All Forum Posts by: Mark S.

I posted this in another section of the forums, but I'm not sure if it was the right place, so I'm posting it here again:

I spoke with local bank today, and after offering me a 3/3 ARM with 15% down to which I told them I much prefer a fixed loan, I was told that they could likely do a Freddie Mac investor loan for 1-4 units. I was advised that they could probably get the down payment to between 5-10% down on a fixed rate loan. The catch, they told me, is that there would be about a 3.5% fee (of the loan amount) by Freddie Mac to do such a loan. This would be in addition to all other closing costs. Mortgage insurance would also apply until I had 20% equity in the property, and would then fall off. I am told that this loan could likely be done on a foreclosure as well. Finally, the bank said they could probably get me out of some of the normal closing costs with a slightly higher interest rate. My situation is limited cash, sizeable retirement accounts (for my age), and wanting to minimize having to touch retirement accounts (ie, backing out Roth contributions, taking a 401(k) loan, etc.). For this reason, I loan such as this really appeals to me, even with the additional fees, due to the fixed interest rate and low down payment. The alternative is 25% down on a fixed loan, no PMI or 15% down on an ARM. I guess my main question is: Do these loans really exist?

I spoke with local bank today, and after offering me a 3/3 ARM with 15% down to which I told them I much prefer a fixed loan, I was told that they could likely do a Freddie Mac investor loan for 1-4 units. I was advised that they could probably get the down payment to between 5-10% down on a fixed rate loan. The catch, they told me, is that there would be about a 3.5% fee (of the loan amount) by Freddie Mac to do such a loan. This would be in addition to all other closing costs. Mortgage insurance would also apply until I had 20% equity in the property, and would then fall off. I am told that this loan could likely be done on a foreclosure as well. Finally, the bank said they could probably get me out of some of the normal closing costs with a slightly higher interest rate. My situation is limited cash, sizeable retirement accounts (for my age), and wanting to minimize having to touch retirement accounts (ie, backing out Roth contributions, taking a 401(k) loan, etc.). For this reason, I loan such as this really appeals to me, even with the additional fees, due to the fixed interest rate and low down payment. The alternative is 25% down on a fixed loan, no PMI or 15% down on an ARM. I guess my main question is: Do these loans really exist?

I found out the 25% down would be a 30 year fixed rate loan.

Thanks Shane Woods I guess it will heavily depend on rehab costs. I believe this property is eligible to have the repair costs rolled into the loan, however, I'd be required to then put 25% down. The 20% down I mentioned would be on a 30 year fixed conventional loan. There are other lenders that would do only 15% down, but on an ARM and only over 20 years. This would put the upcoming interest rate environment against me and raise my monthly payments. The downside is it's going to be very difficult for me to even come up with the 20% down. I'll likely have to back out some Roth contributions, coupled with bank accounts, just to get the cash I need. Not an ideal move, but these numbers look really good. Am I wrong that even if I buy at ask, I'd be getting about $48,000 instant equity? I know equity doesn't pay bills and put food on the table, but damn! As for the other owners, I'm not interested in their properties, but more so how they affect the surrounding neighborhood. I basically want to get a sense of whether or not they care about the area. I'm also curious to see if they know anything about the previous owner/tenants/etc. who knows? They may have some insight as to why the property went into foreclosure in the first place.

Fourplex foreclosure. Asking $194,900. Taxable Value (PVA website): $243,000. 5,000 square feet. Built in 1999.

Purchase Price (conservatively): $194,900.
Down Payment @ 20%: $38,980
Financed Amount: $155,920 @ 6% (conservatively) over 30 years
P&I Payment: $935/month

EXPENSES
Taxes ($2,753/yr): $229/month
Insurance (estimated, need to get quote still at $2k/yr): $166/month
Repairs/Maintenance: $200/month
Lawn/Groundskeeping: $100/month
Vacancy Loss at 10% (conservative, $3,360/yr): $280/month
Advertising: $16/month
Miscellaneous at $2k/yr: $166/month
Tenants to pay utilities, minus trash (absorbed in miscellaneous)

INCOME
Rents @ $700/month per unit: $2,800/month (Conservative)
Rents @ $750/month per unit: $3,000/month (Likely)

RULES / RATIOS at $2,800 / month.
50% Rule: $2,800/month = $1,400 to expenses, $935 debt service, $465 cashflow = $116/month per door. Pass.
2% Rule: Says property should sell for $140,000. Fail.
38.97% Cash-on-Cash Returns
13.55% Cap Rate

RULES / RATIOS at $3,000 / month.
50% Rule: $3,000/month = $1,500 to expenses, $935 debt service, $565 cashflow = $141/month per door. Pass.
2% Rule: Says property should sell for $150,000. Fail.
45.75% Cash-on-Cash Returns
14.90% Cap Rate

QUESTIONS:
1.) Is this a seemingly "good deal?"

2.) Same owners has two other quads on this street. Would it make any sense to contact them? If so, what is my approach? I essentially would want to see other owners' approach to managing property / neighborhood / get a feel.

3.) I'm not sure yet what maintenance might be needed. Assuming property does not require any immediate work, what is a fair offering price?

4.) Any advice if this should turn into a bidding war?

Thanks in advance, everyone!

I passed on a 4-plex that was a foreclosure recently for many reasons. Among those reasons, it was virtually impossible to find anything out about the property in terms of previous rents, repairs, etc., as it was a foreclosure.

It seems like these properties could potentially be great deals, but there are a lot of unanswered questions and that makes it difficult to pull the trigger.

I guess my question is how to approach evaluating a foreclosure differently than you might for a property where you can actually contact the owner or seller's agent for answers to common questions.

Thanks.

Went to check out the units today. Overall, they're in decent shape. There were several little issues, though, which would cost some money to fix up front before making them livable. One of the things that sort of freaked me out was that the copper was stolen out of one of the units. I had suspicions about the neighborhood already, and this helped to confirm.

The neighbors weren't exactly inviting either - loud car stereos with vulgar music blaring, kids screaming everywhere, people driving by yelling stuff out the window, etc. Not a good sign.

We re-ran some of the numbers and with our conservative estimates, the numbers weren't as appealing. Please disregard the figures posted previously; there was an error in the spreadsheet that I fixed and those numbers are NOT accurate.

The two biggest challenges for me are:

1.) The neighborhood doesn't seem like it will allow me to attract quality tenants.

2.) There appears to be some repairs needed to bring the units to livable condition.

It would honestly be a stretch for me to come up with the down payment alone, never mind the extra repair funds needed. All the while, these units would not be rented for a few months and I'd have to continue to service the debt.

There must be SOME value, though, as there are at least two other investors that already bid on the property. It just sucks being late to the party with minimal information since it's a foreclosure.

I have two options:

1.) Don't make an offer, let this one go, and continue to save more cash.

2.) Make an offer with an inspection contingency and back out if the costs are too high.

I'm leaning towards #1. Anyone else have any thoughts?

Hey, Jerry, were they not offering a fixed rate or did you want an ARM for some reason?

Hey Chris,

I just have my primary residence. No other homes. It just seems most banks are not interested in giving out fixed rate mortgages to investors right now. The down payment will be a struggle for me, so I guess I'd consider an ARM, but only on a 85% LTV, not 75% or 80%. I'd really rather put down the extra 5% or 10% and get a fixed rate, though. We'll likely never see rates this low again.

Yikes! So, it sounds like the FHA option for me is out.

So far, the best I'm finding is 80-85% LTV from local lenders; the downside is they will only do an ARM, not a fixed loan. There are non-local lenders (some of the HomePath people I talked about) that are doing 75% LTV (even worse!), however, I need to find out if they'll do a fixed loan or if they're also on an ARM. if they'll do a fixed, it may be worth the extra $ down.