Help with first deal

Real Estate Deal Analysis & Advice
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Help with first deal

Dustin Lee Cotliar
Member since 2019 · 4 posts · 1 vote

Hello smart investors of BP! Long time listener/reader, first time poster. 

My spouse and I are buying my parents house to help them out (long story but needs to happen). The house will likely appraise for 170-180K. Will need around 30K worth of repairs and upgrades. Plan is to buy from them and then have them live in the house for the rest of their lives and pay us a VERY discounted rent and we could cover repairs etc. It seems as though they would be willing to sell us the house for 130K. They owe about 90K on the mortgage, and would get a nice chunk of funds from the sale. I was thinking of getting a 'construction loan' to cover the purchase and construction; from what I understand its unlikely that I will need to put anything down because of the discounted purchase price. Then once complete, use a HELOC loan to pull out the equity and invest it into another property. Will likely try and get a 30yr loan, say 5% interest. We have perfect credit and have never purchased a house before/taken out a mortgage loan. I want to then pull out the equity and buy a duplex or something similar and eventually want to either get into multifam or commercial. This is near Baton Rouge, LA

*If you had to be in this scenario, is this the strategy you would use? Anything you would do instead?

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Robert Leonard
Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes
7y

Here's how I see the numbers you presented: 

$170k = ARV

$130k Purchase Price = 76.5% of ARV

~$30k of Repairs. Where is it coming from? You said two different things: "we can cover the repairs" and "use a construction loan to cover the purchase and construction." Which one is the actual case?

If your parents owe $90k, the only way they get the "chunk of funds" is if you pay them $130k and then do the repairs. That would mean you put $160k (94%) into a $170k property.

If the property is worth $170k, you can borrow up to 80% ($136k) of the value of the property. There will be transaction costs (appraisals, closing costs, loan fees, etc.) that all come out of what you can actually "take out" when you refinance.

Where will the equity come from to buy the next investment?

Just FYI, when you first start doing this, repairs usually run twice what you expect on cost and time.

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  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    7y

    @Dustin Lee Cotliar

    You will still have to have a down payment and closing costs. A SFR for an investment property is 15% down. You could go the route of a renovation loan - HomeStyle versus a construction loan.

    Also this is a non-arms length transaction as you are buying from your parents. This can not be a bailout situation - at least for conventional. Which means - they can not be in foreclosure or stopped making payments and you save them from foreclosure. Not that this is the case, but I wanted you to be aware that the lender will look at the scenario closely.

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  • Chase Pino
    Real Estate Agent · Baton Rouge, LA · Member since 2019 · 17 posts · 4 votes
    7y

    Be careful making your parents situation your first investment.  Emotions come into play and there is a good chance you can end up making the payments.  

    Just from reading the info you have provided brings up a lot more questions.

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  • Robert Leonard
    Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes
    7y

    Here's how I see the numbers you presented: 

    $170k = ARV

    $130k Purchase Price = 76.5% of ARV

    ~$30k of Repairs. Where is it coming from? You said two different things: "we can cover the repairs" and "use a construction loan to cover the purchase and construction." Which one is the actual case?

    If your parents owe $90k, the only way they get the "chunk of funds" is if you pay them $130k and then do the repairs. That would mean you put $160k (94%) into a $170k property.

    If the property is worth $170k, you can borrow up to 80% ($136k) of the value of the property. There will be transaction costs (appraisals, closing costs, loan fees, etc.) that all come out of what you can actually "take out" when you refinance.

    Where will the equity come from to buy the next investment?

    Just FYI, when you first start doing this, repairs usually run twice what you expect on cost and time.

    2Reply
  • Tami DuBose
    Lender · Prairieville, LA · Member since 2014 · 146 posts · 114 votes
    7y

    After my husband, @Robert Leonard is my numbers guy.

    1Reply
  • Amy VergesBusiness Member
    Investor · Baton Rouge, LA · Member since 2014 · 128 posts · 138 votes
    7y

    Ditto what Tami said, @Robert Leonard knows his stuff (I know him through our local REIA). I had the same questions he does after reading your post. I can't seem to work out how this would be a good investment for you. I understand if you're doing it simply for emotional reasons, but I'm not sure how the #s would work out.

    You've probably seen the "70% rule" on here, which says that you should take 70% of the ARV minus the repair costs and that's the highest you should pay for the property. By that standard: 70% of $170k is $119k. Minus the $30k in repairs (although listen to Robert and estimate higher), and that comes out to $89k. So realistically if you want to make it a decent investment deal, you should only buy it for that amount. If this sale really does HAVE to happen because of a desperate situation, then I would just offer to pay off their loan amount of $90k.

    Lastly, make sure you have a realtor pull actual comps to help determine the ARV and not just an appraisal. An appraisal means nothing if no one is actually willing to pay that amount. Hope that helps a bit!

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