Please Help Analyzing This Deal!

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Please Help Analyzing This Deal!

Christopher V.
Addison, IL · Member since 2016 · 35 posts · 12 votes

Hey all,

I live in a western suburb of Chicago and I have a neighbor who just passed away and her son is looking to sell the house asap. He agreed to let me walk the property and make him an offer before he puts it on the market. It's a two-flat and the same exact layout as my house which is extremely rare in my area. Just a little about me, I own a painting company, however, we do custom cabinetry, dry walling, flooring, etc. So I can do most of the work myself with the help of my brother and dad.

Details about the house:

Asking price: $230,000

Layout: Upstairs is 3 bedroom, 1.5 bath which can land a conservative $1300 in my area. The bottom floor would be a duplexed unit with a basement. It's 3 bed 2 bath. That can likely fetch $1700 if not a bit more.

Comp that sold recently: $300k

Estimated repair costs: $75k conservative (full gut)

Property Taxes: $4,500 per year

Utilities: Separate for each unit, tenant would pay their own electric, gas, garbage, etc. I'd only pay the monthly landlord insurance (roughly $120) and snow/grass.

I don't have the funds to extend an all cash offer but am contemplating working with a hard money lender. If any of you have done this before, I'd love to hear your experience. What'd they ask of you to release funds? 

If you had this offer in front of you, what purchase price would you offer? I'm leaning towards a $150k offer if I can make a deal with a hard money lender. I've tried to work the numbers, but I don't have a lot of experience with BRRRR so am having a bit of trouble. Please feel free to ask any questions and I really appreciate your help/guidance in advance.

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Nghi Le
Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
8y

If you're employing the BRRRR strategy, the first thing you should do (before making an offer or talking to a hard money lender), is to talk with a loan officer to see if you can qualify for a refinance. Otherwise, you might find stuck in a hard money loan that you can't get out of.

There are secondary lenders that can do the refinance into a long-term loan if you can't qualify for the bank financing, but they're not going to be as cheap.  But in general, make sure you can refinance out of hard money before putting yourself in one.

In terms of hard money, when you say release funds, what do you mean?  Are you asking how to get pre-qualified for a loan, or how to get funds for the rehab once you close on the deal?

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  • Nghi Le
    Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
    8y

    If you're employing the BRRRR strategy, the first thing you should do (before making an offer or talking to a hard money lender), is to talk with a loan officer to see if you can qualify for a refinance. Otherwise, you might find stuck in a hard money loan that you can't get out of.

    There are secondary lenders that can do the refinance into a long-term loan if you can't qualify for the bank financing, but they're not going to be as cheap.  But in general, make sure you can refinance out of hard money before putting yourself in one.

    In terms of hard money, when you say release funds, what do you mean?  Are you asking how to get pre-qualified for a loan, or how to get funds for the rehab once you close on the deal?

    2Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    Howdy @Christopher V.

    Based on your $300K ARV and $75K Rehab estimate I would offer something like $120K - $125K. Depending on your Closing and Holding cost estimates. The Refinance loan amount will be 70% - 75% LTV. I target my all-in costs to be as close to the 70% as possible. In your case that's $210K. Subtract the Rehab estimate and Holding/Closing costs (using $10K for this example). These numbers represent what would be required to payoff the Hard Money loan and get all your cash back.

    Totally agree with @Nghi Le regarding getting Refinance loan arranged first.  You must have your exit strategy in place to reassure the Hard Money Lender they will be repayed.

    2Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    8y

    To put it simply, I have two goals on a BRRRR. One, get 100% of my money out once it's rented. Two- rent it for 1% of the purchase and rehab costs combined. If I KNOW I can do these two things, then I'll give it a shot. Good luck!

    2Reply
  • Frank Gucciardo
    Highland, NY · Member since 2013 · 169 posts · 130 votes
    8y

    Does it need a full gut rehab or is it just cosmetic updates?  Remember, you are renting not flipping.  You don't always need to go full gut-rehab when some paint and flooring will do.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Christopher V., if you can bring it up to the same standard as sold comp(s) of $300k for no more than $210k all up, you should be good to go for Refinancing your deposit back later.

    A 1.4% gross return per month thereafter isn't too shabby for the area, right? Or, is it?

    So, accounting for Frank's question above, you should be able to calculate your MAO.

    We'll be interested to read about your decision. All the best...

    0Reply
  • Christopher V.
    OP
    Addison, IL · Member since 2016 · 35 posts · 12 votes
    8y

    @Nghi Le Thanks for the advice on having a loan officer in my corner for the refinance before even talking to a lender. I am in talks with a couple now. I don't believe I'll have a problem though. I have $ in savings, a solid W-2 dual income with wife, and 775+ credit score. I'd hope that'd be enough to get me 70% LTV of $300k.

    @John Leavelle I understand how you're coming up with your numbers. But when the seller is asking for $230k, $120k seems so far off. Any advice on how you'd approach it?

    @Corby Goade thanks for the info! With the calculations I did (8.33% vacancy, 5% maintenance, 10% capex, 10% management, landlord insurance, etc.) I was coming in at slightly over 1%. So in my head, I believe it'd work out and I will pursue this.

    @Frank Gucciardo unfortunately this is going to basically be a full gut. Needs new everything, the property wasn't cared for every much. Also, I do believe there is some foundation damage in the living room which I'm accounting for in my conservative 75k rehab estimate. Luckily though I should be able to do most the work myself.

    @Brent Coombs that's where my head is at too with the $210k in total. As far as the 1.4% return, yeah that's be fantastic in my area.

    All in all, I need to figure out how to approach this guy the right way to talk him down from 230k to the 130-150k range that I could live with. I'll give you guys an update should there be one. I'm going to do another walk through this week and bring a contract with me.

    Thanks for all the advice!

    1Reply
  • Brian Garrett
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    8y

    Your analysis seems spot on and is exactly how I would be approaching it. Good luck!

    0Reply
  • Donald S.
    Accountant · Saint Louis, MO · Member since 2017 · 409 posts · 362 votes
    8y
    @Christopher V. Let the numbers do the negotiating for you. Show him, hey this might be worth 300k after its ready to go, but it'll take me 100k to get it ready, add on my holding costs, closings, and a little profit for my effort and this (insert $$) is what I can offer. If he doesn't take it, remember no doesn't always mean no forever, just no for now. He may come back to you after it sits for 6 months
    2Reply
  • Christopher V.
    OP
    Addison, IL · Member since 2016 · 35 posts · 12 votes
    8y

    @Donald S. that's a good point. Appreciate the advice. The answer is always no if you never ask.

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    @Christopher V.

    What @Donald S. said is spot on.  The numbers and condition of the property must do the negotiating for you.  How much will it appraise for in its current condition?  If it really needs a gut job I doubt it would make his $230K asking price.

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