Good potential deal?

Question

Hi all,

I just wanted someone else's opinion on the deal I am thinking of.

I found a rental income property that is selling for $100k. Current renatl income is $700 per month. I got an appraisal done and it is valued $180k. Boyhood the appraiser and myself looked at the house and it is in really good shape. No repairs needed at all. Reaaly nice.

I am thinking of putting in $50k cash and get mortgage of $60k for the balance + closing costs. Then sell it in a year for hopefully $180k which would be a nice profit.

Area is stable, growing, and I think it hold it's value. Person selling it needs the cash.

What do you think?

Jeremy Colonna · Answer

My philosophy is to buy rental property for rental purposes and buy fixers to flip. If the property is worth $180K and is capable of being financed, then you should look into why it hasn't sold.

I have a very hard time believing that a home worth $180k would be renting for $700/month. That's just bad math. Realistically, nobody is willing to make a mortgage payment that is double the going rental rate. Check out the neighborhood at night. The only way that you can acquire a property at 55% of its retail value is if there is something dramatically wrong with it!

Andy More · Answer

IF your numbers are right I would buy it ASAP and sell it ASAP for 180k and make a quick 50k+ profit.

However, what part of the country is the property in? 180k for a 700 in rental income is a 257 gross rent multiplier which is HORRIBLE.

Is the property listed with a realtor? With 70k in instant equity, why hasn't anyone else bought the property?

J Scott · Answer

What Mitch said...

Additionally, if you have renters in there for a year, that's a year's worth of damage being done to the property by people who probably don't care much about your plans to kick them out in a year.

So, if you really plan to rent it for a year, make sure you include some budget for additional rehab after the renters leave but before you resell.

Considering it will probably take just as long (or short) to sell in a year from now, I'm not sure what your motivation is to wait.  Are you thinking you'll list it on the market while the tenants are still there?  If so, you might want to reconsider that idea...

Mitch Kronowit · Answer

It doesn't matter if this house is in the USA, Southern France, or on Mars. If you think it's going to take in the vicinity of a year to sell this house, then it's OVERPRICED at $180k. The forced sale value of $150k means it should move almost overnight. Somewhere between those 2 extremes, the house should sell rather quickly without locking it up for a year. Who knows WHAT the house values will be in that area by then?

Vikram C. · Answer

Mitch, it is quite normal in many parts of the world for it to take a very long time for a property to sell.  This is primarily because many real estate resale markets are not as well organized as they are in the U.S.  For example, there are no databases of properties for sale similar to our MLS, so it often takes quite some time for a buyer and seller to actually know about the existence of each other.  Even simple things such as recording a deed can be a PITA.  Without knowing more about the OP's country, it is hard to rule out the possibility that the house could take a year to sell at the given ARV estimate.  Ideally, I would like to see an ARV estimate based on a 6 month holding period even in inefficient countries, but perhaps in his country it takes a bit longer?

Mitch Kronowit · Answer

Something doesn't look right. Either the $700/month for a $180k house is WAY too low or the appraisal for $180k is WAY too optimistic. $700 in monthly rent for a $100k house would stink even in California where the home value/rent ratio is still relatively high.

I can understand a motivated seller pricing a little below the market for a quick sale, but this is off the charts. He could probably get $140-150k as quickly as he can get $100k. He must have a good reason or be totally clueless to walk away from all that equity.

It looks like one of those examples the real estate guru's always use, i.e., "I found a house worth $180k and the owner owed $95k and wanted to move quickly, so I gave him $100k. He paid off his loan and put $5,000 in his pocket. I flipped the house in one week for an $80k profit!". Yeah, sure you did.

However, if it's all true, write a book about how you did it. I'll quit my day job!  ;-)

Stan Jackson · Answer

Could not get an assignment on the property, sell it to an end-user for a lower return? Somewhere around $20-$30k.

List(sell) the property for a very attractive price, get paid and be done with it.

Ditto, the wife, friend thing!

Des Shei · Answer

double post.

Des Shei · Answer

Vikram is right...nothing like a good ol' exploitation of a wife's good friend to extinguish that friendship! tread lightly.

Vikram C. · Answer

Actually, the numbers posted are quite normal in many parts of the world so I am not surprised by it.  It still sucks as a rental, though.  But it does look good as a flip assuming it does not need much in repairs.  If it is a concrete house as in many parts of the world, I suspect you will not need to spend much on it.  Tenants tend not to cause as much damage in many countries as they apparently do in the U.S., and buyers also have lower expectations with respect to property condition so not much may need to be fixed.  It all depends on the OP's country, of course.

My main concern with this deal is that it is the OP's wife's "good friend" who is apprently mistaken about the true value of her home.  If I were in the OP's shoes, I would ask my wife to educate her friend about the true value instead of trying to make a buck off her.

Good potential deal?

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