All Forum Posts by: James C.

Charlene,

We need a bit more to be able to help:

Purchase price

Taxes

Expenses for the property.

Thanks,

Jim

Brian,

Wholesale it. I am going to assume that the ARV is $172,000, if that is not the case, then adjust your numbers accordingly.

Seller gets 105,000K (payoff)

Buyer buys at 125,000 + 35,000 = 159,000 (12K equity on ARV for the buyer, a selling point!)

You pocket 20K for the flip, with no money in, no headache, no renter etc. This buys your DP for the next project, as well as 3 years of your time.

Good Luck,

Jim

Peter,

On the surface, properties with a 180 to 200K price tag and 1400 income, won't make much, if any money. You might get some on appreciation, but that's a big gamble.

Basic rules of thumb:

1% rule: The monthly gross rental income should be 1% of the price of the property... so on a 180K property, your monthly gross rental should be 1800 per month. 1400<1800 so, no, it doesn't make the 1% rule test. To make the rule, the price needs to be at 140K or less.

50% rule: 1/2 of the gross yearly rents divided by the cap rate should be equal to or greater than the price of the property. 1400/2 = 700812=8400/0.08 = 105K. That says that the value of the property that generates 1400 per month needs to be right around 100K. The 180-200K price range lies outside, so this test fails as well.

These are only screening tests... but they are a pretty good indicator of potential success.

Things to do:

1) Keep an eye out for properties that you can buy below the current market level. Any repairs must be subtracted from the price.

2) Find a close by market where the rents and house prices match more closely.

3) Buy multi-unit properties.

Searching BP will help you come up with a whole list of other strategies.

Good Luck!

Jim

Mike,

Depends on two things:

1) If your contract specifies good title (marketable ) and the seller can't deliver, no deal.

2) If you have a financing contingency, the bank won't lend without good title, so you won't be able to finance the deal. 

The wholesaler should be able to deliver marketable title, and it's fairly rare (unless you are specifically looking for unmarketable titles) to come across one that can't be fixed. If in that rare instance, you may need to call on the assistance of an attorney.

I wouldn't go all wonky in the knees over this unless you have some good reason to believe the title is bad. I would double check my contract, call the title company and check to see how the title search is going, and if they have found any issues. No one in the chain wants a title issue, and most sellers don't want to hold up their pay day. 

In the future, make sure that you learn how to do a title search, or figure that into your due diligence costs. Also make sure that your contract specifies the seller must deliver good title, and the remedies for that. Make sure that you add that to both your business plan, and your due diligence checklist, along with your standard contract. An ounce of prevention is worth a pound of cure... 

Jim

Mike,

Your contract (read the contract) with the wholesaler should indicate that you can't close without "marketable title". If you are financing your deal, then it's almost impossible to close without a marketable title. 

Marketable title is a title that can be transferred (assigned) to another entity without issues. You can buy properties with unmarketable titles, but you need to get that fixed, and it's a bit of a risk. 

If you want, you can run your own title search (that really should be part of due diligence before purchase), or pay to have it done. 

I think if the title company is saying it's clear, and will provide an owners title policy, then it's good. If they say it's not clear, and won't provide an owners title policy... then there is an issue.

Good Luck!

Jim

Andrew,

Excellent points... well taken... I should be clear that I was brainstorming, and chances of success with any of the ideas I put out there slim. Think Loring AFB or Pease AFB.

Jim

Edward,

Hard money lender, Private money lender, Public/private tax credit money (state/federal/town). 

You might be able to do some sort of commercial bank lending if you can show 50% or more pre-leases on your commercial and the numbers all make sense.

This strategy could work for any of the lenders above.

Bottom line, there has to be interest in the resulting spaces to interest the lenders and the developer, or the developer has to front the entire cost.

Possibilities: if the town wants to revitalize itself, it can create a corporation to hold the buildings, and then offer to back the developer of the properties (public/private partnership)

The town could hold the properties and issue bonds for revitalization, then do a master lease to a developer/Property Manager to recoup it's funds. An outright sale could work as well.

All of this must be in compliance with Town/State and Federal laws... that is why towns have town attorneys.

I see this as a economic issue more than a property issue. These properties are vacant because there is no economic value at this point in time. The town, or some larger entity needs to create that economic value through marketing (Come see x town, it's a great downtown). Once the demand for space is there, then the properties will have economic value. Kind of a chicken - egg problem. 

If you want to make a difference, go have a chat with the town manager, selectmen, town fathers and see what they think and have to say. Maybe create a non-profit with the express goal of raising funds to bring the properties back... with some sort of low income housing component. There are many ways to approach this issue, but it will take a bunch of work.

Jim

Nili,

That means the town/city reassessed the property and dropped it's value. I could have been reassessed as part of a general reassessment by the town/city, or the homeowner went and requested the reassessment. It is possible some sort of homestead exemption kicked in, i.e. the owner went over a certain age bracket, and applied for an abatement.

Needs some due diligence to figure out what exactly went on... check other houses in the same city/town and see what happened. A phone call to the town/city assessor can help.

There is an outside posibility that it's a database error as well.

Jim

Joe,

I say the property that rents easier and provides cash flow. 

The harder to rent property could cost you more in vacancies than the increase in value. 

Ideally, you want both easily rentable, cash from day 1 and appreciation. That, however, may be like looking for a unicorn in some markets. 

Jim

Yvette,

What do your comps say... they will drive that price of a 2 unit more than income.

I'll guess that the rents are equal.. so 2500/2 = 1250/mo. 

Doesn't meet the 1% test (175,000 * .01 = 1750) 50% test is not met either (1250*.5 = 625*12=7500/0.08 = $93,750), but those are only scan tests.

As a NOO it meets the 1% test, and passes the 50% test(2500*.5=1250*12=15,000/0.08 = 187,500).

Definitions: 

1% test: monthly rents should be equal to or greater than 1% of the price of the asset. 

50% test: 50% of the Gross Income/CAP rate (I used 8%) should be greater than the price of the asset.

Quick back of the napkin:

Gross rent (Owner Occupied): 15,000

Expenses (all yearly):

Taxes $6,500

Management (8%) = $1,200 (You will need to pay for your time as landlord)

Repairs (10%) = $1,500

Vacancy (10%) = $1,500

Mortgage (30, 5.25,20%DP) = $9,500

Insurance (guestimate) = $1,125

Total: $21,325

NCF = 15,000 - 21,325 = -6325 or -527 per month...

You would be paying 527 per month or more to live there. 

Note, that doesn't include 10% return of and on your money... or current expenses (the 10% R&V are for future expenses) add all that in, and you are over -$1,100 per month.

When you leave and rent the unit out, my best guess is that it will be negative cash flowing as well, but only slightly ~ -$200 to -$300/mo. At some point, it flips to positive cash flow... but it's out there.

Someone else might see this very differently than I do, so it's worth asking around.

Jim