So I found a Property. Advice for a first-timer.

[Yates Snyder]

Hey everyone, 

So I came across a house that is for sale made in the 1940's. It appears that the owner is actually a REI but is retiring (or so his neighbor told me over the phone) so he is getting rid of his properties. The outside looks a little rough and the presence of asbestos which I assume would be in the house makes me wonder what I should be looking out for. It's a 2/1 but looks like it would be large enough for 3 people to live in.. it seems pretty big. But anyways, there is development going on in the area and am told developers have tried to buy their properties in the past. I also know the lower bid that the seller was willing to offer his neighbor which was the tax assessed value. I'm thinking I could potentially wholesale this property, but reallyyyy want a buy and hold investment. Property taxes are around 1.2k a year on a 110k tax assessed house. Retail value is probably 15k higher. I need to do some due diligence and find out comparable rent rates in the area but I suspect I could charge at least 400 easily per person. It's had a recent kitchen remodel ( looks okay..) and new carpets. So what are some things I should be looking out for on a house like this? It doesn't have central AC either. Another thing, I need people to help finance the deal if I decided to go through on it!!!! Ahhhh. I'm also not sure what to say and not say when calling their realtor. Any ideas for a young lad? Best financing options when I don't have a full time job (although I am doing summer full time at Dept of Commerce) but no credit? Should I get someone to look at hte property with me?

[Andy Thompson]

If you have a 2 bedroom house, that's 2 bedrooms whether the house is big or small.  It would have to be a rather unique situation for you to add another bedroom.  If you're thinking about finishing a room in a basement, say goodbye to your $15k hypothetical equity.  Keep in mind that you have to make sure that you're offering your potential buyers (the investor) a good deal.

So let's work backwards.  You're talking about marketing this property to other investors as a possible rental. Suppose retail indeed is $125k and rent is $900 for this 2/1.  Buying retail is a far cry off our 1% rule.  1% rule suggests that the investor should be looking to acquire this place at no more than 100x the rental income, or $90,000.  Maybe the house needs some moderate repairs, let's say $5k to get it rent ready.  Discount that from the price, now an Investor wants it at $85,000.  Of course, you're looking to take a cut while wholesaling, let's say $4,000 for fun, you would need to have a contract for $81,000.  Make sure that you're offering your potential buyers (the investor) a good deal.

Step one is securing accurate numbers. Rent, ARV (After rehab value), cost of repairs. Then you can calculate the amount you want to offer in contract. While working on the contract negotiations, you should be simultaneously searching for potential buyers.

Suppose your accurate numbers say you'd need to have a contract for $70,000.  Yikes, doesn't that seem pretty low?  Well, it depends on the needs of the seller.  Does he need to pay off an outstanding $100k mortgage?  Then walk away, it doesn't suit your criteria.  ...But Maybe ask about his other properties before you leave.  Does he primarily want to liquidate this free/clear property?  Offer him a quick close at $50,000 (leaving room for negotiations).  Does he have 4 similar properties, and doesn't want the headache of listing all of them?  Offer contracts on each of them, getting him a much more substantial sum without all the hassle.

Your profile says you're a student, and your family doesn't own any homes yet.  Where are you living now?  Finances aside, could you move into this place and rent out the other room?  If you're renting, it makes as much sense for you to stop paying someone else's mortgage and start building your own equity post haste.

Maybe, while finding out this guy's needs, you discover that he's not necessarily trying to liquidate immediately.  Maybe he owns it free and clear, and is waiting for the right deal to come along.  Would he be willing to Owner Finance the property with a balloon payment in 3 years?  By then, you'd be 2 years out of college with verifiable income in order to qualify for your own mortgage through a bank, and buy him out of the property.

couple other notes:
-If you're wholesaling, you don't need people to help finance the deal.
-asbestos, like lead-based paint, is not a concern unless you disturb it during renovation.  Although it might be a concern for the person you're wholesaling to.
-If you're calling their realtor, chances are good that this is already not the opportunity for you.  Realtor is likely to push for max dollar from conventional (bank) financed buyer or may seek out passive investors who have 25% down for a turnkey property.

I mostly typed this wall of text because I'm relatively new as well, and the brainstorming feels good to me.  Hopefully this will help spark some others' thoughts.  Regardless, I recommend not letting the excitement of a deal overwhelm the rationality necessary to close a profitable deal.  Your priority is not acquiring this property, your priority is acquiring any profitable property.  If it's not profitable, simply walk away.