Deal Analysis #3- Aurora, IL 60505

I recently set myself a goal of analyzing one property per week, and writing a blog post of my results.  I feel like I've been surpassing that so far, which I'm jazzed about!  This is post #3 in that series, and this time I'm going to not only experiment with multiple purchase price offers, but multiple financing terms (i.e. both hard money loans AND seller financing).

As per usual, I'll be relying on the BiggerPockets calculators (specifically, the Rental Calculator).

Property Description

This is a 3-BR, 2-BA property in Aurora, IL 60505.  The major cross streets are E Galena Blvd and S Union St.  It was built in 1900, has 1,252 sq ft of space and comes with a 3,507 sq ft lot.  The current asking price is $89,900, and it has been on the market for 244 days according to Zillow, down from an original asking price of $142,500 since March 2019.

County Records Search

Research on the Kane County Property Tax Website, as well as the Aurora Township Assessor's Site, turns up a few things which stands out.  One thing is that all sales which took place prior to the most recent ones involved Warranty Deeds, which provide the greatest amount of protection for the purchaser of the property.  However, the most recent sale involved a Special Warranty Deed, which only protects the purchaser against title deficiencies which occurred while the seller-at-the-time was the owner of the property.

This is a bit weird, to me.  Did the previous owner discover a title deficiency that they themselves weren't responsible for, but which prevented them from offering a similar Warranty Deed to the person they sold the property to?  It's better to investigate this than it is to assume everything is OK.

The 2nd thing I notice is in the "Assessments" section of both sites:

I'm having trouble interpreting what these figures mean.  Do they imply that there were $27,949 worth of assessments that the property owner had to pay in 2019, and another $25,105 worth of assessments in 2018?  If so, that by itself would make me walk away from this deal immediately.  As it stands, if I were seriously considering moving forward with this property, I'd want to verify that this is not the correct interpretation before going any further.

Area Description

According to City-Data.com, the median income for Aurora is about 10% higher than the state average ($66k vs $60k).  The population has increased 40% since 2000.  According to NeighborhoodScout.com, Aurora has a crime score of 43 (not the worst score I've seen by far).  I'd say that ranks it as a solid C-class neighborhood.  The crime trend definitely seems to be on the decrease- CityData's crime index for Aurora was 420.6 in 2003, and 141.2 in 2017.  I like that trend.

79.5% of Aurorans have graduated from high school, 32.4% have a bachelor's degree or higher, and 13% have a graduate degree or higher.  That tells me Aurora is a decidedly blue-collar town, but one that is getting a handle on its former crime problem.

Estimate 1- Full Purchase Price, Conventional Investor Loan Via USAA

Purchase Price

I'll initially analyze the property based on its full asking price of $89,900.  I'm assuming a conventional investor loan from my long-time personal bank at a 5.8% interest rate they quoted me for non-owner-occupied properties.  I'll use the same after-repair value of $89,900.  There aren't too many comparables in this area, but I did see one for $87,000 for a property with a similar number of bedrooms, bathrooms, and square feet.

Repair Costs

The interior photos I saw did lead me to believe that the property had been looked after reasonably-well, but could still use some updating.  So I'll budget $15,000 for those updates.  I'll also use my standard $6,000 estimate for closing costs.

Loan Details

For this first estimate, I'm estimating a 20% down payment and a 5.8% 30-year fixed loan.

Income

I'm using the median rent I found on Rentometer.com, which is $1,400:

I'll ask the tenants to cover their own utilities, and there are no HOA dues for this property since it's a single-family home.  I'll peg the homeowner's insurance premium at $40/month.

By the way, check out the spike in median rent when a property goes from 3-BR to 4-BR.  That tells me that if this 3-BR property doesn't work out, I might want to investigate any 4-BR listings on the MLS.  I should also go back and check on the market I analyzed in my last post (Naples / Bonita Springs, FL), as I'm seeing a similar spike in median rents when upgrading from 3BR to 4BR.

Variable Landlord Expenses

Over my last few analyses, I've landed on a conservative estimate of 10% each for vacancy, capEx, repairs, and property management.  And 2% each for property appreciation, rent appreciation, and expense appreciation.  Finally, for when I eventually decide to liquidate my investment, I'll budget 9% for seller fees.

Results

Click here for report link

Cash-On-Cash ROI- 3.68%, Monthly Cash Flow- $119.67

In terms of cash-on-cash ROI, this property doesn't blow me away, but it is profitable.  As a first pass, it piques my interest enough to tweak some variables and see if we can do better.

Let's see what happens if we are savvy negotiators and succeed in negotiating the purchase price down a bit.

Estimate 2- Purchase Price of $69,900, Conventional Investor Loan Via USAA

The only variable we've changed here is the purchase price, which we've lowered to $69,900.  Here's the resulting report link.

Cash-On-Cash ROI- 7.33%, Monthly Cash Flow- $213.55

This is better, and meets one of Brandon Turner's criteria of $100 per month per unit.  It doesn't meet his other criteria of 12% COC ROI, however.  Let's take another crack at sweetening the deal, this time by using seller financing.

Estimate 3- Purchase Price of $69,900, Seller Financing

We'll keep the purchase price the same, but this time we'll ask for seller financing

Results

COC ROI- 10.49%, Monthly Cash Flow- $305.91

Our monthly cash flow is now significantly above what we'd want per-door, but we're still not quiet hitting our ideal cash-on-cash return.

This property has been on the market for 240+ days.  What if the seller is getting desperate, and we're able to offer even less PLUS get seller financing?  Let's see how that scenario plays out:

Estimate 4- Purchase Price of $49,900, Seller Financing

We'll lower the price to $49,900 (basically $50k), with the same seller financing terms.

Results

Now we're talking.  Our monthly cash flow is at $373.36, and our COC ROI is up to 14.46%.

Just out of curiosity, I want to see what happens if we make an all-cash offer (which we might have to do in order to clinch the property at such a low price:

Estimate 5- Purchase Price of $49,900, All-Cash Offer

Results

$541.67 is not a bad monthly cash flow figure by any means, but the COC ROI has gone down to 9.17%.  The cash flow dollar amount is high because we're saving on P&I, but now we have a lot more cash tied up in the property, which we can't leverage toward other investments.  I'd probably be more inclined to shoot for something like seller financing if we could help it.  Or at the very least, make the all-cash offer to clinch this property and then refinance as soon as the closing is finished.

Summary

So there you have it.  I like the idea of doing these multiple calculations.  It allows me to present multiple offers to the seller, allowing us plenty of ground on which to negotiate and come to terms.  I'd present multiple offers at once:

-An all-cash offer at $49k

-A conventionally-financed offer of $69k

-A full-price, seller-financed offer at 3%

All 3 offers work out in my favor, but the fact that I'm giving the seller options means they feel like they're in control.  They're always free to reject all 3 offers, but at least this way it feels more collaborative than if I simply present them with one offer, "take it or leave it"-style.