What to do with this deal?

Question

It's amazing how it becomes common knowledge to the people around you once you're truly passionate about something.  One of my coworkers is a painter on his spare time and people come to him consistently about custom pieces for which he gets paid a good bit of money.  The same has started to happen when someone in my office has a house they've inherited, or want to sell; they come to me for an analysis and I make them an offer.

Anyhow, recently a coworker came to me with a deal that he hopes to sell which him and his sister have inherited from their mother.  It's a 3 bed, 1.5 bath, 1 car built in 1960 with a 5 year old roof and HVAC.  Everything else would need to be updated.  We're in negotiations on price and meanwhile I'm trying to determine if this would be a good flip, or hold opportunity.  I've never done a flip, but have always wanted to dive right in and learn through taking action.

Here are the numbers as a rental assuming it won't need much work to just get it rented out:

Purchase price:  $80,000

Market Rent:  $1400

Expenses (PITI, CapEx, PM, Vac, Rep):  $1066

Cash Flow:  $333

CoC Return:  25%

Possible BRRR as non-rehabbed comps are around $120,000

Flip:

Purchase price:  $80,000

ARV: $150,000

Repairs:  $24,000

Holding costs:  $2000

Cost to sell:  $9,000

Approx Net:  $37,000 before capital gains

Now I know the rental return looks great but here's the kicker: the mother had three different tax exemptions (1 owner occupant and 2 senior citizen exemptions) and once those fall off the taxes will go from $3550 to around $6200.  This brings the cash flow down to $105 meaning a CoC return of slightly less than 8%.  What would you guys do with a deal like this?  Flip?  Wholesale?

Travis Sperr · Answer

Michael R. do you have a few minutes to connect on the phone?

Peter Vekselman · Answer

Michael R. this is definitely either a wholesale or buy fix and sell deal.  You are sitting on good stuff with this one.  I would get it locked up ASAP.

Michael R. · Answer

@Travis Sperr thanks for jumping in on this!  Yeah that's what I'm racking my brain about.  If I go the owner finance route of 10% down @ 6% interest the cash flow will be about $114/mo from now until 2018 when the newly adjusted tax bill changes from $3550 to north of $6200.  At that point the cash flow drops to a negative number.  If I finance conventional as an investment they want 20% down at 4.5% which will cash flow $222/mo and drop to $1.80/mo!  These figures are based on 10% Vac, 10% Management, and 10% Rep./Cap expenses.

Do I hold for a year, kick the tenants out, and flip?  Hold, cash out, and buy something else making this an equity play?  The place is in a great neighborhood with all 8/10 schools so it'll likely appreciate nicely if held for a while, but I'm not going to count on that.  Thanks for the help thus far, I'm really anxious to hear how you guys would handle this one.

Peter Vekselman · Answer

Michael R. I would go with the cheapest money.  Make sure you do not have pre-payment penalties in case you want a quick sale.

But yes, if you can get Sellers to give you cheap money then go with them.  only thing on the Seller side is many times they will want some kind of balloon.

Keep me posted.

Michael R. · Answer

Ok so, believe it or not, we are still trying to put this deal together.  Maybe you guys could help me with this next hurdle:

The person I have been dealing with is the property owners son.  He/his sister have taken over power of attorney for the mother since her mental health has degraded over time to the point where she cannot make conscious decisions on her own.  It's a very sad situation and an opportunity to create a win-win  since the son and daughter are tired of paying for the recurring expenses of owning a home they never wanted in the first place.

The son (my coworker) and I have come to an agreement on the terms of the seller finance loan:

10% down

5 year loan @ 6% with balloon based on a 20 year amortization

6 months guaranteed interest as a "success fee" to the son if it's rehabbed and sold early

Now it just dawned on me that I may have put the cart before the horse here.  My question is how can the son/daughter finance the deal if they only have power of attorney and don't actually own the home?  They're just making decisions on behalf of the mother and paying the bills from their mother's account.

Michael R. · Answer

There's also the consideration that it may cost 5 grand or so to get it cleaned up to the point where I can get a renter in there.  It will need some paint and carpets at the very least.

Travis Sperr · Answer

If you can do owner financing with 0-10% down you might consider keeping as a rental. With nothing down cash flow can be weak as you have equity in the property. Although it looks like $37k in profit would be a lot better than $100 a month.

If you flip - let the owner finance it to you, you fund the repairs and drastically reduce cost of capital. In either case let your bank get started and work the owner finance angle to keep both options open.

Michael R. · Answer

@Peter Vekselman well I managed to get it locked up at 78k and now it's time to fund it.  The house really just needs paint and carpets with some basic kitchen and bathroom rehab to be able to make it comparable to recent sales in the area.

Should I do conventional financing through my credit union at 4.5% with 20% down to leave the option open in case I choose to rent it out for a while, or explore the option of seller financing and keep this a short term flip move(the seller has expressed interest in being the bank on this)?

What to do with this deal?

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