Re: Where do I start … - Posted by B.L.Renfrow
Posted by B.L.Renfrow on February 14, 2000 at 12:02:57:
Sure, always happy to give an opinion! However, I should point out that I am by no means an expert; I have been doing this only little more than a year, so read with that in mind. Also, I see you are in Canada. I don’t know beans about CRE in Canada (although I spend two days a week within spitting distance of the Ontario border)! I believe there are, however, several Canadians on the board here, so maybe they will be able to better advise regarding specific techniques, but keep in mind I am answering from the perspective of a US investor.
As to your specific questions:
No need for an appraisal at this point. Appraisals are like blood pressure: up one minute, down the next. They are hardly scientific, and (at least in the US) typically reflect the agenda of whomever orders it. Appraisals have their purpose (which generally is when a commercial lender requires them), as do comps, but in the end, the best determination of a property’s value is whatever the buyer agrees to pay and the seller agrees to take!
Regarding whether to wait for the listing to expire, remember that the broker commission is paid by the seller, so unless the deal is so thin for him that it would break the deal, I wouldn’t worry about it. Keep in mind also that most listing agreements require the seller to pay a commission for a certain period of time after expiration, if the seller sells to a buyer who became aware of the property through efforts of the broker. So, even if you wait until June to make an offer, the seller may well be responsible for a commission anyway.
In terms of how it could work with a L/O, let’s say, just for sake of discussion, that the present as-is value is $85k and it requires $5k in repairs. What you could do is offer a one year renewable lease option with an option price of $80k. Then, because you need to make repairs to make the place livable, offer no rent for, say, 4 months, while you complete the repairs, or alternatively, a token amount if the seller insists on something. Then you could pay him $500 per month, which is $50 more than he was getting from the previous tenant, plus you have fixed the place up significantly. The other thing I would try to negotiate is that whatever you put into the place in terms of materials and labor costs becomes option consideration applied to the purchase price when you exercise. Then, when repairs are completed you’ve got a property with an ARV of around $125k with $40k equity. Not bad! (You must realize there will be other expenses involved as well, so keep that in mind.)
Of course, if you can’t exercise down the road for any reason, you’re screwed. That’s why if you can get the seller to finance and get the deed, you’d be better off. It wasn’t clear whether you plan to live in the house or rent it or sell it when repairs are completed. Naturally, your exit strategy, if there is one, has a bearing on how much you want to put into the thing. If you sell to a T/Ber on a sandwich L/O, you should have a decent cash flow, plus profit from option consideration, plus a great back end profit. If you’re sure about your numbers, I’d do that deal in a heartbeat.
It sounds as if you’ve got the right ideas. As you know, however, before you actually make the offer you should get input from someone knowledgeable about Canadian transactions, and do plenty of reading to further educate yourself.