How should I structure this motivated seller deal?

Question

I have a motivated seller with an SFR, 3 beds, 2 baths, 1600sq. ft., Houston suburbs. The ARV is 120K, the rehab is 15K, and I'd like to make 20K (flip) with an exit strategy of refi, rent and hold. I'd like to offer 85K and close with no agents to save the commission. I can pay cash or get a loan. She still has a mortgage with 50K left. I'm concerned about having to pay closing costs twice in a short amount of time and capital gain taxes if I flip. But on the other end, I'm not excited about being a landlord if I had to hold it because I'd like to focus on multi-families for passive income. How would you structure this deal? Let me know if you need any more info, thanks!

Vinay H. · Answer

@Frank S. right now you may want to put the investment in Texas on hold pending the outcome of the Hurricane and Flood. As for taxes, yes you will pay but only on the gains, not on your entire cost basis, so that seems fair. It's not like paying taxes on the whole transaction costs twice over. And you will be able to deduct your expenses and costs very liberally ....

Aaron Mazzrillo · Answer

You obviously need to take some classes to learn about tax strategies. Just because someone works, doesn't necessarily mean that person will owe taxes. It is your patriotic duty to pay as little tax as legally allowed. Funding the government's unfettered spending addiction is not the responsibility of the well informed.

Cody L. · Answer

Your main closing costs if agents are not involved will be title insurance. When I've bought/sold or bought/refi with the same title company the new insurance is much cheaper the second time because you get some credit for what was previously done (not sure the term. I'm not a title expert. But I've had similar concerns when closing twice in short order). You could buy the property outside if title for the first close. If she owes $50k and you want to buy for $85k then give her $35k, assume (wrap) her loan and get a QC. Then close traditionally when you sell/refi

Aaron Mazzrillo · Answer

Your math doesn't add up. You can't sell a house for $120K after spending $15K on rehab and still buy it for $85K while making $20K profit. That is reality TV math. Title, escrow, insurance, property taxes, landscaping, utilities and real estate commission on the exit are not free. I know Flip this House would like you to think the only expenses are purchase and rehab, but there are a whole lot more involved. If you buy it for $85K paying all cash, I'm guessing you'll make about $10-12K on this deal IF your rehab goes exactly as planned and comes in on budget... Very unlikely scenarios. I think $75K is more realistic to see a $20K check on the exit, but that is still not providing any wiggle room for surprises on the rehab and not using an agent to sell. If you have $110K in cash sitting around, I'd offer $70K and go as high as $74K if you want to actually make a check on this deal.A 1,600 sq/ft house selling for $120K doesn't sound like much of a house in my world. I'd spend $15-18 sq/ft on rehab, I stick a private lender on it to keep my capital available for better opportunities and my offer would be around $65K.

Bart H. · Answer

That's a great point. It will be the wild west, people will be needing to sell, major rehab needed, a whole bunch of displaced workers, refineries down, destroyed homes. The cost of labor will skyrocket and the cost of suppliers probably will as well.And we aren't out from under this yes. Sounds like there is a lot more rain left to go.

Brian Pulaski · Answer

Have you calculated closing costs yet? There will probably be taxes involved whether they are credits or payments by you. Keeping realtors out on the buy seems easy enough at this point, but what about on the sale end? Seems like you will make $20k, before closing costs/fees and taxes (I get taxed business taxes not capital gains).

Rick Pozos · Answer

Why does everyone NOT want to pay taxes. It is a part of being a big boy. If you work, you pay tax, if you invest in real estate you pay tax. Dont worry about paying taxes, that sounds like an excuse to do nothing.The important thing to do is talk with the owner of the property. Find out what it is that they need. They may tell you that they only need 10k and you got a sub-to deal at 10k down. But you will not know until you ask. Dont limit what you WANT to make. You may get the deal at a better price than you think. But again, find out what the owner wants and needs to get on with their life. Meet or exceed their needs and you will be the hero.