Option to purchase?

Question

Well aside from my initial introduction post I figured I would lay out the plan I have for my first deal.
What im looking for is outside educated opinions, possibilities, and options I might have but not see.

Here goes...

I found a house needing rehab in a decent working class/military neighborhood.. houses in the neighborhood of comparable SF, Beds and baths where selling for 90K 3 years ago.. The house is empty and not on the market. So I went to the PVA office and contacted the owner, fed up with renters and two failed "contract for deed" sales, he's just been letting it sit. (it was inherited and the guys too lazy to drive 2 hours to deal with it) The PVA assessed the house at 115k prior to my inquiry. So blindly I asked the guy what he'd take for it, Explaining the extent of the work I would have to do to make it salable. His asking price = 80K. Being as that I am 22, have a small mound of debt, and minimal working capital, I made a creative offer. I asked If he would take 85K in 1 year. within the next year I would pay him $100 a month to take care of property taxes, I would install new floors, repair drywall, paint in and out, new appliances and light fixtures throughout, new windows and build a custom deck, all at my expense.
(LOWES AND HOME DEPOT 12 MONTHS SAME AS CASH)

And in 1 year, subject to me being able to get financing I would pay him 85K, for a total of 86.2K... 6.2K more than his asking price just for waiting. And If I couldnt get financing he has a practically new home for nothing.

The big thing is location... The house is 5 minutes from Ft. Campbell, what will soon be a "super base", Upon the closing of 2 military installations... as well as the return of 80000 troops from Iraq and Afghanistan in the next 6 months. Clarksville is on the top 10 cities "poised for growth" in the us.
The market here is probably going to explode, but that's speculation... I meet with the guy Monday to sign the option to purchase.

all comments are greatly appreciated. thanks

Dustin Lyle · Answer

You make some great points LindaTx.. Thank you. Dustin

Linda Scott · Answer

Sound like a plan, but look a little deeper. Sure he owns the property? No leans on it? Is the property free and clear? What are the solds in the area for the last 4 months.Rentals? Taxes? What about inspections? How many rentals are out there empty now? I live near Fort Hood here in Tx..when everyone cleared out many units sat empty here. When the solders came back many have bought homes 40-60 miles from the base. Or even rented out away from the base if they had familys. I have many 20 year solders moving back from over sea's, they are driving 1 hour to the base here. When they deploy, the wife moves back to her family no matter where they live. What other market do you have there to rent to? What is your plan B? LindaTx

Dustin Lyle · Answer

Mr. Holdman, you are good! lol, it seems I have much to learn.. But maybe just maybe, tomorrow when I meet with the property owner and tell him im thinking its not a good investment for me, He might just all of a sudden get desperate.... But who knows. But it seems I have a new mission... I really have to educate myself on this cashflow landlord thing.. thanks for your help jon.

Jon Holdman · Answer

Paying $90,000 for a property that rents for $900 is not a good deal. It works with the $100/month payment you're making, but that payment won't stick. A year from now you'll have to refi the property and get a loan for the $85K. You'll also have the $100/mo and the rehab money invested. It would work if the rent really is $1200, not at $900. Your effective payment on $90K is going to be about $600. It may be less if you have some cash invested, but you still want to consider getting a return on that cash. At $1200/month, with 50% for expenses, its break even (look in the landlording forum for EXTENSIVE discussion about expenses.) With a more optimistic 40% for expenses, you have some positive cash flow. At $900/month and with realistic expenses, you're $150 a month in the hole. With optimistic expenses, you're still $60/month in the hole. Also, consider what happens if you put the rehab money on the 12 months same as cash credit cards. How do you pay those off? If you do a refi in a year, and you want to pull cash to pay those off, you'll be limited to a 70% LTV, unless things dramatically change between now and then. You say you have lots of debt, which hurts you, too. So, to do a refi at $90K, pay him off and pay off those cards, you'll need the house to be worth $130K in the eyes of the very pessimistic bank appraiser.

Dustin Lyle · Answer

Thank you for your help guys... Yes the PVA office is the Property Valuation Assessors office. Yes Jeff, I think I may still be able to get it cheaper, I think when we have our sit-down, Im going to come at him with 65K and work from there. LOL yes john I am aware of the DRAMATIC price drop from 3 years ago, But im looking at it like this... I can live there and or rent it for the next 10 months and see where the markets at... All for just 100.00 a month. at month 10 I decide If Im going to put the excessive cash into the rehab, (minor items i would have already taken care of)

Dustin Lyle · Answer

average area rents are between 900 and 1200 a month.

Jon Holdman · Answer

What's the house really worth? I don't know what "PVA" is, but that sounds like the county assessor, and that's irrelevant. What will it rent for? If comparable houses were worth $90K three years ago, this sounds like it would be worth, maybe $75K now. You're going to put maybe $5K into it to fix it up. That sounds like you should pay $45K max, based on that limited info. You do know prices have fallen from three years ago, right?

Jeffrey K. · Answer

Don't you think you could have gotten it at a deeper discount? You might have been able to negotiate the same deal but owe him 80k or less in a year.