Rental Home Valuation Questions - Section 8 Housing Oakland, CA

[Brandon Foken]

I spoke with a motivated seller today looking to off-load their house in Oakland, CA on the 7500 block of Weld St - 2 beds, 1 bath. Currently there is a Section 8 tenant living there and has been for the last 12 or 13 years. Rent is $1,400. Comps seem to support a market value of around $85-90k. Exit strategy would be to assign the contract to a buy-and-hold investor.

So, according to the 2% rule, the purchase price would need to be at $70,000 - repairs - assignment fee. When I talked to the seller and asked about repairs, he said it's an old house so he wouldn't be surprised if there is a lot needed. So, my questions:

- If there is maintenance needed to get the house back into what I would call "move in ready" condition - how do you handle that with a tenant in place? Or would you just leave the house as is until the tenant moves out?

- How will buy-and-hold investors evaluate this? Will they just look at rents, expenses and deferred maintenance? Or will they be looking at a appreciation play since Oakland as a whole is seeing some price appreciation?

-If this was you buying this property for a buy-and-hold, what would be your max offer? And more importantly, why?

[Kyle J.]

Brandon,

I'll try and answer your questions.

First of all, the 2% rule is just a general benchmark or guideline some investors shoot for. However, it's not a very good one and it may or may not apply to a particular market. In fact, it's even less likely to apply in the Bay Area.

The reason I don't care much for the 2% rule is because it paints the market with too broad of a brush. It may be easy to get 2% in some parts of the country, but if I only looked at houses that fit that "rule" in my area I wouldn't own any of the houses I own now (and they all make me money). Or, if I did own any, they would certainly be in a high-crime "war zone". Not my cup of tea.

As for any repairs that may be required, you can certainly use those to negotiate a lower price for the house. If the property has had a Section 8 tenant in it for 12-13 years, I can pretty much guarantee you'll find some significant deferred maintenance and necessary repairs there.

As for how to handle the repairs, that depends on if the tenant is going to stay there or not. If the tenant is going to stay there, I personally wouldn't do any repairs inside unless it's a safety issue or it's something that might contribute to further problems in the house (i.e. leaking water pipe, etc).

You might consider doing more with any outside repairs, but then again you might not. Certainly you'd at least want to fix any safety issues and/or issues that might cause further damage to the house (i.e. leaking roof, broken windows, etc).

As for how buy and hold investors are going to look at it, it's going to depend on the investor. Obviously, they are going to look at it differently then a fix and flip guy, but that doesn't mean that all buy and hold investors will look at a property the same.

For instance, I'm a buy and hold investor. I tend to be able to pay a little more for a property than most fix and flippers because I don't have to worry about making money right away on the re-sale. So I'm less concerned about short term profit margins, and more concerned with long term cash flow. I also don't necessarily seek out properties that meet the 2% rule, but other buy and hold investors might.

I'm assuming - based on your questions - that you're going to wholesale the property and/or flip it to another investor as opposed to hold it yourself? If that's the case, I'd ask your buyers what they are looking for. That way you know who to market it to and for what price you'll need to get it at. Most wholesalers I know ask me what my criteria are and then try to find houses based on what I tell them. If they happen to find something that doesn't meet my criteria, I'm sure they just market it to another investor whose criteria it does meet. The point is, the best way to know how an investor will look at it is just to ask them.

I could go on but I feel like I've already given you a pretty long-winded answer. :) Feel free to ask any follow-up questions if you want.