First Rental Property - Thoughts?

Question

This will be my first purchase so looking for any feedback from the community.

Ask - $50k - started above 70k. Assessment well over 100k. Homes in area 130k+.

Needs - probably 15k in immediate repairs, another 10k in various improvements.

Renter for property already secured.

It is a Foreclosure, bank selling it.

Applied for loan thru local bank. Great credit score. They are asking for 25% down. Should I accept 25%? Seems odd.

Inspector is not allowed to come and review home until purchased. Is this normal?

Any feedback is much appreciated! Thanks.

Dash Siva · Answer

Hi Adam -

Congrats on getting started. The folks here would most likely be looking for additional information to help provide a more complete assessment.

• What's the macro picture? Job growth/diversity, population growth, landlord laws, path of progress
• What are your overall goals? More cash flow, appreciation, or a blend of the two?
• What's the monthly rent you can expect? What are the remainder of key expenses such as taxes, vacancy, repairs, legal, accounting, admin, PM to name a few; what's the capex?
• What's the market vacancy? Class of neighborhood?
• As far as loan terms, it's a numbers game. Don't get discouraged - keep talking to local banks, PMs, realtors, other investors, and anyone you can get in front of to find more favorable terms. It's essentially a #s game, you'll eventually find terms that find your needs, but you may have to get a bunch of "NOs" before getting to the 1 "YES".
• Keep up the good work and keep us posted on your progress

Christopher Phillips · Answer

@Adam Simpson

If you're going to get into foreclosures, you need to get up to speed on the environment. As @Jeff Bridges mentioned, there are a lot of variances between the different agencies involved.

Bank owned properties are straight forward. They are listed on the MLS and you go through the process like any other house on the MLS, putting in an offer and such.

HUD, Fannie Mae, Freddie Mac are on the MLS, but they ultimately want you to bid through their websites. First 10 days are for owner occupant bids. Then they open it up to investors. Each one has its own set of quirks. So, you have to determine which organization you're dealing with and adjust accordingly.

In either case, if your offer is accepted, biggest issue will be getting the utilities on for an inspection. Can take up to 15 days, so you have to make sure the agents handling things keep on top of it. Sometimes they'll try to talk you out of an inspection because they don't want to deal with the utilities, but don't blow it off. Even if you waive the inspection contingency, you can still conduct one so that you know what you're getting into...

A walkthrough with a contractor isn't an inspection, it's just a big picture look at things. Contractors won't test the wiring or the plumbing or the HVAC. But that brings up another issue...

Banks usually deal with the occupants before listing the homes for sale. Fannie Mae homes often come occupied, which will prevent interior access until after closing and evicting the occupants.

Many vacant properties will be missing plumbing and wiring. People either vandalize them or steal the copper. In that scenario, an inspection doesn't get you anywhere since you can't turn anything on. Many will also have mold somewhere.

Ultimately, this brings up an issue of value. Many foreclosed properties are over priced given their condition issues. So, make sure you don't over pay.

Max Offer = After Repair Value - Repairs - 10% Repair buffer - closing costs (to buy and sell) - Expected Profit or Expected Equity.

So, you have to have a good handle on the ARV and the expected repairs needed...

Adam Simpson · Answer

@Christine Kankowski - yeah, we went and saw it with the realtor..but the bank said no inspections until purchase...we're definitely not moving forward on those terms. Seemed odd to me that they would make that a restriction.

Christine Kankowski · Answer

Wait, the biggest thing you said its that you are not allowed inspections until you buy it?  Who agreed to this?  What if the entire house has mold?  You need to know what you are getting in since repairs can exceed the value of th ehouse if you dont know what you are getting.

I would absolutely, without fail, get a home inspection on your first purchase.

Adam Simpson · Answer

Great info guys. Appreciate the insight. @Christopher Phillips @Jeff Bridges

Jeff Bridges · Answer

For foreclosures besides HUD, you are usually allowed to make an offer with an 10 day inspection contingency, if accepted, you get your inspector inside within that period, evaluate the report and findings, and then decide whether you want to move forward with settlement or back out due to unforseen repairs or costs. I only pay for an inspection if/when an offer is accepted and I invoked that contingency. it protects my money from being wasted on inspection fees if they wont accept offer and protects my deposit so I can get it back if I want to back out after acceptance. Be sure not to conflate tax assessment with actual market value. The tax assessors won't buy your house, buyers do so those values differ. Use recent sale comps for similar condition and size/ age houses in the immediate neighborhood to identify After repair value. thats how you tell if throwing 25k in repairs will result in some built in equity (or not) and help you not overpay based on predicted repairs. last thing you want to do is have your purchase price plus rehab cost be more than the house is worth fixed up..

Adam Simpson · Answer

Thanks Dash. Appreciate the response. I'll follow up with more information soon.

Does the % down on a property fluctuate then with different lenders? I guess as a newbie I'm used to hearing the 20% number a lot so the 25% caught me off guard. If I can afford a higher down payment, is it worth it to shop around for less down if everything else is the same?

Is there a good resource for landlord laws? Or should I just talk with other local landlords and network in the area?

First Rental Property - Thoughts?

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