HELP! Need Advice on First Deal

[Jal Singh]

Hello everyone, I’m looking for some advice here. I’m working on my first deal, which will be an SFR income property. Everything was going along smoothly, until just before we were scheduled to close I was told that it would be delayed a couple of weeks for the seller to obtain the Foreclosure Due Process Certificate which was required by the title company. Not a big deal. But now I’m told there is another delay of 45 days to clear the title and obtain the title insurance (actually 45 days was the original number, the listing agent is working with a different title company that can do it in 21 days). This property was picked up by the seller at a tax auction in September 2013. When a property is purchased this way, the previous mortgage and any tax liens should be wiped clean, but I still have a bad feeling about this. Again, I’m a newbie and this is my first deal, so I think the bad feeling I have is just fear, which is why I’m looking for some BP community opinions and guidance!

Here are the numbers for the property, located in metro Detroit area (Ferndale):

* 3 bedroom/1 bath
* Rent: $800

* Insurance: $29
* Taxes: $104
* Vacancy (10%): $80
* Reserves (25%): $200
* Commercial Loan Payment: $160

* Cash Flow: $227

* Out of pocket expenses: Down payment ($8,400), Plumbing/Misc ($1,500)

The numbers are good, but are the numbers “great”? Is it worth the risk here? I’m not sure what other problems could arise from this. I also have to consider the extra time it takes to close, since I’m losing on opportunity cost. I have already invested time and a little money (inspection costs) on this property, but I realize things happen and I'm not necessarily going to hold on just because of that.

The options I’m looking at are: 1) Ask for concessions due to the delay, 2) Wait and take the risk, 3) Walk away and look for another deal

What do you guys think? Thanks in advance!

[Tom A.]

@Jal Singh, the property tax figures on the MLS listing are probably "correct", but may not be applicable to you.

Typically when an agent inputs the data for a listing, the property tax amounts are automatically filled in with data from the county public records. That data should be correct in that it accurately reflects what the seller or previous owner paid for taxes. It isn't necessarily what a buyer will be paying however.

First, the previous taxes may be calculated as homestead (owner-occupied) tax rates rather than non-homestead (investor, or 2nd home) tax rates. In Ferndale, for homes in the Ferndale school district, the homestead millage rate is 53.59 and the non-homestead millage rate is 71.77, or 34% higher. As a rental house you'll need to use the non-homestead rate in your calculations.

Second, if the previous owner had been in the home for a long time there's also the possibility that the taxes shown on the MLS are based on a capped, lower Taxable Value. Since property tax increases are limited to the lower of inflation or 5% it's possible for the taxes for a long-time owner to be well below what a new buyer would pay since the taxes "uncap" upon sale. They may have uncapped due to the tax auction sale but the new higher taxes won't be reflected in the public records until the next tax cycle.

To determine what you'll be paying, check to see what the SEV of the property is. Your agent can get this for you or you can call the city or county. Then go to the State of Michigan online property tax calculator at https://treas-secure.state.mi.us/ptestimator/ptestimator.asp and input the SEV, county, city and school district. It will give you your property taxes for both homestead and non-homestead classifications.