Ready to buy my first deal: advice welcome

[Allen Ellis]

Hi all,

I'm getting ready to purchase my first house and would love a sanity check and any advice you all may have.

Background

• I'm currently living in a rented room costing me $400/mo
• I have some extra cash which I'd like to start getting a return on

My game plan to meet those goals is to purchase a house and rent one of the rooms to help pay the mortgage. I could:

• (a) Find a renovated home, move in and rent out as-is (prices are ~$260-300k)
• (b) Find a home that needs some TLC (prices are ~$150k), renovate as needed ($50-70k)

I'd like to renovate/househack because I have a flexible move out date (any time before next May), I have cash on hand to make repairs, and I don't mind hiring out & supervising the skilled labor.

Specifics

I've found on the MLS a house for ~$140k, around 1200 square feet. I saw it today: it's been well cared for but needs to be updated throughout. The mechanicals (circuit breaker, water heater, etc) seem to have been updated within the last decade or so. Has internal ductwork driving their heat but not the AC. The roof is brand new.

The obvious fixes include: new kitchen, refinish or replace floors, reconfigure second floor slightly to fit laundry beside the bathroom, repair plaster as needed, new lighting fixtures, paint, other cosmetics as needed

The biggest work I could possibly imagine include:

• Moving an exterior wall to make the kitchen larger
• Structural repairs to the staircase
• Add a second bathroom right above the existing bathroom
• Acoustical and/or thermal insulation for comfort

I haven't gotten any bids yet but I would imagine that work could be done for $50-70k. If I could buy it for $135k then I'm in for around $200k, and it should be worth around $230k.

At that point I would plan to rent the upstairs (private bed + bath + small office) for $600+ per month, which would almost completely cover the cost of my 15-year mortgage.

My next steps

• Find a realtor. The listing agent has offered to do it for me and save us all a little money, but I believe on my first purchase it's important that I have my own representation. Recommendations are welcome.
• Find a contractor, get quotes. Is it reasonable for me to invite one or several contractors over before committing to buying? Or is that typically done during the inspection period?

Questions

Why has nobody else purchased this? Most flipping advice I've read says you have to discover deals before they hit the MLS if you want to make money. This one's been on the market about a month.

I asked the listing agent this question, and she said most flippers are looking for returns upwards of $50k per flip, and that the margins on this house don't quite allow for that (I'm projecting a $30k margin). Does that sound right? Are there any red flags I'm missing?

Thanks!

[Maria Stewart]

Find a realtor that works with investors if you can. They have a better idea of what is needed and some steps to take when evaluating a home to renovate and possibly flip. I only recommend dual agency (you use the same agent as the seller) for those who are advanced investors. Dual Agents become paperwork handlers as they can't effectively be an advocate on either side without violations. 

My additional advice:

1. Get a contractor immediately and have them create a list of items required and estimates.

2. Have your agent do a few things: 

 a) provide comps of the house as is, then provide a second set of comps which include the features YOU want to add to the property to make sure you don't over develop. If there are no houses in the area for $230K it may be hard for you to get $230K. 

b) send you the history of the property (in the MLS) to see if any other accepted offers were placed on this house. I was able to negotiate a $20K discount by looking in the history. Found out that the seller listed the house with another agent 6 months prior $20K less. Unless renovations were done, why not accept the price you listed 6 months ago? They did!

   c) Also, ask for the tax records to see if you can figure out how much the owners own on the house. I guarantee you if they owe $140K (for example) they would probably not entertain your $135K offer because they would owe the bank at closing AND have to pay commissions for agents on both sides. 

3. If you buy, make sure your inspector is the very next phone call made and have them thoroughly inspect the place. You want to know everything. A good inspector's report should have pictures referencing the issues and I recommend being there for the inspection. Make sure the agent puts proper clauses in to allow you to back away from the deal with your earnest money as soon as you find something you don't like. 

Feel comfortable negotiating down the cost further to compensate you for necessary repairs. This may help you as it ensures repairs are done like YOU want them AND reduces the cost of the house. You were planning on renovating anyway right? 

Pay extra for a sewer inspection because the line to the street is your responsibility and can get costly when you have to dig up the yard and sidewalk to repair. 

Hope this helps!

Maria