Free house yes or no?

Question

Ok first post on here, I have been reading tons of post and wanted to ask a question.My loan officer called me the other day and asked me if i would like to buy a foreclosed home at 100% financing and he would also loan the money to do the repairs in the loan. I would be paying 30k for the house and he will loan me 40k for repairs.I will owe 70k on the house and it should bring within the 850-950 range in rent.I feel like I am getting this house for free basically because i would have no personal investment and the house would be worth 80-90k when i am done.Is this a deal or would i be putting myself out too far?

David Faulkner · Answer

You are NOT getting the house for free, you are buying it for $30k, and then putting in ~$40k. That's $70k all in on a $80k ARV ... that deal is a bit too thin IMO ... way too much risk and work for a potential $10k profit if everything goes perfectly. Does not matter if you are buying 100% cash or 100% debt. If the deal goes south, I promise you they will still come after you for the amount owed.

Greg Moritz · Answer

More info is needed to really analyze the deal.  Does the house have hidden problems?  Have you been to it?  Is it in an area that attracts renters?  How did you determine the value of the home and the approximate rental price?  What are the taxes on the property?  Have you factored in other costs like closing costs?  Is this property local?  Would you be managing it yourself?  Do you have experience in managing rehabs?

On the surface this seems like this might be attractive, but you really need to do a full analysis to know if it's worthwhile.

Jassem A. · Answer

I'd be curious whether it actually needs 40k worth of work. I bought a house once where it was said to need 50k worth of work and I did the work on the weekends myself for under 5k.  I might let him finance me the home and then do the repairs myself.  I probably wouldn't bother if the home is in a bad neighborhood because it will mostly likely attract bad tenants and they might leave the home in worse condition than when you purchased it.

Steve K. · Answer

@Addison Fields , welcome.

I don't know your market, but you could do worse than the deal you're describing....it might work well for you.

Keep reading BP. On vocabulary, you're not being offered a "free house", you're being offered an attractive "no money down, 100% financed purchase"....which could still work. You're still paying $30k for the house.

Note that fix/hold investors try and acquire and rehab for about 70% of the ARV. So, a $90k ARV should target $63k for acquire/rehab....you are using $30k+$40k = $70k.....so you have found a deal that's 78% of ARV. If it costs you $70k and it rents for $900, that is a ratio of 1.3% of the purchase price (some markets brag that this can be over 20%; find out if it's the going rate by reading Georgia discussion threads). The fact that after rehab, you're targeting $20k of "rehab profit" is skinny....there are closing costs, financing costs, etc that eat into that margin.

100% financing is attractive. At the end, you should have a $70k loan on a $90k property and you have 78% LTV....you will have accomplished a "BRRRR" rental purchase. Could work.

Of course, look at the mortgage payment, and other expenses, to make sure you still cash flow with your $900/mo rent.

Good luck

Ronald Rohde · Answer

I assume you are taking this property off the lender's hands. Id be suspicious of such a "free" deal. Run your numbers, but you can probably get more from the lender. Are you going to have any equity left if its only worth $80k?

Alexander Felice · Answer

100% leverage + cash flow = infinite CoC ROI

I can't speak about your specific deal, but using the most leverage possible is a common leverage strategy.

Doug Woodville · Answer

Have you put this into the free calculators or have you downloaded any of the free spreadsheets for rentals?