Something I'm Missing?

Question

First, a confession - I am a total newbie, never done a deal and still in the learning phase. So the chances are I'm missing something really obvious but I've been analysing a deal on a house and it seems too good to be true. For me analysing deals now will help me do it more effectively when I am financially ready to invest.

I wondered if the experienced investors here on BP could shed some light on what the issue might be so I can look into it. I am a firm believer that when something looks too good to be true - it is!

The house is a Short Sale 3/3 -1800sqft on around a 1/3 of an acre. It's in a very nice area (I used to live in that area) with an award winning school district, low crime area of the burbs. Basement, 2 car garage.

I'm 4000 miles away so I haven't been to view it so I'm relying on the pictures. From the pictures it looks like there are minimal repairs needed. I'd estimate $5k maximum but like I said I'm relying on pictures which could be old!

Not much in the way of comps - 2 currently listed with an average price of 123,623 and 3 sold in the last 12 months with an average price of 135,269. Looking at the sold comps - $178k, 173K and 55K with the $55k being a 2 bed 800sqft smaller than my target house.

Asking price is under 75k, and the one hiccup I can foresee is that it's well water, but it's possible to hook up to city water & sewer for $20k, if that's something that is something that needs doing. So, allowing for that and for some minor rehab, it seems to me that there is still $30k in this deal.

There has to be something I'm missing on this one.

Tom A. · Answer

Hi Jay, You got my attention when you mentioned the house is in Commerce Township. It was pretty easy to figure out which house you were talking about and it turns out I live about 4 miles from it. I'll give you a little more info that may explain why it appears to have been hanging around for so long, when it actually has had a number of seller-accepted offers over the last 14 months that it's been listed. As you know, it's a short sale. What you may not realize is that the way our local multiple listing service (MLS) works is that if the seller of a short sale property accepts a buyer's offer then the status of the listing changes from ACTIVE to CCS. CCS means "Contingent - Continue to Show". There are various reasons for the contingency, it can be inspection, financing, or in this case, awaiting short sale approval from the bank. Since the status code CCS says "continue to show" the listing is still considered an active listing despite the fact that there is a seller-accepted contract on the property, and these listings are rarely shown to any other potential buyers. Previously, short sales that were awaiting bank approval were given PENDING status, which meant they would not show up on searches of active listings. Listings with a status code of CCS however do show up as active listings even though the seller has accepted an offer. That's the case with this house. It went CCS on March 16, meaning the seller has accepted a buyer's offer. Now, this doesn't mean that the buyer won't back out of the deal, or that the bank will accept the buyer's offer. In fact, this house was first listed as a short sale in January of 2011 and since then has gone CCS and then come back on the market five times. During that time the price has gradually been reduced from $116,990 to its current price of $73,900. Obviously the house has some issues, probably related to the well and septic field since the listing mentions that it can be hooked up to city water and sewer for $24,000. Based on the length of time between when the house went CCS and when it came back on the market I suspect that some buyers backed out due to inspection issues and other buyers backed out because they were unable to get financing. I wouldn't be surprised if we see it come back on the market for a sixth time. I looked at the comps in the area and I believe the two that you referenced are ranch-style site condos in the subdivision to the North. Those were built in 2001 and are more of a premium product than the house in question which was built in 1964. I would not use those as comps. There is a subdivision northwest of this property, across M-5, that's more comparable and in that subdivision homes are selling for around $110,000. I think the house in question is a lot closer to that number for ARV than $135,000. Finally, while I apologize for the length of this post, there is one other valuation technique I use as a "sanity check" in areas where I am very familiar with the market. Since this is pretty much in my backyard, I know that home prices have dropped roughly 40% since 2002. The house in question sold for $167,000 back in 2002. Assuming, and this is a critical assumption, that that price represented a fair market value back then, this implies a current value around $100,000. It just so happens that the 2002 sale was a bank foreclosure, so that price may be slightly low. Then again, 2002 was a pretty strong year in the real estate market in Metro Detroit so the price didn't need to be discounted much. Putting it all together, I think you can see why this house has been listed for so long, and why it's not much of a deal for an investor.

Tyler McCracken · Answer

I'm not a fan of long-distance investing -especially for someone new. Have you seen this property? Do you know someone (really well) that is non-biased and you trust -who has seen it? How did you arrive at looking at property thats 4k miles away? My first recommendation is to start in your own backyard. Not saying its not a deal nor that it can't be done..., just that the odds of risk are certainly higher.

Justin Silverio · Answer

You need to factor in purchase costs ( attorney fees, closing costs, inspections, title insurance, etc.), holding costs (mortgage payments, property taxes, etc) and selling costs (re agent commission, attorney fees, staging, etc). If the ARV is $135k, and taking my costs above into consideration, including my target profit, I would be at $83k less repairs = $78k. Seems to be a good deal as long as the true repair costs are 5k and accurate comps are 135k. I will say that i dont usually go back 12 months for a comp. If you dont have access to the mls, ask a realtor to run some comps for you. Good luck.

Jay Neaves · Answer

Thanks a bunch Tom A., I've been checking in with the websites for a couple of these and I'm looking forward to engaging fully when we move. I'm looking forward to getting involved in the Michigan REI community and possibly putting some ideas and deals together.

Tom A. · Answer

You're welcome Jay. When you get to the US feel free to look me up. Since you'll be in the Detroit area I'll offer a few REIA recommendations. - Michigan Real Estate Investors - Great REIA run by Wendy Patton of Lease-Option fame, meets in Troy, Mark Yuschak (great guy) goes to this one as well. http://www.michiganrealestateinvestors.com/ - Renegade Detroit Investors - Another great REIA, run by Jeremy Burgess. Smaller, no selling from front of the room allowed (no guru pitches). Meets in Berkley. http://www.facebook.com/DetroitInvestmentClub - REIA of Oakland (County)- Grandaddy of local REIAs. Meets in Madison Heights. http://www.reiaofoakland.com Hope to see you...

Jay Neaves · Answer

Tom A. Thank you so much for taking the time to reply so comprehensively. Please don't apologize for a long reply that's exactly what I need at this stage so I can learn where I'm going wrong! I knew there had to be something I was missing on this one because I've been watching it for a while (because I actually quite like it for my wife and I to live in) and I couldn't see where the "problem" was. The lesson I've learned is that I need to be better at identifying better comps, but that's something I'll be able to do better once I'm back in MI and to be honest I didn't work as hard on finding the comps as I would have if I was going to be getting into the house! Given your reply I guess there may still be some money in the deal (unless as you mentioned inspection shows something) but probably not much and because it's not a good prospect to flip and I don't see it being a strong rental area. Not a great investment opportunity but a good learning tool for me! Again, that's a lot Tom for giving some insight on this one!

Jay Neaves · Answer

Mark Yuschak Hey Mark, We'll be relocating to the Metro Detroit area. My wife is from Richmond, and we want to be relatively close by (not too close though!) because my wife is an only child and her parents are getting on in years now. The house is in Commerce Township. Thanks for your kind offer of assistance, I will definitely want to talk with you when we get back to Michigan because even though I'm trying to get a lot of learning done now, I'll definitely be very green during my early deals. I've wanted to get into real estate investing for a few years, but we've not been in the right situation. Look forward to checking in with you.

Mark Yuschak · Answer

Jay, What part of Michigan was the property in? And what part of the state are you relocating to? I'm glad to help and offer any local assistance since I'm an active rehabbed in the state!

Account Closed · Answer

One thing I have learned over the years is that the numbers only tell part of the story. I'm a numbers person by trade so it tool awhile. Some factors to consider might be the location of the property relative to the other properties in the neighborhood, topography of the lot, does the ground perk, private water can be a serious draw back in many areas because it limits what you can do with a property and adds more liability. What is the soil like, zoning, neighbors, how close is it to other water sources, what kind of setbacks are required, is it connected to sewer or does it also have a septic system, what kind of septic system does it have, how close is the drainfield to any well water. Have any neighboring properties had septic failures or problems with well water, how many other properties nearby got private water. I often times like to talk to neighbors, the city planning department or others when I get serious about a property. Obviously I don't do this for every property. I only get involved in this type of due diligence when I see a property where the numbers make sense.

Tyler McCracken · Answer

Jay, Very good -you sound like you've got a very level decision making process. I didn't mean to be the one to bring up pessimism; however, I go into every deal with a pessimistic creditor's opinion and build my way towards neutral (or the realistic numbers) versus the typical salesman that on the other end of the chart. That being said...., it's great you working numbers on potential deals that you'll never do, as the more you get involved and work the details the more confidence you'll have when it's time to strike. One thing I always do is follow up on deals I passed on, check in on it in 6-12 months..., see what it goes for and follow up till it ends up into a landlords or homeowners hands to see the end result. Happy Investing.