All Forum Posts by: Account Closed

Hey all,

I ran into a situation that I'm not sure how to handle yet, and searching didn't seem to yield anything. I saw a house go on the MLS this week for $30K, and a quick search of records revealed that the owner is in foreclosure, has already had the judgment made against him and just needs to have the date of sale set. The amount owed to the bank is $66K. I can't imagine he's providing the other $36K to cure the default because if he had that sort of money he wouldn't be in default, right? It also seems like too deep of a discount to be a short sale. My question is, is it even worth it to look? I'm going to look anyway but I don't see how a sale of this sort works out in any fashion. The owner is a habitual defendant and has skipped on a couple other rental properties. The only explanation I can think of is that he's trying to sell the property at a huge discount to get somebody to jump on it, pocket the cash from the sale, and disappear before the bank catches up with him. Is this a common situation? Thanks in advance.

Thanks to all of you for your comments. The plan was to offer $12.5K and, in my personal estimation of the property, it needed perhaps $6K of actual work (mostly siding, I only set the rehab budget high for potential disaster). I think it would've been a great deal but the money people involved (my folks) balked at the neighborhood and basically said they'd have to find another place that was in a nicer area. That's fine; I don't mind letting a deal go by while I learn, and part of the learning process is also taking the time to figure out how I could have made the deal happen personally. For the next one I'll be more prepared and have more of the answers ready instead of needing to look them up.

MikeOH, I wanted to thank you personally as well. I learned so much from reading your posts here and I was seriously glad to see you post here and not tear the deal apart aside from my shoddy rehab estimation. It made me feel validated that I'd found something worthwhile. :D

TC, thanks for making me triple-check my math. :) I'd like to talk to you about the properties you deal in sometime. If you're doing lower-end stuff like me I'm sure I can learn from you. Ohio Realtor, I'm still learning about HML. They seem like an expensive way to do business but a possibility for folks with limited funds if you can find a deal wide enough to support their fees. The points and other fees are rolled into the loan itself, right, so there's no out of pocket expense by the investor initially? I appreciate your input.

TC,

I appreciate the comment but all that I've read suggests that I should be factoring 50% of rents in for operating expenses which includes property tax, insurance, maintenance and others, and leaves only the mortgage to consider. I did some searching back through MikeOH's posts and this seems to be validated, but I will certainly listen to arguments otherwise. $362.50 is already taken out of the rents to deal with these expenses, and the rehab was intentionally set higher than I expected just to deal with some sort of unexpected disaster (I'm really expecting $10K or less, the house was remodeled beforehand and only sat empty for about 9 months with minor vandalism). As also mentioned in my post, the money for the project would have come from an already-existing HELOC. It's not ideal, but we do not have the $30K in cash yet to do it without any financing.

If I'm mistaken, feel free to correct me. I'm here to learn like everybody else.

[edit: To address your other question, the duplex is separately metered and the tenants do pay all utilities]

Hey all,

I didn't expect to be posting in this area quite so quickly but we ran into a particular deal in the area that I couldn't ignore and I wanted to get some input in it before the offer went in. First, the numbers for this duplex:

2 units, 1 br/1 ba each
$20K asking price
$20K rehab
Comps in the area are $45-50K (lower-class neighborhood near the city)
Rents of about $400/325 (both are 1 br/1ba but upper floor is smaller)
Offer $12.5K cash

Now for the story behind the numbers: The house is held by a Californian company that suddenly decided to sell its properties. I don't know the reasoning but it holds three properties in the area and is selling them all at once. They had an ad in Craigslist that made it clear that they would take cash discounts but it was pulled from the site when they went with a realtor instead. The realtor had not had time to even look at the property when we were on the scene; neither he nor the owning company had keys to the house and he had to get a locksmith to let us in. The inside is impressive for a house that has been vacant a while; no funny smells, clean rooms, basically just requires cosmetic work. It does need new siding because somebody stole some of it from the house and garage.

I estimated $20K rehab because of the siding and because I want a nice, fat rehab budget (for the area) in case something goes wrong or we've missed something horrible, but the circumstances of the selling suggest that there's nothing really wrong with the house, the company is just pulling out of the area. If we get our low offer accepted, that's still about 70% of ARV even if we eat the entire budget up.

We're not sure if we're renting the place out yet or selling. My first instinct is renting, since even with the assumption of 50% of income as expenses and amortization of $32K at 7% is $213/month which still allows about $150/month cash flow. I'm not the money man in the deal but my understanding is that a HELOC would be used to make the deal happen.

So thanks to anybody who made it this far. I'd like to first ask the more experienced investors what I missed here, information-wise. Secondly, with the information as-is, is the offer reasonable? The worst they'll say is no, and they probably will but I won't mind getting turned down since that's all we want to pay on the property. Thanks in advance!

All cash,

I wanted to thank you for your informative post. I've been debating this with my family for a week or so now. They're shunning the lower-class neighborhoods based on fears that a tenant won't pay, that they'll wreck the place, that they'll get shot as soon as they set foot in that neighborhood (these houses are about $30K as you get closer to the city, and suburbia houses are typically $100-$150K).

After reading Lonnie Scruggs' books my view on the idea is that either by virtue of a higher rent/retail ratio or by carrying the note yourself with a higher interest rate than the bank you can set yourself up to profit more with the same amount of capital than you would be able to if you bought a single house in suburbia. Basically you're assuming a higher risk for a higher return. If you can rent the $25K house for $450 you've paid for the house in about 5 years (!) but of course you get all the tenant problems with it, which is the trade-off. If you carry a 30-year note at 10% (just as an example) with a $2K down payment on the same property it'll take you 9.5 years to recover your full $25K (the payments are almost exactly $200) but then the 20 years after that are pure profit. With 4 of those houses going out of your $100K investment it's $800/month in basically hassle-free income.

So long story short, if they're good homeowners and pay you the full 30 years, you win because you wind up with an extra $50K in profit in your pocket for just one house (so $200K across four) at the end of the thirty years. If they refinance and pay you off, you win because you got payments that were almost all interest at the beginning of the loan. If you're feeling particularly dastardly you might have written a prepayment penalty into the note, but if I did that I would probably only make it for the first year or perhaps two. You do want to get those interest-laden payments at the beginning but not to openly gouge your homeowners. The only potential for loss is when they bail on you AND trash the place within the first couple years, which is admittedly a lot more likely to happen in low-income neighborhoods. It's months of foreclosure, rehab work and selling again. I say within the first couple years because if they've gone five years and then go bad (that seems to be about how long it takes from the foreclosure documents I've been sifting through) you've collected $14,500 from the down payment and mortgage payments so unless the place is gutted you'll be able to rehab and sell again, perhaps even at a profit. If they go within the first year or two though you'll be taking a hit.

Sorry, this ran off into a tangent and math discussion. :) It's something I've been thinking about a lot though. Working in the low-income neighborhoods is not glamorous, you're right about that. I truly believe the money is made in the trenches though when one is beginning, and it's better for experience anyway.

Now where's my beer? :beer: Oh, there it is.

Direct links aren't allowed on this board if I read the rules right, so just go to usatoday.com and run a search for the article titled "First rung on property ladder gets harder to reach."

This is definitely the time to make money when you buy, whether you're flipping or taking a longer view and renting properties out. The people who weren't paying attention to their deals are getting burned now; I've seen some deals even among REIA members where the numbers didn't work at all and/or had unrealistic rehab estimations (I saw one listed as needing $1K of repair work, and there was only a $15K spread on a $110K house to begin with!).

The school of fish has more wounded than usual and it's time for the sharks to come in and clean up. The poker craze came and a bunch of TV shows shuttled hundreds of thousands of people to the poker sites to get fleeced by the already-experienced players. I see the latest trend of house-flipping shows as being the same, drawing in lots of inexperienced people with the promise of easy riches. When the reality of hard work and education hits them, it's already too late and the sharks have their money if they rushed in blindly.