Is there any way to make the numbers work?

Question

Here's what I'm dealing with:

Homeowner bought a house with his first wife.  They got divorced and she lived in the house, then passed away.  Now owner has a new wife and new house, so is stuck with this extra empty house he still has to pay for.  He owes about $80k on the mortgage.  Comps around $90k-$110k, and could rent for $900-$975 easily.  He's in the process of fixing it up so it's not livable and still needs probably $10k-$15k worth of work.

The numbers simply don't work for flip, rental, or wholesale.  I considered sub2 or lease option but as far as I know those work mainly for move-in ready houses.

Am I missing something?  Any input/advice/ideas?

Joe Villeneuve · Answer

Never, and this is without exception,...NEVER, EVER again ask yourself "is there a way to make the numbers work".  What you are really saying is this.

"Can I rationalize this deal some way, so I can fake myself into thinking a bad deal is a good one.  I want to do this because I would rather have a deal and lose money, than make money.  Adding to the number of properties I control/own, is more important than the number of dollars I make".

Rationalization, is the most expensive word a REI can ever use.

John Thedford · Answer

Pass. If you want to buy deals with no profit call me. I can get you all you want.

Duane Kidman · Answer

Let's break this down:

1) "Homeowner bought a house with his first wife. They got divorced and she lived in the house, then passed away."

NC is an Equitable Property State.  Which means that the Ex/Deceased Wife could have had equitable interest, especially if she continued to live in the house.  If she did have an interest, did she have heirs?  Has her estate gone through probate?  I would check into this, and make sure he has full title and able to provide a General Warranty Deed.

2) He owes about $80k on the mortgage.  Comps around $90k-$110k, and could rent for $900-$975 easily.  He's in the process of fixing it up so it's not livable and still needs probably $10k-$15k worth of work.

What is the ARV?  ARV and comps can be two different things.  ARV is value of the house after renovation is complete.  Comps are typically average home pricing for the area, which are normally no completely renovated.  The difference can be $5-$10k different for this priced range home.

If he provides complete rehab, and you can pick-up for $90k, then you should be able to charge top rental value.

Otherwise, if the rehab is minimal to bring up to habitable conditions, you may make an offer of $80k or sub2 or wrap.

Joe Villeneuve · Answer

I never said don't ask others, I said don't ask yourself.  There is a big difference.  Asking others is asking for guidance, asking yourself, is asking for trouble.

Do you understand what I'm saying?  I'm not telling you not to "analyze".  I'm telling you to not look for ways to make bad numbers look good.  The question, "is there any way to make the numbers work?", is another way of telling yourself they don't...and then arguing with yourself, that somehow, you can make 2 - 3 not be a negative number.

Paul Thompson · Answer

I come across this type of deal fairly often. Entry level house, needs $5-15K of rehab and have $0-15K of equity. But after rehab you or the owner will do well to break even. Only strategy I've seen work here is to assign a lease/option.

The steps:

1. Get a lease/option with the seller so you can legally advertise the property (because you have a lease).

2. Then market for a rent-to-own tenant/buyer who is willing to do the sweat equity rehab. You get paid for assigning your lease/option.

3. Make sure you set everyone up for success and everyone understands the moving parts of the deal. This works best when the house is in good shape. But it can be done for houses that need some rehab.

4. You assign your option for a fee. You can take your payment as lump sum, in payments, or a combination of the two. The fee can be whatever you negotiate. For deals needing work a promissory note for $100/mo for 24 can work. For pretty houses a 3-10% option fee is reasonable with 3-5% being most common. That fee applies as credit to the tenant/buyer's purchase price. 3.5% works nicely for FHA loans. This technique is sometimes referred to as "wholesaling lease/options." There are a lot of moving parts to it so make sure you get the paper work correct. For a house that needs $10-15K of work makes it a tough sell and  leaves you little room for any assignment fee. So one twist is to just take one month's rent as a "consulting" fee. Be careful here not to act as an attorney. Seek counsel on how to set that up.

5. The intent is to get a tenant/buyer who really can qualify for a mortgage in 6-24 months. So you want to screen for a good tenant/buyer and not just accept the first party who is interested but has little chance of ever qualifying for a loan and cashing out the owner.

Also I strongly encourage you to consult an experienced real estate attorney to make sure you are complying with state laws (specifically your state's real estate commission laws).

Leases with options can allow for some very creative situations so you have to think through it and see where you can bring value by structuring a deal that is truly a win/win for all involved.

On this example you could also do a sub2 and then assign your contract or do a sub2 and sell on a lease option. But I would advise against it on this type of deal b/c there's just not any cash flow or equity that's worth the risk. Get a leasehold interest so your risk is minimal and then advertise that interest to a tenant/buyer who has some cash and willing to do the work to rehab and improve their credit. There are investors that construct their whole business out of this technique. Again seek counsel before doing so but it's not a bad technique to use for the right situation. Fully disclose your intent, have good paperwork, and genuinely provide value.

Steve Vaughan · Answer

If the owner can't demonstrate financial hardship, a short sale won't be approved.  They also have to be behind in payments.  Sounds like a short sale is not an option.

Buying sub2 and lease optioning to someone handy may be a good option if your okay holding for a few years. Just be prepared to make the payment even if your TB doesn't pay you.  Have reserves!

Adrienne Bryson · Answer

@Duane Kidman Thanks I will definitely look into probate issues if this turns out to be something I want to pursue.  When I look into "comps" I look for  completely renovated.  I try to find houses that are pretty much what I expect the subject house to look like when sold.  So I really meant to say ARV is probably around $100k.

Thanks for the insight!  It's looking like buying after rehab is going to be my only good option.

Adrienne Bryson · Answer

@Steve Vaughan I don't think the owner is experiencing "hardship" per say, more just inconvenience and a stretched budget.  I plan on keeping this for myself if possible, not necessarily wholesaling.

@Joe Villeneuve I don't think that is a feasible rule.  Considering I'm basically brand new to REI, if I were to NEVER question or pursue options I don't already understand, I'd NEVER get anything done.  I'm still in the learning phase so I have to explore all my options including those I don't yet know about.  I have no issue walking away from a bad deal.  But without seeking the advice of those more experienced than I, I risk walking away from a good deal I'm just not knowledgeable enough to make work.

Trust me, I'm not going to throw my money away!

Is there any way to make the numbers work?

Most Popular Reply