MA FSBO Single Family in good location - need advice

[Rachel L.]

Hi BP community -

I'm new to real estate investing and this is the first house I have looked at to use to learn how to crunch the numbers. I would like advice on how to proceed, if this would be worth any further time.

This is a FSBO single family, 6 br, 1 bath. 1st floor is kitchen, living, dining. 2nd floor is 1 bath, 4 bedroom. Attic (finished) 2b bedroom. Unfinished basement. (The bedrooms are small though).

The owner had a print out from Vision Government Solutions, Inc. Has anyone heard of this company and if so, are their appraisal amounts accurate?

The appraisal from that company came out to roughly $270K and there aren't any 6 bedroom/1 bath single family houses in the neighborhood. There are some single family houses with roughly the same amount of living area and less bedrooms and 2 baths. Would those be considered comps close enough?

Also, the owner is asking for $540K (least she will take is $500K). She's basing this number off a duplex sold with 4 bedrooms/2 baths that's a few doors down and was recently sold. She said that she will list the house with an agent if the house she can't sell it herself. Would it be worth my time to educate the seller why comparing her house to a duplex isn't going to give her the right value for her house? Should I even try to put in an offer?

Any advice would be helpful! Thanks in advance!

[Ann Bellamy]

Rachel, a 6BR house is not a good one to learn on. Here is why:

1. 1 6 BR house is a white elephant, and as you've already learned, there are no comps.

2. There is a good chance those attic bedrooms are not legal anyway depending on egress. They may be "bonus" rooms. If the tax assessor record lists them as bedrooms, it doesn't mean they are legal.

3. Vision Appraisal is the tax assessor database. They do tax assessments for many towns in MA. The "appraisal" is a tax assessment value and has no relation to the market value. Do not use assessed value or assessors "appraisal" as a value.

4. As you've already figured out, you can't comp a SFR to a duplex.

If you want to get a better idea of value, start at the building department for the town and find out if they are legal bedrooms. Then pull comps based on square footage using 4 bedrooms and consider the others to be play rooms, office space, media room, etc. . Assume you will figure out a way to put in at least another half bath. 6 bedrooms with 1 bath, really? Who would buy that?

Then work backwards from the ARV for a 4BR 1.5BA or 2BA depending on what you can fit in on the first floor. Calculate your rehab budget, and make her an offer based on the numbers you want to use taking into account closing, selling and carry costs, and the amount of profit that is your minimum.

Sounds to me like she's not motivated, so it's probably not a deal. So if you are using it as a learning exercise, make the offer anyway, no matter how ridiculous it is. You will work through the process, and not expect her to even consider it. That's not the point. When she is insulted by your offer, you won't be upset that she doesn't take it.

Some other Massachusetts investors may chime in now that I've used the keyword Massachusetts.

[Rich Semakula]

Rachel, I think this might not be the ideal property especially for a new investor due to the following reasons: 1. You state that the appraisal on this property is $270K and yet is asking for $540K and the least she will take is $500K. It seems like you're already too far apart, that I wouldn't spend time pursuing this deal knowing that you're so far apart before you even start negotiating. Secondly, a 6 bedroom 1 bath house isn't very desirable, because of the ratio of baths to bedrooms. Most families are going to prefer at least 2 or 2.5 bathrooms, so if you pursue this property you will have to plan adding 1 or 2 bathrooms to make it a much more desirable property. Anyway, those are my thoughts!!! Good luck...

Rich

[Chan K.]

@Rachel L. It is an expensive house. Are you planning on flipping it? If you do, people don't usually flip with this number ($500k). If you are holding, it won't have any positive cash flow at all. I am pretty sure you won't be able to find any family that is going to rent 4k-5k per month for single home.

If after acquired, you are able to convert to a duplex, then it could be a deal. Given that you are just starting out, you should look for an easier deal to warm up and get your first confident going first. For example, it is like getting a turn key cash flow with small build in equity up front.

In MA, I have seen people flip single house. If you want buy and hold, try multi-family. You might be able to find $350-$500k in Dorchester/Boston MA. It might work well in your favor as you can get in with 3-5% down for owner occupied.

The deal you present, the assessment and purchase price have no correlation.

If you want to learn and crunch number, maybe start with something small first until you get comfortable like ($150k-$300k).

In any case, what are your niche and strategy?

[Mike D'Arrigo]

@Rachel L. I'm not sure what your goal is but if it's buy and hold for cash flow, I wouldn't touch it. There's not a lot of demand for 6Br especially with only 1 Ba. Your best bedroom/bath configurations with widest rental demands will be 3Br 1.5 or 2 Ba or 4Br 2Ba. What is it about this property makes you think it's a deal?

[Rachel L.]

@Ann Bellamy thanks for the advice! I will go look up the info just so that I can maximize this learning experience.

@Chan K. my goal for real estate investing is to buy & hold and use flipping as a way to purchase buy & hold properties.

@Mike D'Arrigo my thought was, would it be worth it to educate the seller and find a way to talk the price down to what single family houses are being sold for. Then, if the numbers worked, possibly flip the house and change it to something like a 3Br/2Ba. So far, the only good thing about the house is the location/proximity to things like transportation/school/shopping.

Thanks for the feedback so far everyone!

[Mike D'Arrigo]

@Rachel L. if you're planning on flipping it rather than holding, that changes your dynamics entirely. 6Br is still a big house and 1 Ba is not sufficient for a 6Br house. The question is, does it fit with the rest of the neighborhood. You never want the biggest most expensive house on the street. If you're flipping it you need to make sure you can buy it right with enough equity to give you a profit.

[Wayne Brooks]

It will likely take 3-6 months listed with a realtor, and few showings-no offers for reality to set in with this owner. 6 beds, 1 bath is ridiculous.

[Kenneth Wong]

Hi Rachel,

Much good advice has already been given by the wonderful BP community.

In addition to all of the positive ancillary factors about the property (location, transportation, crime, etc.) trying to educate the seller is a main goal of most realtors. And, unfortunately some home owners just think their property should be sold at "x" price, which in most cases is higher than anyone wants to offer.

And, although she has lowered her price from $540k to $500k, there may still be a huge difference in the actual value and selling price and unless the seller is motivated to sell, that price may remain high.

I agree that the upper floors (attic) may provide an additional 2-3 bedrooms, that might not actually be legal. My SF home eerily sounds the same, as I have a 6 bedroom, with 2 BRs on third floor, but our 2.5 bathrooms easily accommodates our family of six. Thankfully, the family before me that raised six children legally added the upper bedrooms.

Back to you, once you perform additional due diligence, and determine the ARV, if you still like this house, and the numbers work, you can still offer some number that you are comfortable, say, $300k cash. The seller can only say "no." Of course, make sure the numbers work for you.

Good luck.

[Rachel L.]

Thanks everyone for the great advice!

I plan on going to the Building Department and put in a request to see if the permits are there for the bedrooms in the attic.

I'll update the thread on what out. Thanks again everyone!

[Mike Hurney]

@Rachel L. "this is the first house I have looked at to use to learn how to crunch the numbers." Good.

I'm working to finance a couple of Buyers in Quincy and it seemed like a hot market there.

But when I looked on the MLS 6/1s are not the most popular.

Also check out 7 Wayland which sold quickly and was bid up.

Finally you may want to check out yesterdays Sunday Globe (front page) as to roommate rentals;-(

[Stephen S.]

If you have the time it may be a nice learning experience to try to educate the seller. First of all; it is a 4BR/1bath house with a walkup attic. And, to me; it really needs to be a 3BR/2Bath if that can be managed.

Maybe start with those comps in an attempt to come to an offer-able price for this place.

Although my feeling is that this seller is likely to be so delusional that any sort of worthwhile discussion will be difficult.

stephen
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Originally posted by @Rachel L.:
Hi BP community -
I'm new to real estate investing and this is the first house I have looked at to use to learn how to crunch the numbers. I would like advice on how to proceed, if this would be worth any further time.

This is a FSBO single family, 6 br, 1 bath. 1st floor is kitchen, living, dining. 2nd floor is 1 bath, 4 bedroom. Attic (finished) 2b bedroom. Unfinished basement. (The bedrooms are small though).

The owner had a print out from Vision Government Solutions, Inc. Has anyone heard of this company and if so, are their appraisal amounts accurate?

The appraisal from that company came out to roughly $270K and there aren't any 6 bedroom/1 bath single family houses in the neighborhood. There are some single family houses with roughly the same amount of living area and less bedrooms and 2 baths. Would those be considered comps close enough?

Also, the owner is asking for $540K (least she will take is $500K). She's basing this number off a duplex sold with 4 bedrooms/2 baths that's a few doors down and was recently sold. She said that she will list the house with an agent if the house she can't sell it herself. Would it be worth my time to educate the seller why comparing her house to a duplex isn't going to give her the right value for her house? Should I even try to put in an offer?

Any advice would be helpful! Thanks in advance!

[Stephen S.]

dup. post

[Rachel L.]

@Ann Bellamy I've gone down to the city's Building Department. They looked up the info and said the Assessor's Office has the house as a 6BR/1BA. A building inspector pulled the file and there were no permits for turning the attic into 2 bedrooms. The inspector said that since the house was built in 1921, there are really no codes for what is considered a bedroom and they use the codes from when the house was built. The inspector said that as long as they have a smoke+carbon dioxide alarm, windows that can open up to 20"x24" (in case of fire and for escape) and the average person can stand upright with ease, then the owners can consider the two rooms in the attic as two bedrooms. In this case, the bedrooms could be legal?

@Mike D'Arrigo This single family house would be the largest single family house on the street. That being said, the street is really the length of one block and most of the houses on the street are duplexes. How does that affect the value of a house?

I've done a little bit of research for a 4BR/1.5BA. I ran my numbers with the idea of not making a lot of layout changes. If I change out the kitchen, do some cosmetic work, add a half bath and make the basement stairs easier to go up/down, MAO comes out to right at $200K. (If I'm being optimistic, MAO would be at $220K). I think it's better to be conservative?

I'm still going to put in an offer (with much expectation of being laughed). Step two of the learning process! :D

[Rachel L.]

@Stephen S. Thanks for the tip! I will also look and see about ARV for a 3BR/2BA

[Mike D'Arrigo]

@Rachel L. You don't generally want to buy something that doesn't fit the overall neighborhood. A 6Br 1Ba surrounded by duplexes really doesn't fit. I'd be more the careful with this.

[Ann Bellamy]

Well, then it's possible they might be legal bedrooms, but honestly, you don't want to market a 6BR house. I wouldn't buy this, but if you are doing it as an exercise, just remember that if you make an offer and it is accepted, you are obligated to move forward with it, subject to your contingencies.

I'd consider what it would take to make it into a 3/1.5 with bonus rooms or 4/1.5 with bonus rooms. Depending on the layout, maybe the best use would be a duplex. You could discuss this with the building department as to whether they would require additional approvals.

[Stephen S.]

As an interesting parallel - in about 1980 I was looking for a small house for myself: small yard, garage, cellar, useable attic, two or three bedrooms, LR, DR, Kit, gas heat - maybe 800-900 square feet. I didn't want to pay over $30K. I settled on buying the exact house I was born in - as it fit the wants-list perfectly. My parents had owned it from 1948 to 1958. <g> But the seller and I were about $1000. apart with hope dimming for a compromise. A block away was another house for sale. This other house was about 3000 square feet with a full cellar and attic. The entire south end of the house was a library with floor to ceiling shelves. The carport alone was over 900 square feet - it alone was bigger than the entire house I said I wanted. <g> The property footprint was the entire block - just under an acre. Every previous owner and their wives had died in the house and the last one had been an internationally dealing child pornographer. His heirs had the house for sale for $99K originally. On the market for over 500 days without offer they had decreased the price by the time I saw it to to $69. The Realtor told me later that I was the only potential buyer who ever walked into the house. Most had looked from the curb and said no. A few had gotten to the front door - but then always balked at going in.

The house was everything I didn't want - oil heat, big; thirteen rooms, a huge property to mow and maintain, over 500 feet of fence to paint, no garage, etc. The interior was all varnished solid wood. Hardwood floors, the walls were clear cedar and mahogany trim. I admitted to the Realtor that I liked the place but . . . how much? How much? How much?

Finally he came out with the "recently reduced to sixty nine nine".

What? What part of "thirty K is my maximum" did you miss?

Well; you could make an offer . . . .

OK; $30K

They'll never take that! And it comes with all this land - right in the middle of town - those extra building lots could be sold - this could be a great deal for you.

OK; I don't care if they take the offer - I don't really want the house anyway - it's your idea to make the offer.

So back and forth, I offer $26K, and end up buying the house for $31K - after almost a year of negotiating, by mail, with the heirs in California and Nevada. After the agreement is signed but before settlement I get the property subdivided and secure the loan with only the house on a smallish lot - 90 by 135. So after settlement I own all the rest of the block outright. A big portion I sold to a local church for $35K.

So I ended up owning the house for nothing. I still own it today and have lived in it at various times. It is somewhat different now as it has two full baths and one of the seven bedrooms has since been turned into a sort of laundramat with two washers and three dryers. A substantial part of why I still own it is . . . . nobody wants a large six bedroom house. <g> Most especially in a neighborhood of smaller houses.

Be careful about those 'good deals' you find - always think out your exit strategy carefully Before you buy . <g>

stephen

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[Rachel L.]

@Ann Bellamy Hm... Looks like I'll have to do a bit more research first. I'll definitely go down and have a conversation with the Building Dept about turning it into a duplex. I honestly don't think that would be the route I would go (being a beginner and all). I didn't realize that if the offer is accepted, the buyer is obligated to move forward... This makes me very hesitant to put a offer in, especially this is the first house I'm using to learn on.

@Mike D'Arrigo Thanks for the tip! I remember hearing about that from somewhere and had completely forgotten about it... I'll definitely take that into consideration when deciding on whether I make an offer or not.

[Ann Bellamy]

Rachel, in MA, there is an "offer to purchase" which is signed by both parties, then separately the Purchase and Sale contract is executed after inspections are completed. This is a generalization, but mostly this is what happens.

However, an Offer to Purchase, when signed by both parties, is a contract. Not just a "if you accept my offer then I'll think about accepting your acceptance". And MA courts, to my understanding, have upheld a signed Offer to Purchase as a contract. No legal advice intended, just what I have understood.

[Rachel L.]

@Stephen S. It sounds like a big house is very hard to sell because it's too much space for the average buyer and the average buyer doesn't want too big or too small. Thanks for sharing your story! It's a great story with a very important lesson for a beginner like myself.

[Colleen F.]

I would say while running the numbers here is a fine exercise to do if you make an offer it should be considered real. You have made a commitment - it really isn't an exercise if the conditions are met you plan on going through with it. Now if you have inspection contingencies etc they may change the deal but when you make the offer include everything that makes it work for you. Now they may laugh at the offer but they may also take it.

@Ann Bellamy is the offer to purchase document in Ma common for private deals? Our own home in Ma we purchased privately, agreed by email and had a contract written up, then inspections. This was about 10 years ago.

[Ann Bellamy]

@Colleen F. , it's common for investors not working with an agent to skip the two part process, it's not a law, just a convention, probably NAR