All Forum Posts by: Paul Witte

I am in the due diligence period of property--a duplex to use as a buy and hold rental--with closing scheduled on 9/30.  The biggest issue I'm struggling with is a tenant who has been in one unit since March and is $2400 (2.5 months) behind on rent, and has had multiple noise/filth complaints.  Obviously I can't evict him now, and even after January 1st, the process will be so backed up that it will be months before I can remove him.

Part of my issue will be the lost rent and piling up expenses, but maybe a bigger issue is my strategy here. I was hoping to make this a BRRRR. I am buying for cash at 40k below market value in as-is condition, and after putting in 15 or 20k, hoping to increase the value significantly more. My plan has been to do a cash-out refinance after a 6 month "seasoning" period (necessary, I've been told) to pull most of my capital back out and do it again. But with a non-paying tenant who might still be there by then, I doubt I'll be able to find a lender to go along with that with such a poorly-performing property.  I figure I have to assume a worst-case scenario--6 months at $925/mo = $5550.  PLUS, the lost opportunity to get my capital out and get another deal, perhaps one of the foreclosures many people are expecting to be more prevalent in 2021.  

So in your opinion, how much is a reasonable offer?  I haven't seen any discussions of paying-your-tenant-to-leave deal analysis!  How do I think through this?

 Thanks Mary.  That's really helpful info.  How do those brokers generate their lists?  Have you done any deals using those kinds of lists as leads?  Do you have recommendations for specific brokers?

I'm not much further along than you, actually, so whatever I say take it with a grain of salt!  My understanding is that the appraiser basically just pulls comps (comparable recent sales) to get a range of what similar properties are selling for in the area, and then adjusts the price of your property based on how it compares in terms of square footage, condition, bed/bath #s, etc etc.  

One possible problem, both in general and in my case, is that if there are no or few comparable sales, it's tough to calculate a reliable appraisal.  That might be because 1) there are few properties like your's in the area, 2) no one wants to sell, so there are no listings, 3) no one wants to buy, so sellers don't bother listing.  Generally my understanding these days is that inventory is low country-wide, which is driving prices up.  

I think that's my case as well, since there are tons of duplexes, but very few sales. In that case, I really have no idea what the "correct" way to calculate a current appraisal or ARV is. For me, it doesn't matter that much. I am using this property as a buy and hold, so the cash flow and long term financials are what matters to me most. I am going to pull the money out with a HELOC after I do a light rehab and raise rents, so I will care then about the bank's appraisal value, but only for that purpose.

Cheers!

I think that makes good sense.  But that only works retrospectively--running numbers on what was already done.  Also, by your very good line of reasoning, isn't cost per $ of profit after exit make even more sense?

My question really is more about, as a new investor still trying to figure out strategies, how to I evaluate different strategies?  Some cost time, some cost money, some require long waits, etc etc.  The specific scenario I'm considering is like this: I know the area I'm targeting, but it's fairly large, and I'm short on time.  But I am good at building relationships quickly, following up with people, and making it easy for a curious potential seller to move forward with a deal.  For those reasons, I'm considering something like a "driving for dollars" approach where I pay someone else to find potential properties and then I'll do the analysis and pursue the promising ones.  But that requires me to front some money for marketing, I guess you'd call it.  

As I evaluate whether to try this, I am just trying to figure out if this is plausible.  I can't imagine I could convince someone to do this for less than $2-3 per address.  

Anyways, that's laying it all out there.  I'm not trying to look for "an easy answer", just looking for help in thinking through potential strategies to generate leads with minimal time cost to me.  Any thoughts are appreciated.

Thanks for your thoughts.  I renegotiated the offer to 142k cash and as-is condition.  Surprisingly the seller (who interestingly is actually some kind of court-appointed trust actually as the seller may be incapacitated) is trying to get approval to accept it.  The listing agent says it is outside the bounds of what they're allowed to accept without approval from their main office.  I guess that means I didn't offer too much!  Unfortunately they're closed for the weekend so hopefully they don't get any better offers before Tuesday morning.

They did a pre-listing appraisal which came in at 175k.  So I'm at 19% below fair market value.  This is a stable town of a top-tier public University also so I'm not too concerned about a big downturn.  At this point, though it's not sealed yet and I have yet to get a full inspection of my own, it seems like as close to a home run deal as I could expect.  Still, any other thoughts are appreciated.  Thanks all for your input.

OK, point taken.  I was trying not to bog down the question with excessive detail and leave it open to broad responses...  

Like I said, "an address" of an actually or apparently (based on a drive by) distressed property within an area you like to work where median home values are ~$300k.  I can see someone paying a wholesaler $10,000 for a contract, but that isn't what I mean by "lead".  I'm talking about a list of addresses where maybe only 1-2% would you end up actually offering on, expecting to earn maybe 20-30k in profit.  

Even if that's not enough information based on this scenario, what about your own scenario and process?  What rules of thumb do you observe, or retrospectively what do you find your costs at this level to be?
  

"Be the general" is good advice, but the general has to pay (or get someone else to pay) his foot soldiers.  How much are you willing to pay per lead for potential house flips?  This is just to *get* the lead--basically an address.  Not including analysis and pursuit of that lead.  

Thanks all!

I’m evaluating a deal for a buy-and-hold duplex in a stable, desirable area in a midwestern college town. The neighborhood is outside of the typical student rental perimeter around the University. The sale is being listed by an asset management company since the private seller is apparently incapacitated.

Though I know I need to get exact numbers for expenses as much as possible to be able to do a good analysis, I’m looking for how you would think through “How much is too much for rehab expenses?” on this deal.

Property details

Built in 1923 as a duplex with two side by side 3 bed 1.5 bath units. Hardwood floors and original woodwork. Detached 2 car garage in 2 divided bays (with doors missing for some reason). Corner lot. Property is in a stable area often inhabited by university-affiliated professionals.

Price

Initial asking price: $175,000, reduced 20 days after listed to $159k.

My offer of $155k was accepted today. Hoping to negotiate this down some after a complete property inspection.  If the seller won't budge, I'm trying to figure out my "walk away" point after calculating rehab costs.  

Property Condition & Rehab Needs

Seller-provided pre-inspection shows a property that looks like generally it has been neglected for 20 years. No major defects, but everything looks like it needs at least reconditioning. Mechanicals are past the end of their lifespan (furnaces are 38 years old, water heaters are leaking). Roof is ~12 years old.

Formal inspection hasn’t been done yet.

Expenses

Taxes are ~$4000/year

Haven't gotten PM estimates yet but assuming it's typical 8-10%ish

Expecting low vacancy rates since the area is desirable.

Financing would be a conventional 30 year loan at ~3.5% with 25% down ($38,750). Monthly payment for principal plus interest = $522.

Income

Units are currently rented with leases until March and July of 2021 at $895 and $925/mo, total $1820/mo.

Analysis

Rent to value: $1820 per month / $155k = ~1.2%

50% rule (expectation that 50% of rental income will on average go to non-mortgage expenses) = $910. Based on this gross rule, I’d expect cash flow of $1820 (monthly rents) - $910 (expense estimate) - payment ($522) to give an estimated cash flow of $388/month. I recognize this is a very rough estimate.  Based on this, cash-on-cash would be 8% if I put 20k into the rehab.  Is that fair?  Should I be estimating costs differently somehow?  

My question as stated above is “How do I decide how much is too much to pay for rehab costs?”

Thank you!

Point taken.  Proceeding with caution (in case the current owner lives until age 120).  Thanks for your input!

I'm a new investor, currently setting up my first deal.  I appreciate all of you who donate so much of your time and expertise to help people like me.  Ok, on to the question:

Thankfully I've never had my identity stolen, but it seems to be very common and a huge headache--especially if you depend on your credit integrity frequently to fund deals!  I had a lock on my credit file in the past but found it to be very difficult to manage.  I know there are a number of other options out there, but curious about your practices?  What is the best way to balance accessibility of your credit with protection?  They seem to stand in opposition to one another.  Better protection is a bigger headache and slows processing down.  No protection makes for easy access, but having your identity stolen and credit compromised seems like even more trouble.  What is your practice?