is this deal worth it - Posted by AM

Posted by Ronald * Starr(in No CA) on September 09, 2003 at 09:55:39:

AM-------------

When the market is hot it is often hard to buy a property for a sensible price, especially on the MLS or from newspaper advertisements. To find a bargain price one has to learn how to buy the properties which are not publicly shown to be for sale. There are many bargain buying systems that increase the odds of getting a good deal efficiently. I recommend Jack Reed’s book on the topic “How to Buy Real Estate for at Least 20 % Below Market Value,” available at his www.johntreed.com website.

I am surprised when you say because there has been a hot market you are less sure of appreciation. I would say exactly the opposite. You can’t have much appreciation in cold market. High appreciation comes in the hot markets. If the market is hot now, I think presages appreciation in the near term. Of course, over a longer term, that could change.

I do not think anybody has deviced a model of how high houses “should” sell for. The market determines. People try to project increased values or slowing of values based on several statistical indicators–household formation, average family income, building starts, and perhaps a few more. I have seen no evidence that any of these models are accurate. The may be. I just don’t know that they are.

Here in the San Fran Bay Area, property prices have been rising smartly for something like 40 or 50 years. They have not always gone up, we have had our pauses and declines, such as in the mid-1990s depression here in CA. However, people all during that time have said “prices are too high, they can’t go higher.” You know what, they have. The area is a nice one in which to live: good climate, natural beauty, fine cultural and recreational opportunities, consumer goods from Gucci to Wal*Mart. Or even to Goodwill. It is a nice place to live. I think there is no place in the continental USA which has a better all year round climate than Coastal California, from Mendocino in the north to the Mexican border in the south. Maybe Hawaii is better. I don’t know. Anyway, we are in an area where the cheapest small, old ghetto properties sell for close to $200K. The better ghetto properties sell for a quarter of a million dollars.

So, you may have a hard time predicting property values where you are. Is the area growing in jobs and population? This produces more demand for housing, pushing toward higher prices. Are there any restrictions on building more properties? If so, there are pressures to push up prices. For instance in the Phoenix and Las Vegas areas there is a lot of flat vacant land and it is easy to build lots of more houses to feed the buying demand. So prices don’t go up much there. Where there are restrictions of bulding, either geographical or man-made, the prices go up because the supply cannot increase fast enough to meet the demand.

Good Investing***********Ron Starr****************

is this deal worth it - Posted by AM

Posted by AM on September 08, 2003 at 14:22:17:

I found a small 1 bedroom (each) unit duplex asking price is 209,000. With fha, I can put as little as 3% down. I also have the advantage of gift money if necessary of about 10,000. If I offer 200,000 my monthly payments would be about 1,464 I believe. I would owner occupy and the rental unit is currently bringing in 650 a month, which could be raised to about 750 (or more if I do minimal touchups) after lease is up as it is under market for the area. Eventually I would rent out both units, which are identical.

The house is in the City which is desirable to me and my plan is to hold for years and years.

Thank you for any advice you can give.

AM

Re: is this deal worth it - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on September 08, 2003 at 16:42:06:

AM-------------------

The scenario you have lade out could work. My major concern is that you may be rushing into a deal before you have studied your market and thus may be buying a property at greater than market value.

Now, you do say that the rent is below market value. I hope you know this from your personal investigation and are not relying on the word of the owner, the listing agent, or a real estate agent that is assisting you. These are often not reliable sources for such information.

The ratio of the existing rent to the purchase price seems too low to make me comfortable. Oh, and the unit you want to move into is either vacant or the renter is on month-to-month occupancy, right? In other words, you will not have a problem because you can not move in because both renters are on leases which are not expiring?

In general properties sell for about 5-8% below their asking prices when the market is normal–neither hot nor cold. So, it is sensible to offer about 8-10% below the listing price, unless you are very familiar with property values and know for sure that the property is priced below market value. This latter does not sound likely to me. I would suggest offering $190K. Because of the low existing rent, I’d suggest going even lower: $180 to $185K I think. This is just a first offer, but it “anchors” the negotiation at a lower price, which is to you benefit.

And, in the offer, put a lot of stuff on the seller. The seller to pay for your loan fee, if that is legal. The seller to pay for your first years insurance, the seller to pay for this and that and the other thing. Any repairs to be done and paid for by the seller before the close of escrow, etc.

ALWAYS put in: “The seller is to repaint the front porch in a color of the buyer’s choice.” I sure did when I bought this house I live in. Of course, if the seller rejects that clause, you, hurt and feeling badly, will accept the sellers decision…BUT will rally enought to ask for something else to replace it. You always want to have stuff that can be knocked out by the seller so they can leave in some of the things you really want. No, I did not get the front porch painted. I did however, get virtually all of the furniture in the house. I still have the dining room table and chairs and an armchair. The beds and other furniture have been replaced over the years.

And be sure that you have a thorough inspection before you buy by a knowledgeable home inspector or contractor. It is sometimes amazing what is found that will cost you money in the future if it is not found and repaired by the seller.

Good Investing**********Ron Starr***********

Re: is this deal worth it - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on September 08, 2003 at 16:35:59:

AM-------------------

The scenario you have lade out could work. My major concern is that you may be rushing into a deal before you have studied market and thus may be buying a property at greater than market value.

Now, you do say that the rent is below market value. I hope you know this from your personal investigation and are not relyng on the word of the owner, the listing agent, or a real estate agent that is assisting you. These are often not reliable sources for such information.

The ratio of the existing rent to the purchse price seems too low to make me comfortable. Oh, and the unit you want to move into is either vacant or the renter is on month-to-month occupancy, right? In other words, you will not have a problem because you can not move in because both renters are on leases which are not expiring?

In general properties sell for about 5-8% below their asking prices when the market is normal–neither hot nor cold. So, it is sensible to offer about 8-10% below the listing price, unless you are very familiar with property values and know for sure that the property is priced below market value. This latter does not sound likely to me. I would suggest offering $190K. And, in the offer, put a lot of stuff on the seller. The seller to pay for your loanj fee, if that is legal, the seller to pay for your first years insurance, the seller to pay for this and that. Any repairs to be done and paid for by the seller before the close of escrow, etc.

ALWAYS put in: “The seller is to repaint the front porch in a color of the buyer’s choice.” I sure did when I bought this house I live in. Of course, if the seller rejects that clause, you, hurt and feeling badly, will accept the sellers decision…BUT will ask for something else to replace it. You always want to have stuff that can be knocked out by the seller so they can leave in some of the things you really want. No, I did not get the front porch painted. I did however, get virtually all of the furniture in the house. I still have the dining room table and chairs and an armchair. The beds and other furniture has been replaced over the years.

Good Investing**********Ron Starr***********

Re: is this deal worth it - Posted by AM

Posted by AM on September 09, 2003 at 07:19:05:

Thank you so much Mr. Starr for your expert advice. Offering 185K to 190K might make it worth it. Unfortunately the market here has been so hot, I know I can’t count on appreciation. I believe the houses in the city have reached their high-point over the last few years. It has been a real sellers market. But heading into winter (market slows a bit here) with your suggestion of a lower starting offer I have a better chance.

Thanks again,

AM