Flip, Rental, Rent to Own, or WHAT for a Dallas Suburb Property?

Question

Dear BP family,I received a lead from a middle-income neighborhood and I am trying to figure out the best strategy considering the following:Empty-nesters tired of home owners dues every six months, have a few recreational toys they are tired of paying storage so they may want to move if the price is right. 158K is still owed on the home but has been assessed for 204K Comps show that the ARV is 250K We are overestimating that the repairs would be 20K max as it is only 9 years old, granite countertops, hardwood and porcelain tile floors in good condition, crown molding, etc.4 bed/2 bath2681 sqftBuilt in 2007We personally don’t see this as a flip according to our numbers and while doing the numbers for a rental, it looks to be a negative cash flow…and that was without adding the HOA fees every six months.We are trying to look in the best interest of both the investor and seller. There is 80K in equity and I know there has to be a strategy that would make this a win-win situation for both the investor and seller.Any thoughts are greatly appreciated!

William Powers · Answer

This is a challenging analysis. I think it depends on the investor and creating balance in a portfolio. We purchased a similar property for our portfolio recently…we have 75 cash flow property - 2%+ overall, but not in areas that provide strong gross dollar appreciate opportunity since they are low cost areas - purchase for $30-60K and ARV of only $100-150K. When you are looking at something with $80K of "instant equity" and the opportunity to appreciate further, I think you have to put a value on that within your rental formula. Here is our recent purchase from which you can gleam some information.•Property Purchase Price $220,000 (MLS – January 2016)Total Rehab $45,000Total Invested $265,000•Current Market Value- $350,000 - $85k+ of instant equity•Monthly Lease Payment $2400 – Rent to Own, $379,900 (Pre leased – first, last, security - $7200 to move in)•Debt on this Property - $176,000 (5%, 15 year amortization)•Total Capital Invested in deal - $89,000 (unusually high) •Monthly Debt Payment - $1391•Monthly Taxes - $520 •Monthly Insurance - $78•Maintenance/Accounting/Management Fee - $360•Monthly Total Cost - $2349•Net Cash Flow/Profit - $51 plus principal reduction of $680•Return on Investment – 9.9% (low) and $85,000 of instant equity (high)I self manage on all 76 properties, so I am paying myself. The property is in a area with great appreciation opportunity - 3-5% for the next few year 9my estimate), so that makes the investment deliver a 23% return if we see 3% appreciation. And as you see, we offer Rent to Own (RTO) which could lead to a sale at a price point that delivers us a great return in a "long term flip" with capital gains tax rate rather than ordinary income tax rate. Hope that helps. Good Luck,Bill Powers (BP)

Account Closed · Answer

This is certainly one of those cases I will never understand. In most parts of the Metroplex, the person could simply put up a For Sale sign and get a lawyer to do the paper work. They could most likely close in 35 days from when the put the sign up.If they need help figuring out a price they could simply get several Realtors to to BPOs.

Amber Zelaya · Answer

@Todd Plambeck Those were my thoughts exactly and after talking to the homeowner again, it looks like that is the best option for them. I am starting learn the difference of what a truly motivated seller is. With my marketing campaign I realize that some people are simply curious, while others are truly distressed so to speak.@William Powers Thanks a TON for such a detailed example. I can't tell you how much I appreciate it! Such a valid point regarding the opportunity to appreciate...thank you for pointing that out. Awesome to hear about your 76 properties...and the fact you self manage. That is truly a feat and very motivating!@Mark Allen Thank you for your input as well! I appreciate your advice...I have thought about getting my license and may seriously consider it one of these days. In the same token, I don't mind referring unmotivated sellers to a realtor in my network. Regarding the price, they were looking for around $265k which comps show to be retail price.

Mark Allen · Answer

Amber - How much do they want for the home?There are a few things you could do:1) Take over the mortgage, fix it up, sell it, split equity with seller.2) See if they'll sell with owner financing and wrap a mortgage around it - wrap another mortgage around it or fix/up sell on MLS.3) Get your license and sell on MLS making a commission. I would recommend this if you'll be doing a lot of marketing.4) Get paid a referral fee by an experienced investor that can provide a solution to seller with 1-3.I hope this helps...

Todd Plambeck · Answer

Why wouldn't they just list it with a realtor?