Got a live one - now what?

Question

So after doing my homework, placing ads,etc, I finally got a call from a lady in foreclosure. I have the comps at 230-250, she says she needs 160 to get out of the mortgage, and wants some cash to start over. She says all the house needs is a couple of new garage doors. I am going to see the place this wednesday morning and would like to make an offer on the spot assuming there really is no significant work the house needs that would kill the deal. In my mind I've maxed it out at 180 minus any work. We discussed some rough numbers and she's open to it. So now what? I go with a contract (with an inspection contingency), and just ask for the deal? If she does go for it, do I need to give her a deposit? Does that go directly to her, or does it go in some escrow fund or what? I can enlist the help of a realtor with the contract, in exhange for letting the realtor sell the property later. Or should I just ask my lawyer for his help instead? Am I missing something? please help - despite lots of offers this would be my first deal and I don't want to shoot myself in the foot.

Les Williams · Answer

If you decide to go with this property and Hopefully the 160k Includes the back payments and any attorney fees involved. Depending on the stage of the foreclosure. Your seller should have a reinstatement letter from his/her mortgage company or their attorney. this letter explains what the seller owe's and how much the seller needs to bring her mortgage current.  Have the seller fax this letter to you with sellers current payoff.
this way you will have a true payoff to determine if this deal will work base on the (ARV) $250-(sellers balance and walk money) $180.

:mrgreen:

Ryan Webber · Answer

Well first things first.  Your comps range was about 10%, but you have to be on the top end of those comps to make your money.  So if you were to deteremine an ARV for the property what would it be, 230K or 250K?  If it sells for 230K and you buy it for 180K minus repairs, then you will be cutting it too close.

On a rehab, 70% of ARV minus repairs is the maximum you want to be at if you are in a normal market.  That 30% spread covers your butt generally for the following expenses: realtor/advertising fees (4%-8%), conservative PITI holding costs (4%-8% for 4-8 months to fix and sell), closing/fianance costs to buy (1%-6%), closing costs to sell (2%-3%), and unexpected expenses/repairs (1%-3%).  Now what's left over is your profit.  Going off the numbers above the profits would be best case 18% and worst case 2%.

So if everything goes perfect, you sell it for $250,000 FSBO in less than 3 months after only taking 1 month to do all the repairs, financing it with a low fee, line of credit or bank loan, and no unforseen repairs then you will make about $45,000 profit if you buy if for $175,000 minus repairs.

Now if it turns into the rehab from hell, you still have to sell it for $250,000 but after taking 2 months to fix things you didn't budget for and trying to sell it FSBO for 3 months, you decide to hire a realtor who then sells it 3 months later so you can pay off your hard money loan then you will only make $5,000 profit, but you would still have to buy it for $175,000 minus repairs.

There is only one thing worse than only making $5,000 on a rehab from hell that you've dumped your life savings into and that has destroyed your tranquil sleep for the last 8 months.  The only thing worse is LOSING money on that rehab from hell that you've dumped your life savings into and that has destroyed your tranquil sleep for the last 8 months.

My point is this, PROTECT YOURSELF BY BEING CONSERVATIVE.  When it hits the fan on a rehab, your only protection is the equity.  Make sure the equity is there, or it really hurts.  70% equity is a good number to hold on to when you are crunching your numbers, and don't smudge it unless your market dictates it.  When you smudge it, you are not only comprimising your profit but you are comprimising your protection from loss.

Anyways, when you are ready to move forward on a deal, yes, you and the sellers need to sign a contract.  Put in there whatever contingencies you want, and if your state dictates it, put monetary consideration (earnest money).  I would contact an attorney and ask them if earnest money is required in your state.  If it is not, then I wouldn't put a dime down for earnest money.  If you do put earnest money up, you should not write the check directly to the seller.  I would write it to the title company or attorney who is taking care of the closing.  Show the check to the seller when they sign the contract and tell them that it will deposited with the title company/attorney when you drop off the contract.

Using an agent or attorney for the contract is completely dependent on your comfortableness with the process.  It is a rather straight forward process, but it is new to you so third party assistance may be beneficial to you.  Starting out you might want to use your state's standard real estate contract.  Usually you can get one either from your state's real estate commission website or you may have to get one from a local realtor or a local title company.  They are usually extensive and thorough but are fill in the blank contracts.

Good luck and if you have any other questions feel free to ask.

N/A N/A · Answer

i'm sorry i have no advice, but i'm happy to see your work has paid of thus far, let us know how it works out,il be wacthing for responses also..

good luck