Deal or no deal?

General Real Estate Investing
1

I have been given the opportunity and a 24 hour deadline to take over payments (Sub2) for an assignment fee of $5000 on a property that is going for $76,500. This is the final negotiated price. The property is a 3 BR/2 Bath/Garage in a small town. The property currently has comps between $90K to $95K. The property is in very good shape and is ready to go with the exception of the need for a lease option or buyer. I’m mulling this over and would appreciate any input.

Price: $76.5K
Comps $90K – $95K
Payment excluding taxes $521
Taxes $1400
Rent: approximately $675-$725

2

Let’s see:

Income (max): $725

Outgo:
P/I/I $521
Taxes 117
Maintenance 50
Management (7%) 51
Vacancy (5%) 37

Total $776

Cashflow -$ 51

My two cents: This is an alligator – NO DEAL!

Keith

3

Keith, I was looking at it that way as well. I was trying to convince myself that at $3000 lease option and a selling price of $95K that the back end potential (after a one year lease option), covered with depreciation might outweigh the slight negative cashflow. Am I off in my thinking?

4

NO DEAL.

5

Thanks. That is what this forum is all about. I had my doubts about the numbers and even trying to take over payments (at 7.25%) and doing a flat out sale, the $5000 assignment seemed a little too steep as it cut into any immediate upside gain in the spread between selling price and possible comp value.

I thought that a lease option could turn this alligator into a (insert animal) but I now see that is not the case.

6

Just curious, Keith: Do you always turn down a deal if it means negative cash flow of just $51 ?? What else, if anything, scares you about these numbers?

7

<<[b]Just curious, Keith: Do you always turn down a deal if it means negative cash flow of just $51 ??[b]>>

Absolutely! I turn down a deal if it doesn’t give me at least $125 positive per month ($1500 per year). All together, my rentals average over $250 a month positive, each.

<<What else, if anything, scares you about these numbers?>>

Nothing much…just that the rental income is not proportional to the price of the property. I get better income than this for cheaper properties. The one I am working on now, for instance - Paid $48,200. I will wind up putting $5K to $5.5K into it and it will rent in a heartbeat for for $750 or I’ll be able to sell it for $67 - 68K

Oh, one thing did bother me…to get the $51 negative cashflow, Pauly was going to have to come out of pocket for $5K…my calculations did not include loss of use for that money.

Keith

8

Ok… I’ll contact the seller and let him know that it is No Deal.
As an aside, the last property that I purchased and turned into a lease option has $201 positive cashflow per month. With this No Deal, I should have known better.

Thanks for the advice.

9

OK, so in order for you to agree to a deal, the property must generate at least $125/mo.

Now, do you wind up putting a good chunk down in order to get that kind of cashflow? Where do most of your deals come from, foreclosures, REOs, seriously distressed properties?

10

OK, here’s what I do. I buy a property all cash and close in a week. I have bought from distressed landlords, HUD, heirs that inherited, etc.

Then, I go in and do need rehabs.

After rehab, I rent at the high-end of local market pricing because my properties are clean, freshly painted, and have no issues.

After I get a contract, I go to my lender and take out an 80% NOO loan base on the appraisal in fixed up condition.

My last one looked like this:

Purchase $64,900 from a lady that lived in TX and inherited it
Fixed up for about $2,500
Rented to three Air Force cops for $850 a month
New appraisal = $77K
Borrowed $61,600 (80% of $77K).

When the dust settled, I had the house for $3,300 out of pocket plus a little in closing costs, $15,400 in equity, and a $300 per month PCF. This equates to a 100% cash-on-cash return per year. I’ll swap $3300 out-of-poakcet for $3600 annual return (not to mention the tax benefits) every day!

This next one will have even better percentages, I think.

Keith

11

If you could sell it for $90k and only have the carrying costs for the 3 months it would take to sell it, you would only make $10k on the deal, which would be eaten up by commissions and closing costs. I see no upside for this property.

12

Yea of old “inside the box” thinking. See, it happens even in a “creative” investing website.

:slight_smile:

pauly, what makes or breaks a deal is only what YOU intend to do with it. For example:

An $80K mortgage should run you around $700/month PITI on this thing. So, that being your fixed monthly costs:

Who cares what the rental rate is UNLESS you’re planning on renting the place. Are you? NO. You said that you’ll be doing a lease with option. Owner financing terms, right?

Lease option for 2 years, option price $100K (apreciation, remember), monthly payment of $850/month PITI to lessee (based off of $97K @10% for 30 years, arounded down), $200/month rent credit.

Let’s see, that’s $150/month x 24 = $3,600 + $3,000 down + $92K - $80K = $12K backend all equals up to $18,600 in total profit (rounded down, I might add).

RETAIL OPTION: Advertise “Rent to Own” “Lease with Option” “Owner Terms” etc, etc.

Phone rings off hook. Take applications on interested parties. Take those applications to your friendly neighborhood mortgage broker that works with the “credit challenged” and have him pull credit. Find interested party that CAN actually get a loan on property (Amazingly, in most cases, scores as low as 550 qualify for 100% financing). See to interested party for top dollar (they are just happy to get a house, and you’re a savior to them).

So, assuming three months to sell ($2100 but hey, let’s round up to $3K) and sell is a lowly $90K (get the $95K), that is $90K - $77K = $13K = $3K = $10K profit. Not bad for 3 months!

Just another way of looking at things.

Raj

13

Raj, I see your logic and I’m not making excuses on this one but this town is rather small and the average rent is around $500. $850 would be the top 2% for this town (on a house with no land yet). There is also the $5000 assignment fee which comes into play which eats into the upside.

14

$5K on top of the $77K? Yep, now THAT’S a deal killer!

Don’t understand the house with no land yet comment, but the $850/month is NOT something that I just pulled out of my head. It’s likely VERY close (but on the high side) of what a buyer’s payment would be IF they qualified for a mortgage and they had less than perfect credit. If you’re trying to find lease/options tenants, then you DO NOT want RENTERS, so stop saying that you do.

What you want is a tenant that WANTS to become a HOMEOWNER. If you keep comparing what you’re selling to the rental market, then what you’ll get is a renter, not someone wanting the home.

Raj

15

Keith,

I was reading your comments, and seems like a good thinking. One thing I was trying to understand is how do you get to put the house on contract if you bought before cash and then how do you get to get a loan afterward.

There is something I don’t get…

16

I write a contract that says I’ll pay cash and close in a week. Then, on closing day, I go to the bank, draw the funds from my account, get a cashier’s check for the closing amount, and close the deal with a title company.

When I’m done with the rehab and have a renter on contract, I take the contract to my lender and do an 80% cash-out refi (80% to avoid PMI!). The refi will be based on the fixed up condition of the property. If you buy low and do a good fix up, you will get all or most of your cash (purchase plus rehab costs) back out at closing and then you can repeat. You should finish with:

  • The property
  • A 20%+ equity position
  • A strong monthly cashflow

All with very little out-of-pocket. As I said, my last cost me about $3300 out of pocket plus a little bit in closing costs.

Because I close the original deal as all cash, the closing costs are minimal. The costs to refi are lower than the costs to do an initial purchase. And, because I own the house outright until I’m finished with the rehab, the holding costs are lessened.

Keith

17

How do you close by paying just the closing cost ? Isn’t the Title company expecting you to pay the closing cost plus the purchase price at closing?

The rest makes sense.

Is it just me, am I missing something ?

18

You’re missing something.

Break it down into simplier numbers. Let’s say that you have a car worth $1000. You need $$$ and have to sell it today, so I come along and offer you $500 in cash for it TODAY.

BAM! I am now the proud new owner of a $1000 ride, but I’m $500 poorer.

BUT WAIT! The bank will loan me 80% of the value of my nice new car, so I get a loan on it for $800.

BAM! Now I’m the proud new owner of a $1000 ride and I’m $300 richer.

BUT WAIT! Now I’ve got a $10/month payment, what now?

BAM! I find someone else that wants the car and is willing to pay me $15/month for it. Now I’ve got a $1000 ride, I’m $300 richer AND I’m earning $5/month. Cool!

Change the car for a house and add in bigger numbers. Same thing!

Raj

19

Okay, yes it makes sense,

what put me off is that I understood from Keith that he was bringing to the closing was only the closing cost but in fact I believe he meant by closing amount, the purchase price and closing cost…

His solution requires to have the full amount in cash to buy the home. it also didn’t came to my mind to do a cash out refinance on a property that you paid cash…
Think out of the box !!

20

Now we know that how to run numbers, what ad to place and what are the other exit strategy… Its good that once we have a property, we can do all these…

Question of the hour, is I am in northern jersey and trying for find such properties…but couldn’t. I tried calling all those advt with motivated signs and what not…all are some kind of trap, by other investors…

Please let us know, how do we really jump start finding a deal ?

Thanks in advance for all,
Vinne