Just getting started...Buy from auction for first REI???

Question

Hi all, and thanks ahead of time for all your input/criticism!!!

I am a 25 year old working in Kansas City.  Me and a friend (business partner hopefully) have been wanting to get into RE investing for a while and have been reading books (and this forum!!).  We are wanting to do flipping rather than starting out with rentals (eventually), and have his father as a private investor if needed.  We have stumbled across a property being sold at an auction, no min bid, by an auction & realty llc.  The property is not kept up (very lacking in landscaping), and the house is extremely outdated.  Built in 1955 and from the looks of it, the people must have wanted to live in a time capsule because everything is very 50's.  
2 bedrooms, 2 full baths, 2 half baths, formal dining room very spacious kitchen (pink tile though), unfinished basement, ranch style on a 1 acre lot.  Hardwoods covered up by horrid carpet.  Auction LLC is "suggesting" a price of around 200,000 (probably because of all that need to be done to update)
however, it is in a very nice area, near a popular park.  House down the street on same size lot, ranch (but has a nice pool and is very updated) is selling right now with an asking price or 579,000!!!

do we even stand a chance of getting out hands on this to rehab and sell, or would you even recommend this big of a job for our first time (keeping in mind I work for an investment bank and would be very diligent about calc'ing out the rehab costs and keeping to a sound business plan)

any help/criticism/opinions/etc.  would be very much appreciated

Jeff Takle · Answer

I'd also add that if you're not experienced in doing rehab projects then you might want to have a couple of contractors come with you (bring your personal network if you have one) and do estimates on each piece: plumbing, electrical, HVAC, kitchen/bath, floors, roof, etc.  If you don't have a network, then your REIC or ask people who've done their kitchens/baths, etc. who they used and if they'd recommend them. Almost all of these folks will come do a free estimate for you. This will help you calculate both the time and money it will cost to do a good rehab job.  Big job might take months if you've never worked with these contractors before.

I'd also bring a good home inspector and let them go through the entire place; gives a good holistic approach to the condition of the property. But in my experience, home inspectors tend to tell you every possible thing that could be upgraded. There is a difference between what could be upgraded and what you'll choose to do in a rehab job.

Last, a little plug for the realtor you involve. If they do a good job for you pulling comps and working up the details, then consider throwing them the listing if you're going to put it on the open market. If they're helping you get into the deal, then they're kind of a partner of sorts and have added value to the transaction. That should be rewarded. Of course, if they're lousy or lazy, dump em.

-J

Jason Barnett · Answer

Have the realtor friend pull comparable, nearby houses that have sold recently (prefereably last month or so).  Also have the realtor check to see what the "days on market" is in the area and have them use comps for houses that sold quickly.  This gives you a conservative estimate of after-repair value for a rehab.

I highly suggest that you at least walk through the house first.  Most auctioneers I know won't do the inspection because it doesn't mean much for their potential buyers.  Look for everything that is wrong, then go and find out how much it will cost to replace all of these things.  You really want to focus on the mechanical systems (roof, heat, electric, water)

Just ask your lender about prepayment penalties... some have them, some don't.  Obviously you want to use one that doesn't have penalties.

If you want to defer taxes you can do a 1031 exchange.  Ask a CPA or search this site.

N/A N/A · Answer

juzamjedi,

thanks for the response.  I did some research and found out that this is not a forclosed on home or REO.  It is a FSBO by a very motivated seller (sounds like they moved onto a new home to quickly and now are trying to get rid of it ASAP to avoid paying the two mortgages.)  I also found that the house and all other houses in the area were appraised at a price much much higher than what was "suggested" on the auction.  I also just found out we have a family friend who is a realtor up in this area and is more than willing to help out.  My question is, what should I have him help out with/research/etc?  Also do I need to have an inspector come to the house before I go to this auction or will the auction company have already done that?  And what do I need to know about prepayment penalties and tax penalties for paying off the mortgage to quickly, is there any way to get out of these?  thanks again and anyone feel free to chime in.

Jason Barnett · Answer

If a property is REO then the title should be clean.

Yes, you will definitely want a trusted realtor.  Going to an REIC is a fine way to network for a realtor or you can just talk to some of your IB friends.  I'm sure you're not the only one doing real estate on the side, just ask around.

As for determining sales price... you pretty much need to get MLS data for that.  This is where your realtor friend comes into play... they will tell you the price that you should be able to get if you try to sell a house retail in less than 1 month.

As for repairs... I would suggest doing it all or doing a true flip.  If you can assign the contract to another investor without doing any work to the house then it will put a few bucks into your pocket, but if you're going to rehab you might as well go to the effort of doing it right.  And don't forget to factor in holding costs and opportunity cost!

N/A N/A · Answer

Judson,

thanks for the reply, I really appreciate your thoughts.  You had mentioned I need to get a title search.  What is the easiest way that you would recommend?  Should I get on the counties web site, or do I need to go to one of the pay websites out there to get the info I need (which is what exactly??)?

Also, if it has gone into forclosure and is now a bank REO (am not sure if it is yet), does that wipe the title clean? I have read somewhere that it does, but I was not sure if that is true for every case, or even true at all.  I also am fairly new to the area and do not know any "trusted" realtors that you had mentioned I should have check out the house and advise what they would list it for.  Should I befriend one at a local REIC or trust one from a normal real estate company.  Also how would I go about checking how much others in the neighborhood sold for short of knocking on doors?

Lastly (and I apologize for the lengthy post yet again, just trying to be as thorough as possible), would you recommend just cleaning up the place and doing minor repairs and updates, or going all out considering the prices of the other homes up for sell in the area. (ie. finishing basement, new fence, hardwoods, kitchen makeover).  Please anyone chime in if you have any suggestions and don't be afraid to shoot my ideas down or anything like that, as that is what I am looking for.

thanks