House #4: New Plan

October 29, 2008 · 0 comments

As I mentioned yesterday, The Yellow Stain House is currently in a flood plain, and I have no idea how that will affect resale value and future insurance premiums. I do have enough information to know that the problem is probably not too bad, but it will likely take several weeks to get a land survey engineer to do an evaluation and then hopefully be able to make a recommendation to FEMA to remove either the entire lot, or at least the structure, from the flood plain.

In the meantime, my closing date is next week, and I have a feeling I’ll be unsuccessful at getting the date pushed out without incurring a substantial monetary penalty. That leaves me with essentially two choices: close next week with the issue of the flood plain unresolved or back out of the deal. And given that I have a pretty big earnest money deposit on the property, backing out would be expensive. Oh, and I still think that even with the flood plain issue, this is a very good deal.

The immediate question though is whether I think this is still a great deal as a flip? Or do I think there is a better exit strategy for this property?

I try to ensure that all my acquisitions have multiple exit strategies, just in case “Plan A” backfires or hits a snag. In the case of The Yellow Stain House, there are actually multiple backup strategies, each potential profitable.

Here are a couple of them:

  • Hold the property as a rental. Even with the work that must be done to make this house rent-ready (foundation fix, plumbing fix, roof fix), this property should cash-flow very well. I’ll write another post later in the week with more detail about the rental analysis, but suffice-it-to-say, this is a very viable short-term — and even long-term — option.
  • Sell to another investor. Given the nice discount that I am getting on this property, there is enough equity that I could likely do a couple of the major fixes (foundation and plumbing), and then sell to another investor for a profit. While I think this would likely result in a relatively small return, the effort involved would be small, so it would be a quick profit.
  • Get a renter in-place, then sell to an investor. Another option is to make the rent-ready repairs, get a renter in place, and then sell the property to an investor as a turn-key investment. Assuming we could get a decent monthly rental rate, I think we could likely attract a number of investors who would love this turn-key opportunity.
  • Make minimal repairs, and sell to an owner occupant at a steep discount. While there are some issues that would likely turn off many buyers (flood plain, foundation, etc), if we were to do some minimal rehab to FHA standards (as opposed to the full rehab and basement finishing that we originally planned), stage the property nicely, and then list it well below fair-market-value, we could very likely attract some owner-occupant buyers who would be thrilled to get a very nice property at a great price.

Of course, I’m not sure yet which of these options would be most optimal in terms of ROI; but given the flood plain situation, it seems clear that doing a full flip with only a resale as an exit strategy is not the way to go. So, I’m running various financial scenarios on each of the exit strategies above, and will try to figure out which way seems most profitable. It’s fun to think that I may have my first rental property…we’ll see…

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