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Deal Or No Deal? Project Analysis: Green Hills

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Green Hills, TN

I am looking at several deals each week from my brokers, and I feel like the projects I don’t do are as important in my strategy as the ones I decide to do. I would rather be extremely selective and profitable, than do several projects at once that are time-consuming and don’t make as much as 1 or 2 of the “perfect” projects. I drove by this home again the other day, and my heart sunk a little because I really liked it, but couldn’t make the numbers work. Here’s why.

This deal was presented to my partner and me several months ago, though it is still on the market, see here: Valleybrook Road. It was listed under $1m, in a neighborhood where a house on over 1 acre could reach $2m, and it needed renovation – we were off to a good start. This property is on 1.5 acres, so when our broker pulled comps like Lynnwood and Golf Club Lane, I felt like it would be safe to have a sale price of $1.85m.

We toured the inside, and fell in love with the bones: high ceilings with original moldings and fireplaces, updated with the right fixtures would make the perfect Southern-style home. It was well-maintained and had high-end fixtures and finishes for the era, which meant the renovation would be fairly predictable. But, before we got too lost in how amazing the front porch would look with a lacquer black door and beautiful lantern hanging above, I start doing the numbers.

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I have my current budget figures for the mid-century deal that I recently bid out in Nashville prices (versus the California prices I am used to paying). Given the house is a similar size, and would be finished relatively, I know that $300,000 was a good amount to start on the entire renovation. However, I could see by the existing plugs, that an entire electrical system would be needed, and that the serious amount of wallpaper/lead paint that needed to be removed would add significant cost.

Then, we had the outside. It was a huge lot, but most of it was the hill front yard. The backyard would need a garage, a complete reconfiguration, and at least a wading pool and water feature, if not an entire swimming pool. This translates into spending at least $100k on the outside. Here is where we stood:

Proforma

sale price: 1,850,0000
purchase price: 850,000
cost of construction/permits: $430,000
financing
cost at 2 points (of total loan amount): $20,000
annual percentage rate (apr) at 10%, (12 month term): $125,000
buying/selling costs (transaction costs of brokers – calculated at 1% of buy + 5.5% of sale): $100,000
profit: $310,000

A little slim. But, it wasn’t a hard project, so we decided to put in an offer, hoping to settle on $850k. It was brutally rejected (I get the feeling they were insulted…eep). Now it still sits several months later. If it hasn’t sold yet, it means the sellers are unreasonable about the value, and must be sentimentally attached to the house.

Development Takeaway: It’s important to not get emotional about analyzsizng a deal, and look at the numbers. Don’t be afraid to put in a low ball offer. People always balk, but I have had this work in my favor several times, especially if the property is over-priced. Do a thorough analysis before wasting time on putting in an offer.

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