Psychology of making an offer to distress homeowner - Need Help

[Herlando Y.]

In my last post I have a house that I found while driving. I talked to the homeowner and it seems like he is running out of money to repair his distressed home. Here is what I know:

Asking Price: 290,000 - 300,000
ARV: 264,000
Repair: 70,000 - 100,000
Cashflow after reno: $1000 monthly

• We got this distressed homeowner who evicted two tenants two years ago. Those tenants did not pay rent for the past 1.5 years leaving over 18,000 in rent owed. 
• A developer approached him last year offering him $325,000 contingent on the developer getting the other properties as well. The house sat vacant for 9 months and he never heard back from him. 
• He talked to cash buyer and rejected the offer for $210,000. 
• He have 125k Equity and a 160k mortgage left on this property.
• He states he is running out of money to repair the property
• The property is need of major rehab. I got contractors going there tomorrow.
• He can not refinance the property under these conditions
• He lives 5 minutes away and have attachment issues with the property 
• ARV is very hard to determine because no house sold on his block and it is a very unique house. My loan officer pulled up the info quickly and determine it to be 240,000 to 325,000 k value. He had an appraisal that is around 260k-270k for his refinance.

My plans:

• Give him an offer over 210,000 if possible. Need to give him offer soon since I found a bank that will finance the rehab cost. I just need my contractors to give me a price and add 20% to the cost of repair.
• Turning this duplex into a triplex. It has 3700 sqft, but limited to street parking.
• Total Estimated Cost:
  • Purchase Price: 220,000
  • Closing Cost: 12,000
  • Repair: 70,000
  • Total Cost 302,000
  • Cash Flow @ Triplex = 1000 Cash flow monthly after accrued expenses, mortgage, tax, and insurance

Understanding his psychology, how do I make an offer to the homeowner that make sense for me?

[Christopher Brainard]

@Herlando Y.

Hi Again! While I commend you on trying to look for a solution to this homeowner's problem, all you're doing is making his problem your problem. You need to check with the local zoning and see if the house is currently zoned to be a triplex. Additionally, you will need to secure building permits to make the conversion. Neither of these items are within your control - I have a colleague who had this same issue but bought a triplex that was only zoned for a duplex. She lost a large sum of money due to lost rents and the cost of converting it back to a duplex. 

Additionally, the house isn't going to cash flow $1000, even if you can make it into a triplex. While you may get more rent overall, by decreasing the size of the 4/3 part of the house, you will also decrease the rent on that part. Also, with your increased bid you're going to have $302k wrapped up in a house that is worth $264k. Going in with negative equity is almost always a no-no, when you're putting a substantial amount of cash in the deal.

Wanting to help a homeowner is one thing, but doing so at your expense is another. If the owner only has $160k left on the property, he should be more than willing to let it go at that, if he was truly motivated, however, it still isn't a good deal at $160k.

-Christopher