My House Hack Journey: Detroit Edition Update #2

[Desreal Shorts]

Welcome back to my house hack journey. If you are new I encourage you to go back and read the previous post so that you can get a feel for the full process. For those who are returning, you may recall that the last thing you heard was that I hired a contractor to take a look at the house. This is where you discover if your dream home is really all you thought it could be, or a pig with lipstick. 

Now I will point out that having an inspection done is something that will come directly out of your pockets. I will tell you this, it is not cheap, and for this reason I believe it is good for anyone pursuing this career to have a basic knowledge of home structures; what to look for, warning signs and such. This way, on your initial walk through, you can determine if anything that you see is already a deal breaker, saving you on sending out a contractor unnecessarily. If you are curious to know how much an inspection may cost you; in Detroit, Mi, the average seems to be about $350. I would not recommend doing this for every house you look at. 

So, not that I am a pro or anything, but this is my pro tip: Some inspectors have their own way of doing things. Some like to get through the inspection, and then walk you through pointing out problem areas, and some do not mind having you tag along throughout the process. My suggestion is find one that does not mind having you tag along, and if the contractor you pick is not that person, ask him/her to be. I am not against offering them a monetary incentive if necessary, just to allow me to learn from them on the job, but I am happy to say that my contractor was happy to walk me through the entire process for no extra charge. People love to teach...

I was satisfied to learn that there was very little areas of concern on the home. An added vent to the bathroom was necessary, fixing the handles on the shower, a minor leak in the basement, nothing that was a deal breaker. The contractor wrote up his report, I sent it to my realtor, and she went on to work her magic. 

By now you may have noticed that I have not actually spoken to the buyer. From what I have observed in this experience is that there is no need. That is what our realtors are for; they negotiate for us but in the end everything is our decision. Nothing is offered or accepted without the clients say so, and every offer is presented, even if it is not a good one. But your realtor is your gladiator, here to make sure you get the best deal possible. 

The seller agreed to fix everything on the list. We moved forward with the offer. 

Next comes the paperwork. Your lender is going to send you a lot of forms. I can not tell you what to do, but it would behoove you to read every single one of them. And I will not lie to you, it is going to take some time so grab what ever your caffeine of choice is. You may feel like it is excessive to read over every page of the contract you will receive, but the way I think about it is like this: This is the biggest purchase I have ever made in my life. If I have to spend an evening reading through contracts with my google dictionary on the side, then that is what I have to do. Also, if you plan on purchasing homes on a regular basis, you should read through them at least once. And do not be afraid to ask questions. You are not a Pro, yet. 

After all the forms have been signed by all the proper parties, two things are going to happen; Appraisal and Underwriting. Before I continue I want to remind you that I am using an FHA loan. This required me to have an appraisal done on the house to determine its fair market value. The appraisal is based off of similar properties that have recently sold in the area. The lender will not lend to me anything above this amount. This is why it is very important that as a flipper, you understand how to estimate a property's ARV (after repair value). This was not properly done and so I have ran into my first real hiccup.

The property went on the market at $99,500 which seemed like a great deal to me compared to the $150,000 properties I saw on the other side of town; but that is not how property value work. I offered $100,000 to avoid a potential bidding war and we settled at $104,500. Fair enough for me considering they decided to pay all the closing cost. BOOM! I thought I was winning.

The house apprised for $87,000...........This is what happens when you do not run comps before making an offer on a deal. So what does this mean?

This means that the most the lender will offer me for this home is $87,000. If I am to purchase the property at the price originally negotiated I would have to pay an additional $17,500 out of pocket or find an additional way to finance the property for the remaining amount. Is this what they mean by your property being underwater?

Bottom line is that it will not work. So what to do, what to do? The beauty is that at this point I am able to walk away from the property if we can not come to an agreement. This would call into question who the earnest money deposit belongs to, along with  whether or not I am reimbursed the $500 for the appraisal fee. (Oh yes, if I did not mention it before, the appraisal fee is also an out of pocket expense on your hand, but it is also considered part of closing cost, which is why I had the question of reimbursement).  The answers to these questions are to be determined. 

The ideal scenario is that the seller decides that because the appraisal follows the home, and it is highly unlikely that an investor, or anyone else would pay $17,500 more for a home in the same area, that he drops the price down to $87,000 and we all move along with the deal. But after the feedback that I received from my realtor, it seems like dropping the price is going to be a personal struggle for our seller. But that was just on Friday and he has had the weekend to reconsider. Maybe today we make progress, or maybe this is where I learn negotiation. Either way, wish me luck .