there is no “or”.
