Is an OK deal better than no deal?

Question

My HELOC is paid off and all that cheap money is just sitting in the bank ready to be used as my 20% down to buy some more houses.

At some point I'm thinking it's better to buy/rent a house with a low dscr than it is to do nothing. I'm thinking that 6% is better than no percent. I'm half tempted to make some decent deals with this HELOC money as the 20% down, then use the cash flow from all my properties to pay off the HELOC, then repeat the process.  It's a process that has worked so far, but I made some pretty good deals the last time around.

I know I can do better in the bad neighborhoods, but I don't want the trouble that goes with it.

Thoughts? Do I hold out and let the money sit a little longer or make an OK deal?

James Wise · Answer

If the sellers didn't counter at 48k or 50k they won't counter at 53k either so I would just skip out on that idea just wasting everyones time at this point.

What will the house rent for? If the rents are $900+ sounds like a good deal to me. Dont get caught up in this nonsense about 70% rules or 2% rules. A property can be an awesome investment even if you can't turn around and sell it for an immediate profit or make $300 per month in cash flow.

Think about market cycles, interest rates, tax benefits and principle pay down. Rates are low, financing is easy to obtain. You can't reduce your tax burden while having the tenant pay down your mortgage while you wait for an uptick in the market if you never buy any properties.

Russell Brazil · Answer

@James Wise likes to use the baseball analogies just like I do.  2 or 3 singles gets you to the same place as 1 home run.

James Wise · Answer

You can't hit a home run if you don't go to the ballpark.

Steve Vaughan · Answer

For me it would depend where you are in your investing career.  First deal? 'Young' and hungry? Going to learn a lot?  An ok deal may be better than none.  The education alone would be half worth it.

Experienced and content?  No way.   I don't chase or try to squeeze blood from turnips or whisper sweet nothings into my own ear.  It is what it is.   I'd rather take a nap.

Congrats on paying off your HELOC.  Save and continue learning.  Impatience has put many in a bind.

Got to know the seller's pain point.  If not, you are offering 'blind'.  Blind offers are time consuming and usually a waste as you have found.  ID a few rentals you really want and get to know the owners.

Or join 'em and sell your least favorite until things turn @Earl Whitbeck.  I'm amazed at what people will pay for my 'dogs' in this market.  Good luck!

Anthony Angotti · Answer

Hi @Earl Whitbeck

I wouldn't make the numbers too tight, but since you are going to get more consistent equity growth in better areas and you are paying down the mortgage you may count equity growth as wealth generation as well.

Based on that it's not a horrible idea, but I think the best idea is to just look a little harder for a better deal. I don't know your area though so if they just don't exist much then more power to you for keeping the money rolling.

Vivek Khoche · Answer

@Earl Whitbeck - I think you have learned the basics of REI. You should consider yourself lucky not to have tried home run as you just can't hit one.

You need to be patient and work on strategy, refine your criteria until you find a deal. A great deal for someone may not be a OK deal for you. Here is an example of off market deal:

3BD/3Bath/1 car garage house in A neighborhood in a great shape ready to be rented $1100 PM:

Previous owner bought in 2004 for $70K.

I was offered at $73.9 K , My numbers were $68K but I increased it to $71 since It was my first deal with a new agent.

Owner sold (Whole seller) it to TK at $70.5K

The property is under contract @$103K.

I could have paid $3 - $5K more but house was on a zero lot therefore I passed.

Good Luck Investing

Vivek

Earl W. · Answer

Andrew,

You're absolutely right.  Problem is, I've lost multiple deals by holding out over a few thousand dollars, I guess it's a case of thinking "If I don't act now, it'll be gone".

Maybe as time goes on and they continue to get letters they'll reconsider.

Earl W. · Answer

James, Home Runs are great. At this point I'm thinking a base hit would be better than striking out.  Here's the details from one of the deals I'm letting get away.

$95,000 Assessed value $85,000-$90,000 Value after repairs, IMO $25,000 Everything else. Probably closer to $20,000, I added in a little for worse case.

I knew right off the bat the sellers wouldn't take anything close to the70% rule, so I skipped right past it and went for 10% profit.  I figured If I sold it tomorrow:

$79,050 Sell price after realtor's fee. $85,000-7% realtor's commission=$79,050 worse case

$54,050 Break even using worse case.  $79,050-$25,000 in expenses=$54,050 Break even

My first offer was $48,000.  $48,000+25,000 in expenses my all-in would be $73,000. $73,000+10%=$80,300

The seller replied that $48,000 wouldn't cut it because in their mind the house is worth $90,000 fixed up and it would only take $15,000 to get it there.  So I offered $50,000.  The seller responded back that $50,000 wouldn't cut it. House has been vacant for 6 months, bank is getting ready to foreclose and I'm their only offer.  The bank wants to do a short sale, seller wants to get the bank as much as possible because the bank is a not for profit that helps lower income families and the bank helped them get the loan.

My question: I'm very tempted to give a "best and final" offer of $53,000.  In all honesty, the house would probably sell for closer to $90,000 and my all-in costs will probably be closer to $20,000.

So $90,000*.93 Realtor's Fees=$83,700-$20,000=$63,700.. More than likely at $53,000 I would still make $10,000 profit without doing any of the work.. But this doesn't factor in worse case scenarios.. Still a pretty good deal, but according to the big dogs this deal sucks.

My last part is this... If I'm hanging onto it as a rental and paid worse case $78,000 ($53,000+$25,000) for it that's still a pretty good deal and still 7% cheaper than buying anything on the MLS. Of course if I sold it, it would be a wash after paying the Commission, but since I'm keeping it as a rental a 7% discount isn't bad? At $53,000+20,000 I would be getting closer to a 15% discount compared to the MLS. If the house actually sold for $90,000 and I had $73,000 into it I would be getting close to a 19-20% discount off of the MLS.  Not bad IMO, but it doesn't meet any of the "rules".

Thoughts?  Would you pass on this house?

Joe Hughis · Answer

@Earl Whitbeck - Not every deal you do will be a homerun.  In my opinion, as long as the "OK" deal you speak of still satisfies your investing criteria and allows you to sleep at night, then it would be worth taking it on.   However, don't go chasing after a deal simply because you have the funds available.  I think someone once referred to that as being an "itchy investor".  Not sure if that phrase is proper, but it was humorous.  :)

Is an OK deal better than no deal?

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