I have a widow I want to help with a 1971 sfh 3/2/1 w/pool on 1/2 acre in nicely kept area of west central fl. She lost her spouse and cant afford it anymore.
she wants 110 Just mv from property appraiser is 125,500 she owes 66 with 20 left of 30 fixed @ 751.00 incls T/I @ 7.5%fha
The home shows real nice and clean like your gramas place has signs of use. all total repairs 7500 she knows are needed and cant afford to keep it up. I want a win/win senerio. she needs a brake. I would like to pull money out to carry and repairs when needed. she will listen to all options and will most likely take a note for a portion of her equity but does need some cash now. I can market folks from main road to home and believe the home will sell or rent with some serious effort.
I have a widow I want to help
Uh-Oh! Wanting to “help” someone is not a good basis for a business decision. MAKING MONEY is the point of running a business. Just remember the number one rule of real estate investing - NO GOOD DEED GOES UNPUNISHED!!!
Good Luck,
Mike
Where is the deal and “your” profit in this?
Using your numbers and assuming nothing goes wrong.
$110,000 - Purchase price
$7,500 - Rehab
$7,500 - 6% Realtor commission on the expected $125,000
$125,000 - purchase and selling costs
$125,500 - Sales price, you hope
$125,000
$500 - profit - :beer
Where is your profit and compensation for your time/money/risk? Which pocket are you going to pick for carrying costs, closing costs, unexpected circumstances, etc? Can you rent this place for $2,500/month so its a profitable rental?
Thankx Sammy, Does this make sense if I take sub/2 and give her 2500 to relocate, have her hold note @ 5% for 15,000 with Intrest only ballooned to 3 yrs. I can find T/B collect consideration monies 3000 for the moneys I put out. I can cash flo with anything over 950 but use that as credit toward thier deposit if the take the option. If they dont I L/O again
Do you think there enough room?
I can cash flo with anything over 950 but use that as credit toward thier deposit if the take the option. If they dont I L/O again
If you mean that this deal will cash flow with rents of $950 per month, you will be VERY DISAPPOINTED!
Here’s how this deal would look as a rental or lease-option.
Gross Rents: $950
Operating Expenses: $475
NOI: $475
Mortgage Payment ($117,500, 30 yr, 7%): $782
Cash flow: $307 per month LOSS (OUCH!)
The facts about lease-options that the gurus don’t tell you are that most tenant “buyers” never buy the property and while you’re waiting for some tenant with terrible credit to show up with a big pile of cash (for the option premium), you are losing rent. It’s often more profitable to simply rent the property. In any case, this one is a TERRIBLE deal as a rental or a Lease-option. For that matter, as Sammy pointed out, this is a TERRIBLE deal all the way around. This seller is not DESPERATE to sell and is basically wanting retail for this property. I’d move on!
Good Luck,
Mike
If you really want to help her and decide that you don’t want the house, I may be able to find a buyer for her. What area of West C Fla? You can PM me. I’m just saying if you decide to pass . . .not interested in bird-dogging . . . no money on the deal for that . . . but if the deal is essentially FMV (or a little under) . . . I can probably find buyers.
Thanks,
Tina
IF you plan on holding the property:
Offer $100k
Takeover payments for the $60k she owes
Give her the $2500 she needs cash
Make payments for the remaining at 0% interest till paid off or sold
Never corner yourself, and never feel sorry for someone or you won’t last in this business.
You forgot holding costs, closing costs for both buying and selling, buyers negotiating a discount 
I like the fact that she only owes 50% of the appraised value. Your gross rent multipliers aren’t the greatest.
Buy and hold:
If you paid 71K (66K, 5K for commissions and closing costs), then spent 7.5K for repairs, and came to the table with 26K down, and could get $950/month, you would have a positive cash flow buy and hold.
Mike is the king of cash flow, so let’s use his numbers in this scenario:
Gross Rents: $950
Operating Expenses: $475
NOI: $475
Mortgage Payment (45,000, 30yr, 7%): $300
Cash flow: $175
ROI 6.3% annually (many investors would consider this to be too low)
Fix and Flip
If you paid 71K (66K, 5K for commissions and closing costs), then spent 7.5K for repairs, and you come in all cash:
Purchase: 78.5K
Holding costs: 0
Sell 112,950 (90% of the appraised value)
Commissions and closing costs $9,036
Your before tax profit: $25,414
I had you pay closing costs and commissions on both sides of this deal because she can’t apparently afford to absorb these costs, and in a buyer’s market, you will probably get stuck with these costs at the sale. If you use hard money or bank financing for this flip, you will have financing costs and carrying costs which will leave you with too small a profit, unless you can flip 20 of these deals per year and don’t mind the risk.
I don’t see how you can make any money on this deal if you give her what she wants, the 110K.
You might suggest that she obtain a reverse mortgage; I don’t know if banks are still offering these.
I would not let her carry back a note for 5% interest. A win/win situation might be possible if you buy an option to buy the property for $2,500, make the repairs, and then each of you take a percentage of the profit when the place sells. You would have to sell the place quickly, and the risk would be the holding costs. Who would pay the holding costs? You’ve already risked 10K.
I would almost never have a seller carry back a due and payable note with a three year term, it’s not enough time.
I like this.
Especially the last comment.
Funder - the problem with your analysis is that you bought that cash flow with your down payment. You can cash flow any property as long as you make a big enough down payment… For example, if you bought the property for $1 million dollars and paid $955k as down payment you would end up with the same “cash flow” (Gross rents of $950, NOI of $475, Mortage payment of $300)…
In addition you should also consider the repairs as part of your cash flow analysis - the $7.5k is not free. What if you had to put $50k into the rehab? Would you still feel this property is a good buy for the cash flow?
This is one of the challenges I am facing in finding good properties to cash flow - after you consider 100% financing and rehab costs they all end up belly up… :O)
Have a great weekend.
He did. A cash on cash return of 6.3% includes the repair cost in the calculation.
Whether this is a good deal or not for you depends upon whether you can get a better return on your invested capital somewhere else for comparable risk. You can buy a 5-year CD that pays 5% with interest paid monthly. If you take the $33500 you would have invested in this property and bought a 5-year CD instead, your monthly cash flow would be about $139.58 with no risk, and your investment is FDIC insured.
When you consider that this property is 27 years old, you have to factor in major systems replacements in the near future. New roof and new HVAC within the first couple of years could cost $15000 or more. At $175 per month, those two replacements alone eat the first 7 years of your cash flow.
As Funder said, many would not consider this property a good enough deal, even on the terms he outlined.
Actually, he did not. He considered it for the cash on cash return, but not in the cash flow analysis. I would add the cost of repairs to the property price, apply the terms of the loan and see if the property would cash flow…
Nothing wrong with doing a cash flow analysis with 100% financing to include the cost of repairs, if your goal is nothing down and nothing out of pocket. But, since Funder’s scenario has the downpayment and repairs paid out of pocket, his approach was correct for the scenario he described.
If you are able to do 100% financing, then the initial investment will be zero $ and consequently the COCR will be infinite.
When you don’t do 100% financing, you need to do a cash on cash return calculation to get a feel for how efficiently your money is working for you. It’s just the second to last step in completing a detailed cash flow analysis.
The last step in the cash flow analysis is calculating the debt coverage ratio to determine whether the cash flow is sufficient to sustain the property without the need to resort to additional capital contributions.
If the cash on cash return and the debt coverage ratio meet or exceed your investment criteria, then you might consider purchasing the property for your rental portfolio.