First deal analysis

[William MacBride]

This is kind of the first potential deal me and my girlfriend have run down and are trying to decide if its a "good deal." I'm just putting it out there for anyone to comment on in whatever way they see fit because I'm so new to real estate.
It's 2 houses in a not that nice neighborhood in Buffalo, N.Y. They are "two detached houses." one has 2 bedrooms and 1 bath. The other has 1 bedroom, one study of some sort, and 1 bathroom. I haven't seen them yet but they must be pretty tiny. He wants 18k for both of them together.
He says he rents 1 for 280.00 a month (the 1 bedroom), and has someone lined up to rent the other one for 500.00.
The PITI on the 5 year (seller financed) note plus the utilities he pays (water and garbage) comes to about 450.00 a month. The two rents together come to 780.00. So positive cash flow of 330.00.
Its near a state university (buff state), but is not exactly in a nice neighborhood. It looks sort of like we'd be in for slum lord hassles to me, but I donno. It's just a low income area, not exactly a slum probably.
My girlfriend says zillow.com gave a FMV of 39 grand. It seems unrealistic to think we could even flip it for 30 grand if this guy's willing to let it go for 18k. Why would he do that?
Haven't done any comps on it yet.
any thoughts?

Will

[Minna Reid]

It sounds like a good deal up front 18k for 780/month in rents, especially if he'll hold a note, but have you seen the houses? Do they need a ton of work? Are the rents and expenses verifiable?Are you close enough to manage/repair these houses? Sounds like you dont know the area very well.
What kind of terms are you getting on the note?
Have you done a full cash flow analysis as in estimated ALL expenses? Theres a few I see missing in you initial numbers.
There's a few questions to consider, for starters.

[Jon Holdman]

Originally posted by William Mac Bride:

The PITI on the 5 year (seller financed) note plus the utilities he pays (water and garbage) comes to about 450.00 a month. The two rents together come to 780.00. So positive cash flow of 330.00.

Many, many other expenses. Rent - PITI does not equal your cash flow. Search for "50% rule" to get an idea of what the other expenses are. At the lower end, and this is definitely lower end, you will want to assume a higher ratio for expenses.

Yes. You need to forget about zillows value. It thats correct, its pure luck. Figure out the value yourself. Look at other houses. Find recent solds in this area for similar properties. Zillow can help with that. So can your county records, a realtor, or a title company. Until you know the real value, you're flying blind.

You need to verify the rents, too. The seller may be totally truthful. But it would be foolish and expensive not to verify all the numbers yourself.

$18K for $780 in rent does sound pretty good. But, like Minna says, it could be a complete dump. It could be a good deal, but still not a good a deal as other properties in the area. It could be unrentable except to crackheads. You need to check it out and do your own due diligence.

[M. Jones]

In some ways it sounds like a good deal ( seller carried note, 2 properties at one price, decent rental history) and then in other ways it doesn't sound so hot( bad area). But one thing you should learn from this situation is that there is no realistic way to tell if it is a deal until you do some research. Getting your values from Zillow will not cut it. I have seen them list a property way too high and way too low! At least if they were consistent one way or the other it would be useful as either a buying or selling value generator. But please don't get discouraged if it first it looks good, and then looks bad after you have gotten the true comps, rental history, neighborhood background, and repair quotes. It is better to find out it is not a good deal before you sign on the dotted line.
Also worth considering is that I have been approached to buy properties before that I wasn't interested in until I ran some numbers!! Then I was really on board. The trick is to get accurate comps, rental history, and keep a realistic expectation of vacancies and maintanance.
As far as why he is selling at that price, it could be any number of reasons. Just because he is selling low (possibly) doesn't mean it is not legit.
Best of luck to you.

[Michael Rossi]

Go look at it!!! Until you've seen it, you're just wasting your time. Sometimes, properties can be worth LESS than the land they're sitting on. On the other hand, this could be a very good deal. You won't know until you've seen it.

Good Luck,

Mike

[William MacBride]

yeah I looked at it. Not a great neighborhood, definitely he scent of drug activity. I'd like to know more about this 50% rule.

Will

[Will Barnard]

50% rule is a very quick way to analize a property's potential cash flow.
Take the monthly gross rents and dived by 2 (50%) the 50% is your operating expenses (which also include capital expenses according to this rule). The balance 50% is your net operating income (NOI). Then subtract out your debt financing and the balance is your cash flow.

Keep in mind this rule is based on making assumptions and averages and should not be used as the final decision to buy or not to buy.

[Michael Rossi]

I agree with everything Will said except this. I use 50% as the basis for my purchasing decisions. There simply isn't a more accurate way to do it, because there are not accurate, long term expense numbers available for the vast majority of small residential units.

Mike

[Will Barnard]

Fair enough Mike, but I do not agree 100% there. However, if you read what I said closely, I stated that it should not be the final decision. Of course it can be part of the decision.

[Michael Rossi]

We're dangerously close to consensus here Will. I do agree with you that a person should do all possible due diligence and nail down as many expenses as possible.

Mike

[Will Barnard]

Mike,
I see no danger in that. In fact, reaching the consensus is a positive outcome.