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The Start Of a Rehab Project

Several years ago a guy and his wife walked through an open house I held for a property we’d developed and were working on selling.  The house was an open loft-like home with a green roof.   It was really cool, and they liked it.  At the time it wasn’t right for them, but we exchanged numbers and stayed in touch.  

About a year after that Franco asked me to work with one of his classes at Drexel, where he teaches.  I was happy to do so, and enjoyed the process very much.  In the class, we worked with students to identify various “green” measures (everything from insulation to flooring) and evaluate and model what mattered.  It was a daunting task in many ways - most of the experts in the field aren’t really very good at this yet. 

During that class, where I probably learned more than anyone, Franco and I started thinking and talking more-and-more about doing a house for he and his wife Sharon and their two kids.  I had never worked with a client before, having done more speculative development projects where I called all the shots (for better and, at times, way worse).  The idea of a design-build project appealed to me, especially for clients as cool and receptive to sustainable design ideas as Franco and Sharon.  The timing wasn’t quite right, but we both agreed that when the time was appropriate, we would work on this together.

Fast-forward to about 6 months ago, and we re-initiated the talks again, but this time more seriously.  We discussed everything from new construction to “container houses” to rehabs.  We discussed areas of the city, costs, how to get construction financing, contractors, real estate agents … you-name-it, we discussed it.  And all for good reason.  Though not doing it speculatively, we were undertaking a development project.  To do a project right, there are many, many variables that have to be considered.  We considered them.  

After a false start or two (an initial offer on a rehab house fell through), they made an offer on a home on S. 13th street, in Philadelphia, near Passyunk.  It’s a great, tree-lined street with lots of parks nearby, close to the subway on Broad Street, and with lots of hip new restaurants opening up in the area.  

The house is a 3-story home in need of fairly serious rehab.  Over the course of the past 60 days or so, I have worked with Franco and Sharon to first imagine the completed home, and then price its development (both labor and specs), and then re-imagine and re-price it a time or four as we worked through a very laborious construction loan process, called a 203k loan.  The 203k aspect of this project probably requires a post or 7 all to itself, but let’s just say that it was a challenge for all involved.  Ultimately though, they closed on the home yesterday.  

The design plan isn’t quite as grand as once imagined and our nerves are a bit more frayed than we’d like, but I just received a text message from our contractor that he has a demo permit in hand.  Work will, at last, begin in the morning to first deconstruct, and then reconstruct, this home from its current state into something we all can be proud of. 

For the next several months I will continue working with Franco and Sharon and Paul (the contractor) to manage this project and various design elements (with significant assistance from an architect).  Developing a property is a constant juggling act of finances, design, sustainability, timelines, and other restraints.  The end product must touch on each of these (and several other things, too) to be successful. A great-looking house that is too expensive:  failure.  A bad looking house that is affordable: failure.  For it to work, all of these various parts must be the best they can be within the context of the overall limitations (budget, scale, etc.).  That’s not easy to do, but getting the most you can out of whatever limitations you face is the challenge, whether a project be a rehab of a home or a new office building.  

The Trouble With Sellers

Man, this is frustrating.  With the very positive exception of a likely client (more info to follow soon I hope), getting deals done right now is tough.  The trouble continues to be three-fold.  First are the sellers.  Second are lenders (still).  Third are buyers, including me.  This post is about the sellers, I’ll post on the other two this week.

Most sellers continue to have unrealistically high ideas of the value of their land / home. Recently I made an offer on a lot on the Island and inquired on another.  In both cases the property has been available off-and-on for several years. Both are very challenging properties that offer limited appeal to buyers.  Realistically both properties are very unlikely to be purchased by anyone but an investor / developer.  For similar dollars there are plenty of other options on the market that have greater appeal to your typical vacation home buyer.  Most sellers fail to recognize this reality and price their investment home / land as if it is likely to be purchased for move-in value.  If they discount it at all, it’s $50,000 or so.  They are missing the boat.  

For an investor or developer to want to do a project and take on the risk (especially in this market), there has to be upside.  Take a lot where you hope to sell a finished home, upon completion, for $850,000.  Less the cost of sales of 6% your net sale is instantly $800,000.  Subtract $300,000 for construction costs (these are humble) and you’re at $500,000.  To a developer or investor, paying more than $350,000 on the initial acquisition gets risky.  Paying close to or more than $400,000 just doesn’t make sense.  Is this greedy?  I don’t think it is.  

In the scenario I just laid out the developer (buying for say $375,000) would be all in for $675,000 or so - add soft costs and you’re realistically going to have an investment of $700,000 or so on a home you hope to sell for $850,000 and make $100,000 on (don’t forget about the $50k cost of sales mentioned above).  

In this scenario if everything goes well you’ve made about 15% on your investment ($100k / $700k).  The truth is, for the level of risk involved in real estate right now, that’s not great.  It is at the low end of what a developer is willing to consider, and it makes you think two or three times more than you’d like to.  Sure, $100k is no small amount of money, but is it possible you end up selling for $775,000 - you bet it is. Adios profit.  

I don’t expect any seller to care.   I really don’t.  If they can get $550,000 for their knock-down home or lot, good for them.  Really.  But the thing is, they can’t.  When a property has been on the market for years with $5,000 price reductions and it hasn’t sold, it is time to re-evaluate things.  If the seller actually wants to sell the property, they need to realize who the buyers are (in this case, investors / developers) and how they value things.  Without motivation there are no deals made.  Right now, with some limited exceptions, it seems that many sellers, and the Realtors that represent them, still aren’t seeing the actual value in their development-type properties. 

If you’re a seller of a development type property (undesirable house or vacant land) and you actually want to sell your property, you need to understand the way people like me evaluate these things.  If, after doing that, the real value of the land isn’t enough to motivate you to sell, then don’t. Take it off the market.  Wait it out.  If, on the other hand, the real value of the property is enough to motivate you, then market it at the price and get it done.  

The Start Of a Rehab Project

Several years ago a guy and his wife walked through an open house I held for a property we’d developed and were working on selling.  The house was an open loft-like home with a green roof.   It was really cool, and they liked it.  At the time it wasn’t right for them, but we exchanged numbers and stayed in touch.  

About a year after that Franco asked me to work with one of his classes at Drexel, where he teaches.  I was happy to do so, and enjoyed the process very much.  In the class, we worked with students to identify various “green” measures (everything from insulation to flooring) and evaluate and model what mattered.  It was a daunting task in many ways - most of the experts in the field aren’t really very good at this yet. 

During that class, where I probably learned more than anyone, Franco and I started thinking and talking more-and-more about doing a house for he and his wife Sharon and their two kids.  I had never worked with a client before, having done more speculative development projects where I called all the shots (for better and, at times, way worse).  The idea of a design-build project appealed to me, especially for clients as cool and receptive to sustainable design ideas as Franco and Sharon.  The timing wasn’t quite right, but we both agreed that when the time was appropriate, we would work on this together.

Fast-forward to about 6 months ago, and we re-initiated the talks again, but this time more seriously.  We discussed everything from new construction to “container houses” to rehabs.  We discussed areas of the city, costs, how to get construction financing, contractors, real estate agents … you-name-it, we discussed it.  And all for good reason.  Though not doing it speculatively, we were undertaking a development project.  To do a project right, there are many, many variables that have to be considered.  We considered them.  

After a false start or two (an initial offer on a rehab house fell through), they made an offer on a home on S. 13th street, in Philadelphia, near Passyunk.  It’s a great, tree-lined street with lots of parks nearby, close to the subway on Broad Street, and with lots of hip new restaurants opening up in the area.  

The house is a 3-story home in need of fairly serious rehab.  Over the course of the past 60 days or so, I have worked with Franco and Sharon to first imagine the completed home, and then price its development (both labor and specs), and then re-imagine and re-price it a time or four as we worked through a very laborious construction loan process, called a 203k loan.  The 203k aspect of this project probably requires a post or 7 all to itself, but let’s just say that it was a challenge for all involved.  Ultimately though, they closed on the home yesterday.  

The design plan isn’t quite as grand as once imagined and our nerves are a bit more frayed than we’d like, but I just received a text message from our contractor that he has a demo permit in hand.  Work will, at last, begin in the morning to first deconstruct, and then reconstruct, this home from its current state into something we all can be proud of. 

For the next several months I will continue working with Franco and Sharon and Paul (the contractor) to manage this project and various design elements (with significant assistance from an architect).  Developing a property is a constant juggling act of finances, design, sustainability, timelines, and other restraints.  The end product must touch on each of these (and several other things, too) to be successful. A great-looking house that is too expensive:  failure.  A bad looking house that is affordable: failure.  For it to work, all of these various parts must be the best they can be within the context of the overall limitations (budget, scale, etc.).  That’s not easy to do, but getting the most you can out of whatever limitations you face is the challenge, whether a project be a rehab of a home or a new office building.  

The Trouble With Sellers

Man, this is frustrating.  With the very positive exception of a likely client (more info to follow soon I hope), getting deals done right now is tough.  The trouble continues to be three-fold.  First are the sellers.  Second are lenders (still).  Third are buyers, including me.  This post is about the sellers, I’ll post on the other two this week.

Most sellers continue to have unrealistically high ideas of the value of their land / home. Recently I made an offer on a lot on the Island and inquired on another.  In both cases the property has been available off-and-on for several years. Both are very challenging properties that offer limited appeal to buyers.  Realistically both properties are very unlikely to be purchased by anyone but an investor / developer.  For similar dollars there are plenty of other options on the market that have greater appeal to your typical vacation home buyer.  Most sellers fail to recognize this reality and price their investment home / land as if it is likely to be purchased for move-in value.  If they discount it at all, it’s $50,000 or so.  They are missing the boat.  

For an investor or developer to want to do a project and take on the risk (especially in this market), there has to be upside.  Take a lot where you hope to sell a finished home, upon completion, for $850,000.  Less the cost of sales of 6% your net sale is instantly $800,000.  Subtract $300,000 for construction costs (these are humble) and you’re at $500,000.  To a developer or investor, paying more than $350,000 on the initial acquisition gets risky.  Paying close to or more than $400,000 just doesn’t make sense.  Is this greedy?  I don’t think it is.  

In the scenario I just laid out the developer (buying for say $375,000) would be all in for $675,000 or so - add soft costs and you’re realistically going to have an investment of $700,000 or so on a home you hope to sell for $850,000 and make $100,000 on (don’t forget about the $50k cost of sales mentioned above).  

In this scenario if everything goes well you’ve made about 15% on your investment ($100k / $700k).  The truth is, for the level of risk involved in real estate right now, that’s not great.  It is at the low end of what a developer is willing to consider, and it makes you think two or three times more than you’d like to.  Sure, $100k is no small amount of money, but is it possible you end up selling for $775,000 - you bet it is. Adios profit.  

I don’t expect any seller to care.   I really don’t.  If they can get $550,000 for their knock-down home or lot, good for them.  Really.  But the thing is, they can’t.  When a property has been on the market for years with $5,000 price reductions and it hasn’t sold, it is time to re-evaluate things.  If the seller actually wants to sell the property, they need to realize who the buyers are (in this case, investors / developers) and how they value things.  Without motivation there are no deals made.  Right now, with some limited exceptions, it seems that many sellers, and the Realtors that represent them, still aren’t seeing the actual value in their development-type properties. 

If you’re a seller of a development type property (undesirable house or vacant land) and you actually want to sell your property, you need to understand the way people like me evaluate these things.  If, after doing that, the real value of the land isn’t enough to motivate you to sell, then don’t. Take it off the market.  Wait it out.  If, on the other hand, the real value of the property is enough to motivate you, then market it at the price and get it done.  

The Start Of a Rehab Project
The Trouble With Sellers

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