Can they make money on this house?
September 10, 2012 11:42 AM   Subscribe

Please explain how they're going to make any money on this rehabbed house.

There's a house across the street from me that has sat empty for almost three years now. From what we can determine, the owners just walked-away from it one day.

Finally, beginning around the end of spring this year, a continual procession of contractors and subs have descended upon the house. Once summer came, work really got serious on the place.

Among the obvious work done so-far...
• New roof (tear-off)
• New windows throughout (Anderson vinyl-clad double-hung)
• Tear-off old wood siding, replace with insulated vinyl siding
• New guttering
• Dig a new well (we're all on wells here)
• Gut kitchen
• Break-up and bury in-place large, concrete in-ground pool in backyard!!!

Judging from the debris in the dumpster, they very well may have gutted much more than just the kitchen. The dumpster in on its third fill. There's been a lot of carpentry going on over there.

Still to come, I expect, will be all the finishing work...paint, carpets, kitchen appliances, etc. I have no idea if there was any damage from standing empty over the course of at least two winters (water damage form pipes, etc) There was some broken-out siding and soffiting, which could have allowed water or critter entry, so who knows?

The house itself is approx 2000 sq.ft., single-story, 3-4 bedroom, 2-bath home, built in the mid-70's. Earlier this spring (before all the work started) the house was briefly listed for-sale by some entity that seemed to specialize in repo'ed homes. Before their sign disappeared from the yard, the price had been lowered to about $70,000. For some perspective, my next-door neighbor sold his house (roughly the same size) this summer for $124,000...and his place is impeccably maintained. Move-in ready.

So, I'm trying to work-out in my head how anyone is going to make any money on this house, given 1.) the amount of work going into it, and 2.) The going prices for similar homes in this area. Unless the title-holder has decided to take a bath on the place just to get it off their hands, I can't make the numbers work. It's certainly been fascinating to watch, though.

Can any MeFites with experience in these deals shed some helpful light on this for me? What are the economics of this?
posted by Thorzdad to Home & Garden (22 answers total) 2 users marked this as a favorite
My current landlord did an absurd renovation to the building attached to ours. It had something to do with extracting mortgage money based on the increased value. But he took a bath on that. He inherited these buildings and had no experience in either real estate or construction.

Ultimately, it was a great renovation, sliding glass pocket doors and all, but there is no way it was a profitable investment. The buildings are held in a trust, and doing the renovation allowed him to take an oversight fee, so that was good for him. He was trying to make a rational business decision, but he just didn't have the vision or the ability.
posted by StickyCarpet at 11:52 AM on September 10, 2012

Low income housing credit is my first guess. Also, improvements on rental property can be depreciated (i.e., the whole house, not just the rehab), generally over 27 years, which can change the economics versus occupying the property (you can't depreciate your own home).

Lastly, it could just be a flip, bought for a song.
posted by Admiral Haddock at 11:52 AM on September 10, 2012 [1 favorite]

Maybe the old owners sold it (for super cheap) and it's new owners, not in residence, who are making the upgrades.
posted by c'mon sea legs at 11:52 AM on September 10, 2012 [4 favorites]

Title holder may have taken a bath. Can you look at county records, assuming ownership isn't buried in MERS, that is?

We had a house that did that, was under the impression is was bought by a GC who used his crew to do it on idle time. We got a good roof that way once (kind of accidentally) in like three days 3,000 sq ft... The guy was having a dispute on a job, we found out later, & moved his whole crew to this "little house" while the disputes were worked out.
posted by tilde at 11:53 AM on September 10, 2012

Sounds like a flip. Not as profitable now as they used to be. But say he bought the house for $50k and is doing $50k of renovations. If he sells it for $130k he has made $30k profit.
posted by amro at 11:53 AM on September 10, 2012 [3 favorites]

From what little I know in these cases, having seen this happen three times in my tiny neighborhood, at the end of the day nobody is going to make any money on this. It exists only as a property to be loaned against at worst and an asset to some corporations balance sheet at best.

Treating housing as a commodity instead of a utility is slowly draining what's left of the blood out of the corpse.
posted by Sphinx at 11:57 AM on September 10, 2012

House 35,000; roof 6,000; windows 7,000; siding 15,000; gutters 1,000; drill well (?) 3,000; gut/remodel kitchen 20,000, pool 3,000 misc 10,000=$100,000 or 2,000 square feet rehab at $35.00 sq. ft=$70,000 plus purchase. Please no comments about how my estimates are off as I sitting here speculating on limited experience. Regardless--if the house was bought by one/more of the contractors this seems quite doable an reasonably profitable as labor costs are minimized. Time will tell
posted by rmhsinc at 12:10 PM on September 10, 2012

A few possibilities.

One is that he's getting some kind of volume discount from his contractors, or that he's actually one of them himself. Either would cut down on what it costs to renovate the house.

Another is the possibility of some kind of tax benefit and/or urban development program. Many municipalities have money set aside to encourage people to rehab houses. Mine offers up to $45,000 for qualifying renovations in particular areas. That'd significantly change the profit/loss equation.

There's also the possibility that he acquired the property for a song and thinks he can squeak out a profit here. Distressed properties frequently go for significantly less than their street value, and there are businesses set up which deal with precisely that fact. You know those "We buy houses!" placards you see on telephone poles and the like? It's guys like this. They'll buy your house, as is, for cash pretty much tomorrow, but they're likely to only pay fifty cents on the dollar--or less.

Is the guy going to make $50k on this? Not unless he winds up selling it for north of $150k, which you're suggesting is unlikely. But can he make $10k on this? That's entirely possible. And if he can get in and out of there in less than a year, that's not a terrible return.
posted by valkyryn at 12:12 PM on September 10, 2012 [2 favorites]

Maybe they just want to live there long-term, and some kind of life circumstances prevented them from starting on the renovations until now.
posted by something something at 12:19 PM on September 10, 2012

I'm trying to work-out in my head how anyone is going to make any money on this house

I can see why you'd have trouble figuring out how anyone is going to make any money on that house.

Go back to the point where you concluded money would get made on this house and look at your reasoning there. Hundreds of thousands of people loose money on houses every year.

Why do you think someone is going to make any money on this? You need to add that information to get any meaningful answers as to how.
posted by yohko at 12:21 PM on September 10, 2012 [2 favorites]

Where can you get a 3-4 bedroom house for only 124k? Jesus.

That said, the house may already have been sold for a small amount and the new owners are putting x amount in renovations. I imagine in an economic area where homes go for 124k, labor is cheap, and at auction that house could sell for next to nothing. Say you paid 30k for the house and 50k for the renovations. That's 80k for a 124k house. Not bad.

Oh, and the government has all sorts of programs for this. You can actually get a FHA loan that buys the house for you and also provides x amount for renovation. This allows someone with little to put down to buy a junker, fix it up, and have a nice home.
posted by damn dirty ape at 12:30 PM on September 10, 2012 [1 favorite]

The house may have been purchased for the back taxes. (Perhaps the mortgage holder screwed up or something.)

Combine that with the guy being a GC himself/herself and that's about the only way.

Could be that he's bought it for a family memeber and he's not overly concerned about selling it.
posted by Ruthless Bunny at 12:35 PM on September 10, 2012

Response by poster: Where can you get a 3-4 bedroom house for only 124k? Jesus.
Small mid-size Indiana towns where the manufacturing base dried-up in the 80's and 90's, and no one really wants to move to.
posted by Thorzdad at 12:35 PM on September 10, 2012

... and much of northern OH, PA, and NY. Same reason.
posted by IAmBroom at 1:21 PM on September 10, 2012

the owners just walked-away from it one day

the price had been lowered to about $70,000. For some perspective, my next-door neighbor sold his house (roughly the same size) this summer for $124,000

Okay, having lots of relatives who do flips, I know more about this business than I would like to know.

If the owners did just walk away from it and it sat there for three years, the rehabbers did not pay the last-known asking price of $70k. They may have only paid $50k, or even $40k. Hell, one house down the street from me went to rehabbers for $16k (yes, sixteen) in a $249k neighborhood last summer! The rehabbers have access to different financing than the rest of us (they may even had paid cash), too.

**You can look up how much the rehabbers paid for it, by the way. It's public record.**

Okay, now that you have the price that was paid for the house. Now, if these guys are pros, they can rehab entire houses for very little, say, $26k-50k. They sell it just below the median price for homes in your area but with better amenities (e.g. a whirlpool bath in some if not all bathrooms is just plain standard for rehabs now, and they know that swimming pools decrease home values in most areas).

Subtract the two, and there is the profit.

Now, it doesn't always go as planned. While the house to my south was purchased for $16k and resold for $210k after a rehab, the house to my north was purchased for $80k and sold for $190k, and the rehabber was so bad that he spent over $100k fixing it and thus lost money on what could have been a great deal.

Personally, I helped with a house purchased for $60k and we resold for $209k, and turn around was less than 45 days, to boot!
posted by TinWhistle at 1:49 PM on September 10, 2012

Response by poster: Not meaning to threadsit...
Rummaged around the county assessor's website...The house sold in June to an LLC for $68,500. That coincides with when the major work started on the place.
posted by Thorzdad at 2:01 PM on September 10, 2012

If it's in northern Indiana, when we were looking at homes in this area a year ago you could get wrecks of a home for 30-40K from the banks. They always tried selling them for more first but our Real Estate agent told us we could offer easily half what they were asking and they'd most likely sell. So say they paid 35K plus that again for renovations and then they would be paying wholesale for fixtures and fittings and the like.

We bought an already flipped house in the same area (as I have already renovated 2 houses in my life and that is more than enough). The woman we bought it off had her own contractors that basically worked just for her and they did all the work. All the supplies where bought wholesale, she gave us all the contact info in case we wanted to match door handles, add cabinets or whatever. She had 3 other houses going when we bought ours, so I imagine she gets all sorts of discounts a home handy man would never see and she had a couple of contractors that worked for her pretty much full time saving her money there too.
posted by wwax at 2:04 PM on September 10, 2012

Or you know, they are going to take a bath on it...
posted by JPD at 3:01 PM on September 10, 2012

Well, the business of fllipping has changed significantly since the pre-crisis days. Then, it was sort of amateur hour, financed by NINJA loans and hope, and we all know how that turned out. These days there are people in the flipping business who are experienced, capitalized, and ready to wait. These investors aren't thinking of rental as a way to pay the mortgage until they can sell, they're thinking of cash flow. As noted, if you can depreciate, you're basically looking at a tax deduction against income spread over several years. (And people don't always realize this, but being a landlord is a GREAT way to offset business income. So a paper loss can be ... good.) I wouldn't necessarily jump to conclusions that they don't know what they're doing.

That said, even though they bought the place at about half price for your area, that still seems a little high to me for this strategy, so it's just as likely that you're right and they're preparing the bath salts as we speak.
posted by dhartung at 4:08 PM on September 10, 2012 [2 favorites]

unlevered residential real estate is an absolutely terrible investment. Illiquid, returns basically CPI over time.
posted by JPD at 5:00 PM on September 10, 2012

If it's like the house down the street from my mother's house whose situation sounds similar to your question, it is that the owner died in the house, then it sat fallow while probate was figured out, and then a pipe burst and wrecked everything. So the renovations are being paid for by insurance.
posted by gjc at 5:11 PM on September 10, 2012 [1 favorite]

Oh, I missed the part about this being in Indiana. Just a bit south of me, if your profile is any indication.

One distinct possibility is that the contractor and/or LLC is in over their heads. I've seen several of these deals go pear-shaped.
posted by valkyryn at 9:03 AM on September 11, 2012

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