Newbie question: Should I buy it?

Question

Hi everyone,

I have recently started reading about real estate investing and been analyzing deals for a week or so. I want to try out value add + house hacking on a 1M+ sometime next year (I was planning to stop renting and buy a home for myself anyway). However, given my lack of experience, I'm worried about doing such a big purchase directly next year. I've started looking into much smaller deals just to get my hands wet and work my way up.

I've come across a deal from a wholesaler for 1bd/1ba SFH for $55K. It's a 1920 home that has been remodeled and sold at $135K early this year. The wholesaler says they're selling it because of financial distress. My plan would be to add a couple of bedrooms to the home and the typical 3bds in the area about $180K.

The problem is, the numbers look too good to be true and I'm worried that I might get scammed in some way that I'm not aware of yet. Should I get over my fears and just do it? Should I wait for some more time and munch on deals for a few more months?

Lynnette E. · Answer

If someone really bought it for $135k and is selling it for $55k in this market, where the prices of housing is rapidly increasing there is a problem.  A big one!  At least $85k problem.

Some possibilities:

1.  The whole seller is a scammer, the property may not even be for sale, he will take your money and run or give you a deed that is not signed by the real owner.

2.  There is a serious problem with the tenant, maybe the person living in the house has a life estate--can stay there for their life-- and they are 30 years old.  Or there is some reason the tenant will not be leaving the property.

3.  The property does not have clear title.  Somewhere in the past the title had an issue, maybe someone did not sign the deed in 1950, or the house is not totally on the actual lot of the deed and the past buyer did not get title insurance.  Or there is a deed restriction, like the property can not be lived in or rented or is for conservation.  OR the property does not have access, it is landlocked.

4.  The house is not structurally sound, old houses can be termite eaten in the walls or foundation and you do not know it.  Or it had a fire since it was last sold.  Something changed since the last sell.

5.  The house has a failing septic tank, well, electrical is not up to date, there is no HVAC or electrical availability for it, not utilities are at the site, or some other serious major set of issues that the last buyer did not see, but this is unlikely to have been missed in the $85 amount.  Its a small house!

6.  The land is being rezoned or will be rezoned around it.  OR the property was condemned and the last buyer thought they could save it, but can not.

__No one would have bought a house at that price point and walk away from $85k.  They could list it and get heir money back in this market, probably even a pretty big profit and sell in 30 days in most areas today...unless they missed a big issue.

__You can certainly get bargains, but that is not one, that is a problem house or seller or scammer.  It is too good to be true.

Shivateja Reddy · Answer

Thank you! I’ve got my well needed reality check after the initial excitement of spotting a deal.

Anna Laud · Answer

Hi Shivateja!

I'm maybe not seeing the full picture here on this and why you'd pay for a SFR at $55K to add beds/baths for an ARV of $180K? The rehab on adding beds and baths is okay if it's within budget to do so, but adding them just for the sake of playing the 'value' add game is a newbie mistake.

I'm not trying to be mean or poke holes here in this, just trying to help- but for $55K and adding all this into a house where you're likely going to be looking at new water lines/pex (I'm TOTALLY assuming there's no sewer scope done etc), updating electrical, there's probably (or could be) asbestos siding, roofing and other far outdated items- PLUS the addition of beds and baths in costs for total rehab- PLUS you're adding onto here right in SqFt- not within the walls work for these rooms so survey to lot line etc-right, well that's one part.

Preface; - I do have my broker's licensee but I was a wholesaler first so I see both sides- but let me say -and ARV of $180K- purchase of $55K, and rehab of at least $50K okay but then this was a cash deal? I mean it seems really unlikely that there was another investor that had $135K+ closing costs to drop in Q1, then come Q3 they want to take a $85K loss? That's minus the $5K 'assignment' but I'm sure it's over $5K honestly. Hard to imagine that this is really for sale unless it's a trust fund baby that simply has more millions than they know what to do with and doesn't care.

Bottom line- RED FLAG- too good to be true on the sale price, likely not even known to seller the house is being marketed, etc- Ask to see the assignable contract and what their equitable interest is in the property- the wholesaler I mean.

Hope that helps!

Jonathan Greene · Answer

Everything in your post is wrong, don't do anything. If you've been analyzing deals for one week, you know nothing, actually less than nothing. Have you seen any properties in person? What background, besides one week online, do you have in real estate to start investing confidently? And why would you want to do a 1M house hack? No first-time investor, especially not one with a week of online research, should be buying from a wholesaler. You are basically what they dream of. They already milked the profit out of it, the sellers, and the thought that you think you can just "add a couple of bedroom" is nuts. There are restrictions on many homes that won't allow you to do just whatever you want. Variances, setbacks, ground cover. Your fears are justified, you literally have no idea what you are doing so buying now would be a disaster.