Posted by Brad TX on November 06, 2000 at 16:35:39:
Us newbies don’t catch the humor sometimes, it just zips right over our heads. Thanks for the clarification. I understand your point.
Brad
Need feedback on purchasing 2/1 home - Posted by Brad TX
Posted by Brad TX on November 06, 2000 at 08:47:21:
I’ve already seen this FSBO home on 1 acre and visited with the sellers. I’m scheduled to go back tonight and negotiate the deal. The house needs no repairs (cosmetic or otherwise).
Area: Small Town about 30 minutes outside Houston, Texas.
Seller motivation: They wan’t all cash. They already have their earnest money down on another house they are buying and need a quick close. I’ve already told them that if I purchase all cash I couln’t pay more than 60% of the homes market value. They seemed ok with that.
The home: By my estimate the home is worth between $55k and $60k based on comps. The rental market is strong here, even for 2 bed, 1 bath which rent for $600-$700 a month
My Maximun Allowable Offer: $35,000.
Exit strategy: Rent, L/O, Seller Finance.
Money Source: Private lender with interest only payments.
I’m looking for feedback on the pros and cons of doing a deal like this.
Thanks,
Brad
Re: Need feedback on purchasing 2/1 home - Posted by Merle
Posted by Merle on November 06, 2000 at 14:31:51:
Since we have communicated via email, I assume your plan is to seek a private lender similarly to our method. If you do not have someone already lined up, be sure to allow an “out” in your purchase contract for financing. In other words, a contingency on your ability to arrange suitable (you describe what is suitable) to you.
Unlike Bud, I would do the L/O. Set the option price at $60,000. Collect $1,500 - $3,000 (you determine that in advance) as option consideration (most people won’t know that term, so I call it a down payment in conversation). They would still owe you $58,500. You could set their monthly payment at $650, with a credit toward the purchase price of $100 each month … if they pay you on time. Option term for 3 years (oral agreement to extend if necessary at no cost).
Meanwhile, your interest payment on $35,000 at 9% is $262.50 per month. Add $87.50 (just guessing) for taxes and insurance. You end up with $300 per month. If your buyer pays you off at end of 3 years, they owe you $54,900. Pay off your loan and you have $19,900 cash … plus the $300 for 36 months for another $10,800. Total profit of $30,700 over the 3 years.
You invest zero cash … let the mathematicians work on that “return on investment” percentage.
Possible downsides? You can’t find a lender at 9%, interest only. So, find someone at 10% … or 11% … or whatever it takes to get the first one going. If you had to pay 14% (and I don’t think you will - the most we ever paid was 11% - same as the bank had been charging us), your interest payments, plus taxes and insurance would be around $525 … still leaving you $125 per month. That would cut your overall profit to $24,400. Still, no cash out of your pocket.
I believe you are on the right track … whether you close on this one or the next one. The way I see it, if you buy at 60% of market, you almost have to make some money.
Let us know what happens.
Merle
Where’s the deal? - Posted by Bud Branstetter
Posted by Bud Branstetter on November 06, 2000 at 11:07:14:
You stand to only make 20K. You will be using someone elses money. There is no repair needed. The only thing I question is your exit strategy. If you can get 600 to 700 as rent you could get the same owner financing. But then you would have to sell the note to make some of your profit. If you use hard money from Statewide then you have to sell in 6 months and pay them back. If you found a private lender willing to do longer term you would have to wrap it, collect payments and pay taxes on all those profits. But then you may not personally need the cash or cash flow so you do the deal from your Roth IRA and never pay any tax on the income or profits. But then the house is so far out and only a two bedroom, you don’t want to take a chance. You should flip the deal to an other investor. Let me know, I can connect you with one.
The type of deal I find the people only want 30K cash. Of course the house is worth 189K+ and the mortgage is 126K. They too are are ready to move into the new home they had built. They are making two payments. I kept asking it they have to have all 30K to get into the new house but they haven’t told me. Will that private investor do an interest only loan on my deal?
Seriously, at 60% it is hard to get hurt. My first priority is to find a buyer and have a mortgage broker review if they can get a mortgage. Then, owner finance, L/O but not rent.
Any downside due to the home being a 2/1? - Posted by Brad TX
Posted by Brad TX on November 06, 2000 at 15:00:27:
This house is on the smaller side for sure. It’s around 1,100 square feet. It’s also about 40 years old, but it’s very solid, with new kitchen, new bath, new roof, new water well. 1 acre.
Still, are there drawbacks since I’m not dealing with the “3 bed, 2 bath, 2 car garage, pretty home in a pretty subdivision” type of home?
Thanks,
Brad
Thanks. Can you clarify one thing? - Posted by Brad TX
Posted by Brad TX on November 06, 2000 at 12:28:31:
I wasn’t clear on whether you thought this was a good enough deal to go through with.
“You stand to make only $20K”. ONLY 20K???
$20K profit sounds good to me, but then I’m new to this game. If I seller finance, I could get 4k-5k upfront money, a $200-$300 per month cash flow. With a 3 year balloon in my loan to the buyer I could cash out of the deal in 3 years with a backend profit of $15k or so. It could work basically the same with a L/O, with the exception that my front end profit, would only be $1,000-$2,000 depending on what I could get for option consideration.
There’s probably holes all in this plan. Could you, or anyone else out there, show me where they are?
Thanks again,
Brad
Re: Any downside due to the home being a 2/1? - Posted by Bud Branstetter
Posted by Bud Branstetter on November 06, 2000 at 16:06:56:
Sorry for the tongue in cheek humor. But again the diffference is with the objective as an exit strategy. If you are in the phase of investing like Merle, you go for cash flow. However, most people need to accumulate cash. You yourself indicated that you would secure private lending. When that is not immediately avaiable do you decline the deal? When you have all your bills paid off and cash available to do your deals, then I feel it is appropriate to look at cash flow. For those not yet at that point, borrowing money at high interest with broker costs and points stiffles the growth. Anytime you can be in a property at 60% ARV you will make money. Yes, a two bedroom house takes longer to turn but per sqft it is similar.
I think it is a great deal!! - Posted by Hope(Fl)
Posted by Hope(Fl) on November 06, 2000 at 12:58:15:
If you know, for a fact, that it is worth 60,000 and that you could rent it for 600-700 a month, and only buy it for 30,000, then I would snatch it up, and lease option it or go for a fast sale at 49,900. You never did mention how much the owners wanted, you only said that you believed the FMV to be 55-60. I would make sure you are on the same page as them, and make sure that they understand you are only offering them 60% of FMV. I think this is a great deal, I dont really see any down side, and to me it sounds much better than Brads deal where there is a much higher payment that needs to be dealt with. Oh well, I guess we all see things differently!