How this deal look like - Pls Advice 1st Deal

Question

Area - Chicago NW Suburbs

16 Miles from my place.

2Bed/1Bath Apt

Looks Clean, Move-in Ready

Bid Price - 38,500

Asking Price - 35,000

Offer Accepted by Fannie Mae Today.

Previous Sale prices are around 40-45K avg. Zestimate - 62K

Potential Rent - $950-$1000

HOA - 280/Month

Tax - 950/yr

Tax+HOA - $360

Vacancy - $80

Maintainance - $25

Total Expenses - $465

Net Return - $485-$535

There is a six month HOA bill that I got to negotiate. Will know only tomorrow what that would be. Hoping it is 1500 max.

Inspection and Attorney would be 150 and 400-500 respectively.

If I can get the place for 41K is it worth it?

Mehran K. · Answer

Since FNMA is the seller, wouldn't the property be an REO? If it's an REO they should have all debts payed (including HOA) and deliver the property lien-free. I personally don't like dealing with HOA's. Using the 50% rule: $975 * 50% = $487.50 - $280 (HOA) = $207.50/mo cash flow estimated on your $41k investment. This is without financing. Are you financing the purchase? What's included in the HOA fees? Another thing to consider is there is a high probability that the $280/mo will increase. If there was no HOA, it'd be a great deal! Like @Tom Goans mentioned, how is the market for 2/1's in that area? If it were me, I'd pass.

Tom Goans · Answer

@Keerthi Arumbakar, There is no mention of the target market study. My method for investing and researching begins with knowing and thoroughly understanding the target market. The way I view investing, the target market is the cash flow or buyer. Without a the target market, the rest is just numbers on a page. So many times I have read in this blog of people buying a property, spending money to fix it up, and then discover they cannot find renters or buyers. NO CASH FLOW. Many cannot determine why. I would caution about one subject you mentioned in your post; negotiating the HOA debt. Consider this; the HOA is your business partner that will always be a part of your investment until you no longer own the property. Do you think it is wise to begin your relationship with the HOA and all the other community members by not paying the full amount of the debt owed? Everyone else had to pay their full fair share. Why not you? If you do not pay the full amount owed without hesitation, the other members may feel cheated by you. You may want to begin the relationship on a positive note by walking in with a payment in full check, smile, and promise that this will not happen again as long as you are the owner of the property. This begins the relationship on a positive note. The delinquent debt is an associated cost of the investment. What goes around, comes around.

Keerthi A. · Answer

Dropped this. Wrong condo assc. Got confused with another. These guys do not allow rentals. Thanks for all your advice. Moving to next deal.

Keerthi A. · Answer

Update: I just saw the place, the unit looks neat and no major work is needed. Freshly painted, with AC in all rooms and nice refridgerator, decent cabinets and stove. Needs blinds, pantry missing handle, one kitchen drawer missing, bath tub needs cleaning, one vinyl tile on kitchen floors needs to be restuck, etc. I estimate $600 to make it rentable. Also I confused with another unit on HOA and attorney fee. This one might come lien free. I bid for another property on the same lane but did not win, so I got confused. Aplogize for the misinformation. It is hard to keep track of my bids. I made 14 bids I think in last three months. Good news is that FNMA might even cover titile and title insurance if I choose their company. Only stamps, I have to bear and prob some other small charges. I feel I might be able to close at under 40K. Keeping my fingers crossed.

Keerthi A. · Answer

Hoffman Estates. Off of Golf Rd. It is around 3.5 miles from Woodfield mall.

Steven Hamilton II · Answer

@Keerthi Arumbakar , You are in my neck of the woods. I'm located near Gurnee; however, I am there often. What town is it in?

Keerthi A. · Answer

Craigslist shows lowest 2-BHK unit at $1095 without water, heat. My figure at $975 is pretty conservative as this place has heat, garbage,water, etc included. At $1050 a month, cap rate crosses 15%.

Keerthi A. · Answer

It is move in ready. No repairs needed. Can you guys look at my numbers. Purchase Price $38,500 Inspection $150 Attorney $500 HOA (6 Months) $1,698 Title Transfer & Insurance $1,000 Stamp and other costs $652 Total Price $42,500 Rent $975 Tax + HOA $362 Insurance $15 Vacancy (1 Month) $81 Maintainance $25 Total Expenses $484 Rent - Expenses $491 Annual Rent $5,896 Cap Rate 13.9% If Financed 80% of LTV Acquisition cost $42,500 Lender Fee $250 Appraisal $400 Other Costs $400 Total Borrowing cost $1,050 Appraised Value $40,000 Downpayment $10,500 Downpayment + Loan Cost $11,550 Loan Amount $32,000 Mortgage (3.5%/10Yr) $316 Hazard Insurance $15 Annual Bank Payments $3,977 Net Annual Cash Flow $1,919 Cash on Cash% 16.6%

Scott W. · Answer

I ran the #s based upon a 10% for repairs & 10% vacancy estimate. with those HOA fees you're 56% of the rent WITHOUT a PM. I show $5600 rental profit after expenses. I went with a $10k rehab estimate, $41k purchase price, & $3k in holding/closing costs. that's 9% return. I'd put my $ elsewhere.

Keerthi A. · Answer

@Tom Goans, I am already offering 10% above asking. So I expect bank to cover the HOA dues. I do want to take everything into account when I look at the numbers. I am not negotiating with HOA so I do not expect to shortchange them, I am working with the bank thats it. Either I am in the deal or out. Also I heard HOA dues are hard to negotiate, they sometimes have a hefty attorney fees.