The following was written by Abhi Golhar, Managing Partner at Summit & Crowne Partners, an Atlanta-based real estate investment firm. Since 2003, Abhi has used a “value-added” approach to capitalize on real estate renovation, new construction, and development opportunities in the Midwest and Southeast United States. He actively educates and works with seasoned debt and equity investors to employ market-driven investment strategies that yield success. Abhi holds a BS in Electrical Engineering from the University of Michigan. You may find him tweeting @AbhiGolhar and delivering value to investors on #RealEstateDealTalk on YouTube and Periscope.*
Hi Real Estate Friends,
In this article, my objective is to offer a quick perspective on property analysis so you can make better decisions with your capital, time, and energy.
Earlier this year, a wholesaler sent me a text with an address to a property and suggested that it may be of interest to me:
From this message, the wholesaler is telling me the purchase price is $220,000, comparables in the neighborhood are supporting a value of $550,000 or greater, and the home across the street is currently on the market for $599,000.
Tempted to buy this deal? Let’s find out what the research says…
A quick note: this three-step process is exactly how my team and I determine to either complete the project ourselves, joint-venture with another real estate investor or lend capital for the project. Our definition for a high yield flip is for rehabs: net $50,000. For new construction, net $100,000+. These numbers will vary for everyone.
Step 1: Assess the neighborhood/market conditions
I asked my agent to run a search for me on the MLS, and this is the initial data that I received (the white bubble in the middle is the location of the subject property):
Here’s what you are looking at: the green bubbles represent homes on the market currently, the orange bubbles represent homes pending a sale, and the red bubbles represent homes that have sold.
What do you notice immediately? There are more homes that are pending a sale or that have sold than homes currently on the market. And for a real estate investor, that is a powerful piece of actionable information and also something that lenders love to hear.
Next, the wholesaler tells me that the home has 3 bedrooms, 1 bathroom, and is 1,050 square feet. I immediately think: “Alright, I’m either going to expand the footprint of the home to increase its size, or tear it down and build a new home.”
So let’s find proof in the market where 1) renovating and expanding the home, or 2) building a new home is a winning opportunity:
196 Warren Street NE, Atlanta, GA 30317 SOLD March 2015 for $350,000.
This home has 3 bedrooms, 2 bathrooms and a footprint of 1,512 square feet.
229 Locust Street, Atlanta, GA 30317 SOLD December 2014 for $375,000.
This home has 3 bedrooms, 2.5 bathrooms and a footprint of 1,732 square feet.
190 Locust Street NE, Atlanta, GA 30317 SOLD May 2015 for $454,000.
It is a newly built 4 bedroom, 3 bathroom home with a footprint of 2,220 square feet.
120 Warren Street NE, Atlanta, GA 30317 SOLD for $354,900 in April 2015.
The home has 4 bedrooms, 2 bathrooms with a footprint of 1,880 square feet.
210 Warren Street NE, Atlanta, GA 30317 SOLD June 2015 for $590,000. The newly built home has 4 bedrooms, 3 bathrooms, and 2,950 square feet.
Step 2: Determine cost to renovate or build new
Now that we have identified homes to use as a benchmark for our subject property, the next step is to identify the cost associated with each option: 1) renovate and expand, or 2) tear-down and build new.
Here are my two cents about this: it’s very important to view each property in-person. This helps to determine exactly what repairs must be completed and make sure to take your contractor along to the viewing. Remember that the price per square foot to renovate or build a new home will vary from neighborhood to neighborhood and can also vary from contractor to contractor.
Don’t have a contractor you can trust and is reliable? Attend your community real estate networking events and ask around. I’m confident you’ll find some names you can call on immediately.
Step 3: Determine the cost of debt or equity
Let’s take the case of deciding to build a new home for this deal. I’ve outlined two lender scenarios for you to review:
1. The first scenario (picture below) is a basic debt model that illustrates 20 percent down, 4 percent closing costs, and 14 percent interest.
2. The second scenario (picture below) is a basic equity model that illustrates leveraging an equity partner and splitting net profits equally.
Scenario 1: Debt Model for New Construction
Scenario 2: 50 Percent Equity Partner for New Construction
Keep in mind that in each scenario, I assumed the following: 1) a cost of $85.00 per square foot to build a home that is 2,400 square feet, 2) the project will take 12 months from purchase to sale, and 3) the home will sell for $600,000.
Choose your own adventure.
*Abhi Golhar and Summit & Crowne Partners are not affiliated with Equity Trust Company or its affiliates. The information provided in this article is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and financial professionals.