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Project Analysis: Mid-century Modern

Location: Belle Meade, TN

I love the project, but I need to make sure it’s 100% viable.

Broad strokes, it makes sense: $1.2 purchase, $350,000 for construction, sell for $2m? Before I put any money down, I want to get more specific about my analysis. I have ordered a home inspection of the house, to make sure I am aware of all issues that could arise. I will also walk with my contractor to start getting pricing. I have 10 days to sign-off on contingencies, so it is important I make sure there aren’t any major issues with the house that I will have to address/could put us over budget.

I put in an offer for $1m, and am assuming I can get the property for $1,100,000. At this point, I have to guesstimate some figures, based on my previous experience with contractors and lenders. Here is a general Pro-Forma, to make sure I will make enough money to account for the time and risk:

Proforma

sale price: 2,000,0000
–purchase price: 1,100,000
–cost of construction/permits: $300,000
–financing
cost at 3 points (of total loan amount): $40,000
annual percentage rate (apr) at 12%, (9 month term): $120,000
–buying/selling costs (transaction costs of brokers – calculated at 1% of buy + 5.5% of sale): $150,000
profit: $290,000

So, at this point, this is a deal that makes sense to do. I based this on 9 months total project time (from purchase, renovation, and sale) though I think the construction is going to take less than 3 months, and I am hoping selling takes less than 6 months. This is a conservative approach, because there are many circumstances that can arise in development that can cause delays. If it takes less time, my financing cost will be less, and it will be more profitable. However, I have to keep the construction cost to a minimum while still commanding a high sale price. This is the fun, challenging part!

Development Takeaway: Ensure to account for all costs of transaction, finance, and construction when analyzing a deal to ensure you are covered. If it doesn’t make sense taking twice the amount of time you think it will take, I don’t think it is a good idea. It’s important to do a detailed analysis before signing off any contingencies and losing your deposit money.

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