Sometimes After You Run the Numbers, You Need to Run Away
Insight Doing Business

Sometimes After You Run the Numbers, You Need to Run Away From the Deal

First Looks Deceiving

There are times when you think you’ve hit on a great deal, only to discover the numbers just don’t add up.

In Episode 18 of “Real Estate Deal Talk,” I’ll show you a good example.

I’m absolutely not excited about the outcome of our work and our calculations, but I am excited to share this with you, if it helps you avoid making some big mistake in the future.

The MLS lists this address as being under contract (by us), but we are going to terminate the contract because the numbers just don’t make any sense. We are losing money on this deal.

First looks can be deceiving

At first glance, it looks like it could be a good deal. Our acquisition price on it is $145,000. And the lot is pretty big, but we going to have to develop it, which means, at minimum, cutting down some trees.

We were doing some research and it looks like the homes across the street here are in exceptional condition. They are new construction—north of 3,000 square feet, a number that is going to come in handy when we start calculating some of these new-build numbers. So, they’re 3,000-square-foot homes, three-sided, potentially four-sided brick on the basement.

They look gorgeous, which is good for the neighborhood but a problem for us because that means our build cost is going to be sky-high. We are going to have to dig out a basement, bring in a bulldozer, move all this dirt, level the lot and regrade a little bit. It’s kind of flat so that helps.

Now, the numbers:

Overall, $145,000 acquisition, Development costs are going to be astronomical—probably $30,000 to $35,000.  So we are looking right about $175,000 to $180,000.  Here is where it gets a little hairy: We’re looking at 3,000 square feet, minimum.  Let’s assume $100 a square foot to build, because you want some nice finishes in order to hit that $600,000 ARV.  So now we are looking at $300,000 for building on top of the $180,000 for acquisition and development.  That puts us in at maybe $480,000. And I am thinking we probably need to add some contingency in there, so $500,000.

If you are using a traditional hard money lender, you are looking at about 15 percent interest on the entire amount, unless you can find a lender that will charge incremental interest as you use it, but there aren’t a whole lot of those. So we’re looking at maybe $540,000-$550,000 all-in with interest. If we’re selling it at $600,000, we can take 8 percent right off that for real estate commissions and closing costs. So you are looking at close to nothing in profit. That’s really what it comes down to.

On our smaller renovations, we want to net $50,000, and on our new constructions, we want to net $100,000. These are minimum numbers that make sense for us. So to raise this kind of capital, to take on that that debt, to build something of the caliber of what’s across the street at a minimum of 3,000 square feet is definitely tough.

So in your real estate digging, have fun, invest properly, and be smart.