Duplex: need help setting up an offer!

General Real Estate Investing
1

I’m looking at a duplex that seems like a good investment if we can work something out.

It’s in city limits - great location.

Built in '95
No repairs needed - maybe some interior paint.

On about a quarter acre.

Both sides currently rented out. (600/500) Unit A is on a month to month. Unit B (500) is leased through October.

The realtor is asking 153,000.
Price has been reduced from 162,900

The seller has it priced for quick sale.

Taxes for '07: 1166.48

I’m asking if the realtor can carry the paper.

But first, I need to know if this property will be worth my time?
What, step by step, should I do from here?

2

This does not appear to be even close to cashflowing…how did you do your cashflow analysis to determine that it “…seems like a god dealif we can work something out”?

“Working something out” on this property would mean buying it for about $55K but certainly less than $100K. It doesn’t appear that you’re in the right ballpark.

Keith

3

Tax assessment value is 130,100
Was purchased in '05 for 135

I’m playing with offering 133
If the Realtor will play banker, I’m told they charge about 7% interest.

That’d be 9,310 in interest.

Total: 142,310
At $710 monthly payment, that leaves me $390 a month leftover. That’s 4,680 a year.

The property would be paid off in 20 yrs.

I don’t know exactly how realistic this scenario is. I’m new to this.
Constructive feedback much appreciated.

4

I’ll try and help you out, but a more experienced investor should chime in…

First, the way you came to your offer is gonna get you killed. The tax assessment is usually no where near the actual value of the property, can be 25% or more off.

Also what the property sold for back in '05 (booming market) will most likely not even be close to what the property is worth now (busted market).

You need to get true comps from a Realtor before you can come up with an offer price. Once you have the comps you can use the 50% rule to determine what your offer should be.

Second, if you are getting a mortgage with 7% interest on a loan, you can’t just Multiply the amount of the loan by the interest rate to get you the interest you owe. For example…

Loan: 100,000
rate: 7%
Term: 20yrs
Monthly Payments: 775.30

Now if you are talking 7 Points to get the loan that is a different story and you are then correct.

Hope that helps, but do note that I’m no expert and this is just my understanding.

5

Thanks for the help.

Since I have this going, I thought I’d mention another property that I’m looking at.

First let me say that I prefer FSBO and not going through real estate agents.

However, this property seems worth mentioning.

It’s also a duplex.

Unit A is 2 bdrm
Unit B is 1 bdrm

built in 1906 - COMPLETELY REMODELED and brought up to county codes and regulations. This house actually looks brand new.

1700 sq. ft.

I was thinking about moving into Unit B and renting out A for $600.

Or should I rent out both?

They’re asking 69,900.
I’m sure though, that I can get the price lowered.

Does this sound like a better deal?

How would I accurately figure the numbers to make sure this deal is worth my time?

6

Just curious about the arithmetic behind your payoff projection. Would you mind sharing more of the calculations? Walk me through the numbers. I want to understand how you would pay off this property in 20 years.

7

Fabian, do not forget to account for yearly real estate taxes, property insurance, maintenance etc… your math does not seem to make sense to me at the moment… try looking for a free mortgage payment calculator on the web. this would give you the actual monthly payment including tax and insurance… hope this helps.

another thing to keep in mind, with properties that are just about break even, try a lease purchase agreement instead. this allows you make the offer for the needed price, negotiate the monthly payment, and you can hold on to the property until the market starts to pick up again…

good luck

8

The second one sounds like a better prospect. With the first one you will likely lose money every month.

I usually use the property analysis tool on biggerpockets. I plug all of the numbers in, and it me all of the pertinent numbers.

Scott

9

Fabian,

There’s a big component I think you’re missing.
And I’m not an expert on here, I’m a newbie myself still trying to learn.
You need to account for expenses other than the mortgage and insurance. You need to account for vacancies, damage from tenants, and other maintenance you’ll have to pay for while it’s being rented.

Let’s see if I get this right… I learned it here!
The 50% rule is a rule of thumb for estimating these expenses. You can expect to spend about 50% of the fair market rent on these “other expenses” aside from the mortgage and insurance.

So if you’re renting out your first scenario for $1100 a month, you should expect to spend $550 a month in expenses. Then subtract the amount of the mortgage ($135k at 7% for 30 yrs, maybe around $850-$900) and you find that you’re losing hundreds of dollars every month.

Did I get it right guys??

10

Neg,
Not quite. Over time, your “operating expenses” will run approx. 50% of your gross rents. Operating expenses include everything except debt service and cash flow. Using Fabian’s first example, here’s how the numbers work out:
His offer: $133,000
Payments on $133K @7%/30yrs = $884.85
Gross rent = $1100/mo
NOI = $550/mo
Monthly LOSS = $334.85

We could evaluate the second property the same way. He just needs to include what Unit B would rent for each month.

11

Thanks for all the input.

Property A doesn’t sound like such a good deal anymore really. :rolleyes

Property B still seems worth looking into though. I think I might be able to work out a deal to keep me in the black if I play my cards right.

Any other advice?

12

I am assuming that the realtor and the seller are two different people. If so, then the realtor is not the one “asking” $153K. The seller is asking $153K. The realtor is just advertising the property for sale at the seller’s asking price. Since we don’t know the comps for similar properties in your area, $153K may not be a quick sale price. It may be the FMV (full retail price) for the property. If there is no discount to FMV, then it is not really priced for a quick sale.

As a general rule, if anyone in the transaction will hold paper, it will be the seller. The seller owns the equity in the property, and it is the seller that will hold a note secured by his equity in the property.

If the realtor agrees to hold any paper at all, it will be a promissory note for the amount of his sales commission. Realtors depend upon the sales commissions for their livlihood. There may be some that will hold paper for their commission, but they will be few and far between.