Neighbor wants to sell, deal or no?

Question

We are in Phoenix and have been really wanting to get into real estate investing.  My neighbor wants to sell us their home (single family).  They had an appraisal done April 2019 appraising at $273,000.  Zillow, Redfin, and some comps show estimate around between $285,000-$310,000.  They gave us about a week to consider it before they seek out other options.  They urgently want to sell and plan to move out of state this month due to serious health issues.  They do have a loan on it, but I’m not sure how much they owe.  However, the home is not move-in condition and needs some work.  It is a historic home, like ours, that would need the hardwood floors refinished, update the kitchen completely, new paint, fix a gasline issue, and do landscaping (estimating $15,000 in repairs).  We would not mind the work of a fixer upper house like this one and have experience from completely renovating our own historic home.  Otherwise the home is in good condition, it’s a solid brick home in a cute historic neighborhood.

We really want to get into buy & hold, so we can have rental income long-term.  We have run the numbers to buy at $270,000 for buy and hold and it is cashflowing negative.  According to the calculator we could only offer $185,000 for it to break even.

We tried running the numbers for fix & flip, but if shows we could offer $260,000 just to break even (we would want at least $20,000 to take on a fix & flip).

We have considered buying it and using the property as a lease to own option.

We also thought about taking over their mortgage somehow or asking if they would do seller financing, but I’m not sure if they are interested or capable of that.

We’ve also considered wholesaling the property, but have never tried that and wondered if it’s worth the risk?

Also, with the virus closing everything down, are people still buying homes or would we risk sitting on it for an extended time until things are back to normal?

Considering all these options, none of them seem like a “deal”, but we don’t want to pass on the opportunity of our chance to get into real estate and possibly own an income property right by us.  Is there something we aren’t considering?  Is the Phoenix market not good right now for buy & hold?  Is that pricing just too high for a fix & flip?  How would we go about wholesaling this deal?  Would any investors be interested in partnering on this?  Does anyone have experience with lease to own?

Wes Blackwell · Answer

@Joel Carrasco

This doesn't sound like a deal to me. The owner is trying to sell their property for near full retail price, and the best buyer for them is going to be someone who plans owner occupy as a primary residence. And under $300k in Phoenix is super high demand so they shouldn't have any trouble getting that.

While they do have some medical issues, they aren't pressing enough to not allow you a week to think about it before considering something else, so there's a lack of motivation.

Ultimately, I would weigh this option against other options/properties that you have. If your money is better spent elsewhere go with those options. This may be an opportunity for someone, but not an opportunity for you.

Account Closed · Answer

First, could you cash flow positive if you just rented it as-is?  You could try renting it without spending a bunch of money on upgrades and see how that goes.

Try the numbers with these calculators, to see if there's a difference.  It would be really nice to own the house next door.  How convenient would that be?  Also, check out Craigslist rental ads, too.  I never found Zillow or the other sites like that to be accurate on rent estimates, although that was a few years back.  Look to see the actual ads to see what others are asking for rent.  Good luck.  I hope you can make it work.

Rental income calculator:

https://www.calculator.net/rental-property-calculator.html

Tax calculator

https://smartasset.com/taxes/property-taxes

Residential Rent Vacancy Rates:

https://www.deptofnumbers.com/rent/

Wes Blackwell · Answer

@Joel Carrasco

It may help if you show some added interest and tell the homeowner you'd like to get a bid for the work that needs to be done to the property. Have a contractor come in and write you up an bid/estimate for every single thing imaginable. Might even be worth it to pay for a home inspection too (as this is what would happen in a normal transaction, and then seller is liable to disclose this information to a potential buyer). Then when you show it to the homeowner they may realize there's a lot more work to be done then they thought there was, and give you the discount you need to get the deal done at a number that works for you. Hope it pans out for you!

Joel Carrasco · Answer

@Wes Blackwell thanks we agreed that it wasn’t looking to be our deal however got a better idea/number from them that might work after all, we are still considering all our options.  They are ready to sell as is and it’s not move in ready so owner occupied might have a challenge, unless its someone like me that wants a fixer upper.

Joel Carrasco · Answer

@Pamela Sandberg. Thx, sent you pm, happy to explore other areas.

Joel Carrasco · Answer

@Jake Saliba thx yes rehab ourselves as much as possible to keep costs down.  Thx for the pm, appreciate your insight.

Joel Carrasco · Answer

@Sue K. Thanks for the suggestions and additional resources, unfortunately it’s not move in ready so we will have to rehab a bit, at least flooring, kitchen also needs a gas line repair and possibly some insulation.  We think we may as well improve it more significantly to get the value and rent up, maybe add bed and bath...still considering all our options.

Joel Carrasco · Answer

@Stone Jin thanks for the suggestion, we’re going to explore however I know they have a home equity loan also, so that may make things more complicated, any way to do subject to on that as well as any additional equity they want?  Thanks again for your time!

Pamela Sandberg · Answer

Cash flow is tight in Phoenix right now, there's no denying that fact. It's going to be especially difficult in the historic neighborhoods (which have become very popular and driven purchase prices up, while rents are increasing a little less quickly). Most people are looking for the appreciation instead of a monthly cash flow.

If you are really interested in cash flow, there are neighborhoods and strategies that can help improve your numbers. Happy to discuss!

Jake Saliba · Answer

The rehab stuff you listed will cost a lot more than $15k. I guess based on price that you're thinking of doing all the labor yourself?

Depending which historic district in Phx, a lot of rehabbers and end buyers are targeting pretty nice rehabs to maximize ARV in those areas.  I have flipped in historic Phx and I spent anywhere between 50k - 150k rehab on the various flips I have done there! (150k we only kept exterior walls and roof)

I sent you a PM. Curious which neighborhood this is and what is the sq ft / beds / baths?

Neighbor wants to sell, deal or no?

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