First home investment, any advice??

Question

Hi All,

I am a new investor and was wondering if the more experience investor can give me some pointers/advice.  I've been searching for 6 months and I hope I'm not rushing into anything because I'm too anxious.  I am currently considering a foreclosure property in the DFW area.

Foreclosure Infomation:
-List Price:59k
-County appraisal:100k
-Neighborhood average value:120k (according to Zillow) 
-Normal rent for that house size and in this area:$1200
-Condition: House looks in decent condtion (maybe 8k fixup), small foundation problem (hairline crack on exterior)
-Days on market:10 days (so I won't be trying to low ball for this foreclosure)

Tomorrow I am planning to submit an offer for $57,000.  With this offer I am planning to include a $10,000 check for down-payment.  Also included is a business card, stating "Real Estate Investor".  I have two out  clauses(inspection and mutliple offer) ready for sales contract.

My plan is to acquire property. Bring up the value by cosmetic fixup, landscaping and foundation fix. Then get an appraisal followed by a 2nd Mortgage on property when I find another good investment.

Would anyone do anything different?  Would anyone focus on any different factors?

After soooo much reading (this forum and books) its finally time to test the waters and any advice would be appreciated.

Thanks for your time,
Ray

Jon Holdman · Answer

Don't know the area, so can't comment on that.

I agree with Sam that you need to get a better handle on values.  In TX, sales prices aren't in public records, so you'll need info from and agent.  Without that, you're flying blind.  Zillow MIGHT give you some comps.  Ignore any of the values from zillow.  Only look at any real data.  County assessors are also bad.

You won't get a second mortgage on an investment property.  A year from now you MIGHT be able to do a cash out refi and get some cash.  That won't be cheap, several grand in costs.  And you'll likely be limited to 70-75% of the new value for the total loan.

A hairline crack in the foundation is either irrelevant or a pretty big deal.  If its just minor movement, it can be ignored.  If it means part of the house is sinking, its a bigger deal to fix.  Have you had a foundation guy (or three) give you estimates?

Numbers wise, this looks like a good deal.  Assuming your numbers are accurate, you'll be all in at about $67K and collecting $1200 in rent.  If you put down $10K on a $57 purchase, and pay closing and fixup out of pocket, your loan is only about $47K, then your P&I is only $282.  Allow $600 for expenses and you nave NOI of $318 a month, $3819 a year.   Total cash investment about $20K.  That's a 19% cash on cash return.

If the value really is $120K, and you can refi at 70%, your new payment would be $504.  After paying off the old loan and costs, you would get $34K back.   That's gets back your $20K plus $14K more.  You still have $96 a month in true cash flow. Whether or not you can actually get a loan like this depends on a lot of factors, some of which (the general lending environment) are out of your control.  If you wanted to do this right now, you would need good credit (720+), good income (enough that your DTI is good even without the income from the property) and some cash in the bank.  Bad credit or self employed (i.e., you need a stated income loan) and you can forget it.

Lot of assumptions in all that math, so your task right now is to verify they're correct.  As Sam points out, if you can buy any home in that neighborhood for $60K, or even $90K, its not such a good deal.  You need to verify the comparable, fixed up value is at least $100K.

Sam M. · Answer

Yikes! Zillow and the county tax assessor records are a BAD idea when it comes to determining sale value.
 I would recomend getting recent comparable sales (30-60 days) from a realtor. before plunking an offer on the table.

You would likely kick yourself to the curb if you found out properties are selling for 35k all around you and you just paid 57K.

I don't know your area so maybe someone will chime in who does

Jeffrey K. · Answer

Forget the check for the downpayment and the business card.  Makes you look like an amature.  Act like the seller should know who you are.  I am worried about your rental rate, your ARV, and your repair estimate.  Check them and check again.  It is great you found BP.  It should help you a lot as you first start.

Michael P. · Answer

Feel free to PM me the address and I will check comps for you.

What is your exit strategy?  I know you mentioned rental comps but still wasn't sure based on your post.

Most houses in DFW have hairline cracks.  About 20-30% of all houses I buy in DFW need foundation work.  So it is fairly common in the area.  A hairline crack does not necessarily mean you need foundation repairs though.

If your numbers are indeed correct you have about a 40k spread.  I flip houses in DFW and that is the minimum spread I require to purchase a 100k and under property.  So if they are true IMO that is a decent deal, especially for a new investor as it means you will probably come out alive.  *This of course depends on the condition of the house.*

Jon Holdman · Answer

That's too much of a range to be meaningful.  The best possible comp is the identical floor plan right next door.  Failing that, you need to find properties with the same beds, baths, garage, size, and style.  Closer is better, both in location and in sale time.  You also need to find out if the sale was distressed (short sale, REO) or a retail sale of a move-in ready house.

ARV is the single most important factor. Its also a tough one to figure out.  You have to get to know the area. Go have a look at those comps and see which ones are good comps.  If they are all very similar, all recent sales, none near a major road or school, etc, then you have a puzzle.  An appraiser would likely use a set of properties on the lower end.  Once upon a time they might have used the top ones, but no more.  You cannot count on them picking ones in the middle.  So, given that set of information, you would have to use an ARV of $60K.  Or, at best, the average of the lowest three.

But this is not an averaging process.  None of these are identical to yours.  An appraiser would use those differences to adjust the sales prices, then average (sort of, never quite figures this out exactly) the adjusted values.

Ewa Reza · Answer

I apologize I didn't respond to you in time. Ive never got notification email from BP. How did your purchase go? Did you find anything good?

Ray Tran · Answer

Hi Ewa, I would like your opinion because it sounds like your an Real estate agent or know alot about this area.

(1) Do you consider it wrong to use more than one buying agent (I wouldn't cut the used RE agent out, but I turned down so many RE agent that I meet because I already have one).

(2) As a RE buying agent, what do you appreciate in buyers? (any traits that doesn't annoy you, but is really effective in buying a house).

(3) After I check out an house and determine its NOI and Maximum Selling Price, this is when I ask for a Market analysis.  Do you think I should ask my buying agent for more Market Analysis  (for ex. I only ask a very small amount of CMR, should I be asking for CMR at houses I haven't even stepped in - that would make searching for properties so much more efficient)

Ewa Reza · Answer

Never ever take Zillow estimates seriously. On average they show 10% higher value then reality. Sometimes even worse. Just last week I had a client interested in a property listed at $450,000 but zestimated at over million dollars! The client was all anxious to buy but when i pulled the comps it turned out it wasn't a good deal at all. So do your market analysis or as an agent you trust for help. Good luck :)

Ray Tran · Answer

Yes, seller is currently processing my offer, so I think its currently under my contract.  Thanks for investigating its comps.

Yeah my exit strategy is to fix it up to rent.  Then lease it out.  And within two years try to improve the condition of the house to increase its value.

Michael P. · Answer

Did you get the house under contract?  I noticed it says Pending on MLS.  Listed at 49k even though I am not a huge fan of Garland IMO that is a pretty good deal.  I would have probably considered it myself, but I rarely search for houses in Garland.  I put the value of this house at 90-100k just from looking at the comps on the road and from owning a house less than a mile away from this one.  It might even be worth north of 100k but I am not going to delve into comps further unless you tell me you are the one who has it under contract.

I also notice it might back up to something unattractive.  That can and certainly does negatively affect the comps if it is a shopping center or something similar.  Your Days on Market will skyrocket usually as well.

When I talked about exit strategy I meant are you going to lease it, rehab and sell it, etc.

First home investment, any advice??

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