IS THERE A DEAL HERE? (semi-long) - Posted by Debby


#1

Posted by Baltimore BirdDog on January 29, 1999 at 14:40:20:

Debby,

Time has a way of changing things. The roof may start to leak. The boiler may go bust. The bank’s REO personnel may be ordered to dump it by their higher ups. By all means, continue to submit your offer to the bank every month or so. This costs you nothing and you may be surprised at the results. Personally, though, I’d make a few changes to the offer:

Treat this as the fixer-upper that it is. You need enough cash or potential equity NOW to fix the roof, the boiler and take a sledgehammer to that illegal addition (low interest rates are no good if the place is vacant and falling apart). Either the bank can give you a new loan based on the after-repaired value of the property and your handyman does the repairs OR the bank agrees to a price low enough, defined as:

FMV After Repairs

  • Rehab Profit
  • Rehab Costs (repairs, carrying costs, selling expense, etc.)
  • Your Flip Profit (at least $5,000)

for you to flip it to a rehabber and make some profit.

I’d also check the comps again. Someone posted, correctly, that the range is too wide, both for FMV price and rents. Of course, unless you plan on holding it after you rehab it, you’ll only be concerned about the price.

Next time you’re in the bookstore, sneak a peek at the back of Kevin Myers’ “Buy it, Fix it, Profit.” Therein lies a success story of a guy in your exact situation who picked up a bank REO at a ridiculously low price just by instructing his agent to continue submitting his original offer. Once you’re finished reading, if you’re at all interested in learning how the rehab process works, buy the book. It’s an excellent reference.

Good luck and don’t give up!

-Jeremy


#2

IS THERE A DEAL HERE? (semi-long) - Posted by Debby

Posted by Debby on January 26, 1999 at 13:33:34:

Hi everyone. I’ve been listening in for several months and I think I may have my first opportunity here but would really like to hear your comments.
The house is an out of state mortgage company REO. It needs about $2500 worth of work to get in shape to rent and about $10,000 to get in shape to sell (these are both estimates from my handyman–it will need a new furnace and roof and some improper addition demolition for a buyer to get conventional financing.) Comps range from $74.9K to $90K. The mortgage company has the house listed at $79K.
I would like to propose a price of $58.5K with 0 down at 8% with a ten year balloon. This will give me a $660 PITI. Comparable rents for Single family houses in the area are from $800 to $950 but the house as-is would probably not get that much. (I’ve already offered lower amounts which would allow me to do the necessary repairs and rent or sell the house but the mortgage company rejected the offers.)
If my offer is accepted, I thought that instead of doing any of the fix up work, I would look for a lease option tenant with $2000 1 year option payment and $725 a month rent with some portion applied to the purchase price, which would be about $75K. Do you think a lease option tenant would be interested in such a situation? Am I cutting my cash flow too close?


#3

Re: IS THERE A DEAL HERE? (semi-long) - Posted by Debby

Posted by Debby on January 26, 1999 at 20:12:31:

Thank you all for your comments and suggestions. I think I’ll keep looking. The mortgage company wouldn’t budge below 65K with 5% down and 8% interest. They wanted a 2 year balloon. I got the impression that they would work a bit more on terms but not on price. But they wouldn’t change the terms enough to give me a positive or even break even cash flow. Hopefully you will hear from me soon with a successful first deal. Also I will see you in Dallas!!!


#4

What bank? - Posted by kev

Posted by kev on January 26, 1999 at 15:45:03:

If the bank that owns the property takes your offer… please call me as I would like to purchase their whole REO list with terms like that.

I doubt that the bank would accept your terms, however, what are they going to say? No? Big deal. Try another offer. Then another.

GOOD LUCK!


#5

So … - Posted by Redline

Posted by Redline on January 26, 1999 at 14:54:15:

You’re planning on doing NO work with a bad boiler, bad roof and a possible unsafe addition and pulling that off by offering a below market rent of $725? I just don’t see it. Someone has to do these repairs at some point. Who?

Also, your market ranges are way too broad. $74,900 to $90,000 FMV? $800 to $950 /mo rent? You have to nail down these numbers better than that to have an idea.

Good luck,
RL


#6

Re: IS THERE A DEAL HERE? (semi-long) - Posted by rayrick

Posted by rayrick on January 26, 1999 at 14:41:30:

My first impression is that it may be tough to get $2K in option money for a place that needs $2500 to just look halfway decent. Are you expecting the tenant to do that work? What exactly does that $2500 consist of? Is it necessary to make it an acceptable place to dwell?

I think I’d probably be more inclined to bag most of the option money and explain to your tenant buyer that you usually DO charge a downpayment, but if they will do the work you will waive the fee. Then, don’t give them the keys to keep until they’ve done it! (do you have Bronchick’s course? He explains this sort of situation) Then charge enough rent that you have decent cash flow (say $850, fair market)

This still leaves you with a funny situation though. What’s your back end strategy? Do you expect the tenant to do the repairs necessary to get financing? Or are you just going to keep it as a long term rental (a scary thought with a bad boiler and roof looming over the place)? If you are expecting the tenant to do the work, what are you offering them? A price discount? What if they say “ack! this place needs 10K in repairs for me to get financing. See ya’!” Do you then find someone else? What happens when the boiler actually goes belly up or the roof starts leaking? Do you think the tenant will fix them? I guess I just don’t quite see how it’s all going to work out. Doesn’t sound terribly promising to me. But hey, I’m a rookie. Don’t take my word for it.

-rayrick


#7

Re: IS THERE A DEAL HERE? (semi-long) - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on January 26, 1999 at 14:26:18:

Let me make sure I understand this.

If you get a lease option tenant to put up $2000, wouldn’t you be at least $500 short of the repairs needed to fix the place up to rent ?

If the tenant is willing to pay $725, wouldn’t that net you a cash flow of $60 per month ? The cash flow would not include repairs, right ? Make sure that your lease/option clearly spells out who will perform the maintenance. It still seems like a very small return.

If you can get the bank to agree to the 0 down 8% financing, that would be great ! I haven’t been able to come anywhere close to that. Most banks won’t event finance an REO.

My 2 cents worth.