Buying a Section 8 Property from a Wholesaler

[Chris Schroeder]

Hello,

I have acquired a few properties before but never have I acquired one from a wholesaler nor have I owned a Section 8 property.  I never intended to get a Section 8 property but a deal was sent to me by a wholesaler that just seems to good to be true - however, every step of the way in my due diligence process indicates this may be a deal worth considering.  Details are as follows:

-Wholesaler is offering a 4 bedroom/1 bathroom house for 40k$.  The pictures indicate the house could use some surface cosmetic work.  The wholesaler is claiming there are no major defects with the home and the roof was replaced a few years ago.

-Comps for similar condition, similar size homes in the area are in the 30-45k$ range.

-The property is currently being rented on a month to month basis (1 year lease expired a few months ago) at 1174 $/month.  This rent is wholly covered by the Section 8 program.

-I have confirmed that the house is indeed Section 8 approved.  The owner has forwarded a letter from the housing authority stating that as of 11/1/17 the approved rent assistance for the current tenant is 1174$/month.  As a double check I called the housing authority and they did confirm the house is Section 8 approved.

-The house is being sold as a cash only deal for expedition.  I would prefer financing but from my understanding this can be typical for these type of wholesale deals.  Hoping to refinance soon after buying.

At 1174$/month in a guaranteed rent check from the government and an asking price of 40k$ this is very hard for me to pass up.  My plan is to get an inspector out ASAP so that I can understand the condition of the property - my main concern being the major components such as roof, foundation, piping, electrical, etc.  I have never bought from a wholesaler before though and usually had the loan process and a real estate agent to act as additional protections that I am not missing anything.  My questions are:

-What other things should I be considering here as part of my due diligence process?

-1174$/month is definitely high for rents in the area.  From the research I have done a similar house would rent for 700-900$/month on the open market.  The housing authority has approved it for 1174$ though.  What risk do I have of losing that level of rent and/or Section 8 status and having a place that rents for much less than it currently does?

-Is there any value in me using a real estate agent to represent me in this transaction?  I have a friend who is an agent and his honest opinion was that not much value would be added having an agent for this transaction.  He advised that I just need to do my own due diligence with a proper inspection report to identify potential repair work needed and getting title insurance.

As you can see, on paper this deal looks great.  My main concern is that the 1174$/month is higher rent than similar properties I am finding in the area.  Am I wrong to assume that if the current tenant moves out I will be able to get another Section 8 tenant placed for the same price?

[Hattie Dizmond]

@Chris Schroeder First, your friend is right. You aren't getting much value having an agent involved. Second, Section 8 rent levels are set based upon location and number of bedrooms, which determines how much a property can rent for. Financial qualifications of the tenant determine how much of the rent Sect 8 will actually pay. That means, if the house is approved for up to say $1500, but the tenant is only approved for $1000, they can still rent the property, but they would be personally responsible for the $500 delta between the 2 price points. Sect 8 rents haven't gone down. In this market, there's no reason to believe they will. It sounds like this property will cash flow positively at a much lower rent, so I wouldn't be too concerned. Just be cautious, if you need a new tenant, with folks whose entire rent isn't covered by sect 8. Getting that delta amount from the individual can sometimes be a challenge. As for the wholesaler, generally when a deal is cash only it is because the property will not qualify for underwriting in it's current state. I don't know of that is the case here, but I would definitely want an inspection period. If everything is good, then just look at the $40k as a down payment. You can finance out of the house immediately. Still, with regard to the wholesaler, I don't know who the person is or what group they may be with. There are good, ethical wholesalers, there are shady wholesalers, and there are downright sleazy ones. My partners and I wholesale properties, when we either don't have the bandwidth to work it ourselves or find a deal that just doesn't match our business model. I like to think we are the good, ethical sorts. ;) But, I still encourage all my investor partners to double check all my numbers. I would never intentionally mislead them, but I could have just made a boneheaded mistake. Do your own due diligence, always.