Is this a deal?

Question

Hello,

I am currently in contact with a distressed seller in Ohio who wants out of their mortgage. It is a VA loan and having it is keeping them from buying a home at their new location in California. They tried to sell the house before they left but could not sell it without taking a loss, so they decided to rent it. There is an all-star tenant in there right now paying 1100 a month. The tenant is a 50 year old widowed nurse 3 months into a two year lease.

They changed their minds about renting the property after realizing they did not have enough VA entitlement left over to buy another house in CA. So basically they are trying to give the house away at this point.

Home Value: 122k

Remaining Loan Balance: 110k

Annual Taxes: 2,786

Annual Insurance: 750

I know normally people don't think of single family homes as good investments but this house already has a tenant only 3 months into a 2 year lease. Furthermore the rent rates look real solid in the area - I feel like I could do better than 1100 a month. Anyone have any thoughts? It looks like there could be $300 a month cashflow on this? Do people disagree?

Michael Morrongiello · Answer

Aaron - I agree with most of the other posts here. The deal is a GOOD deal for the seller IF they

can get their FULL VA entitlement back that allows them to buy a CA home. However there is LITTLE equity and cash flow that you are picking up with the current lease / tenant situation.

Here is a TWIST of an idea. Bring in an investor to pay off their VA loan so they now have their full entitlement back.  In return the investor will have a FREE & CLEAR rental house which they can then refinanced later down the road to get back a good portion of their cash outlay. Now CONCURRENTLY for paying ALL cash and paying off the VA loan the couple will give the investor an OPTION to buy a 50% interest in the CA house they are BUYING with their restored VA entitlement. Now the investor has upside potential on BOTH houses.

Aaron Canciani · Answer

@Brent Coombs

Thanks for the advice! That seems to be the consensus and I think I will move on.

Brent Coombs · Answer

@Aaron Canciani, not a deal!

Most buyers look for at least 10% off ARV anyway, which makes $110k = FULL market value! Investors (such as you are hoping to be?) want/need MUCH more of a discount! You owe it to your wallet to not to get caught up emotionally.

Once you start talking underwater prices with someone who is hoping to come out owing nothing - there is trouble brewing! Wish them well; move along...

Jeremy Pace · Answer

@Aaron Canciani

I can't really say that it's a bad deal without some knowledge about the maintenance.  What I can tell you is that 110k owed on $122k value is a problem.  That's a 90% LTV.  For you to be able to buy it (bank style), you have to get that LTV under 75%.  Do you have $20k down that you (or a client of yours) can bring to the table, plus six months taxes and insurance, plus all the other closing costs?  You're looking at ~$25k to $30k+ cash up front for $300/mo, assuming that number is solid.

That's not a terrible CoC, but is that the best you can do where you are?

Now, if you have the whole purchase price cash, or you have private funding, that would shift it a bit, but not a ton.  You'll still run into issues on your exit because you'll only be able to refi out 75% of the value ... so either way you have to address it.

Frank Dimino · Answer

It's a deal for the seller as it solves all their issues, but on your side it's not a "deal"

its just an ok buy, you should be able to do better.

Chuck VanDyne · Answer

@Aaron Canciani My best piece of advice is to contact a local real estate agent who specializes in short sales. We have a short sale expert here in Rochester NY and he will actually meet with the seller with you and get all the information needed. The seller doesn't pay them a commission, usually the bank will pay that. The best part is that the agent will work both sides of the deal so you can sit back and relax while the short sale process comes to close. This could take 3 months to a year to close but can have a huge pay off.

If you decide to take this route I would search google for short sales and see which realtor represents the majority of them in the area. Best of luck!

Aaron Canciani · Answer

@Chuck VanDyne

Thank you for the detailed response! It seems to be lukewarm at best. Maybe if I can get them to sell it for less than they owe I could make it work better but I am not sure if they are in a position to do a short sale - I have not learned much about that yet - I will have to do some reading. Thanks again.

Chuck VanDyne · Answer

@Aaron Canciani Lets run some math on the property...

Annual Rent - $13,200

Insurance - $750

Water - Does tenant pay the water in the lease agreement?

Taxes - $2786

Vacancy - $1100 (1 months rent)

Cap Ex - $1320

Maintenance - $660

Property Management - $1320

Net Income = $5,264 (Which is pretty good!)

Cap Rate = 4.8% (assuming you bought it at 110k)(Net Income/Purchase Price)

4.8% Cap Rate isn't awesome. You would need to know the cap rate of that particular neighborhood in order to compare the deal. Also, if the house has a new roof, new water heater, and furnace, and/or newly painted exterior then you may be able to justify decreasing your budget for capital expenditures and repairs/maintenance. I typically stick with 10% for cap ex and 5% for repairs and maintenance regardless of the condition (unless its a new build and all new mechanicals, or the contrary).

For example, you may find that the cap rate in that neighborhood is 7% and you would find that the deal is not a good deal at all. However, if the neighborhood is 7% you can always divide your net income by .07 and get your new purchase price of $75,200. At this point you can offer her $75,200 and if she rejects it then go on the MLS and find a deal that does make 7%.

Also, I wouldn't classify a seller as "giving away the house" at a discount of 10%. I would say anything below 80% would be giving away the home.

Aaron Canciani · Answer

@David McLean

When I say give it away I mean for the amount they owe in it, 110k

David McLean · Answer

what do you believe you can purchase the house for when you say they "basically want to give this house away"? That would be important info in analysing this deal.

Is this a deal?

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