This property is listed at $32,900, but I’ll probably offer $20k. It needs about $12k of rehab. ARV is about $65k (will verify this when my realtor gets back to me with sold comps).
I’d like to buy it, rehab it, and then rent it out. But only if I can get my cash back that I spent on rehabbing it. From my understanding, the following might be a good way to approach this deal:
- Offer of $20k gets accepted
- Get 80/20 conventional loan. Probably ARM with no prepay peanalty
- Rehab the house using my own cash ($12k)
- Put a tennant in place
- Refinance the house for $32k (fixed APR), with $12k going back to me
Do I have the basic process down? Is this the best approach to tackle this type of a situation? ANY feedback would be helpful! If for some reason I’m not able to do the cash out refi then I’ll probably end up selling the house, because we need that cash within the next year or so to do a room addition on our personal residence.
Thanks,
Travis 8)
Your own track. Only thing is that the loan amount would be to small for a residential lender.
This type of deal may be better served at your local bank. Speak directly with a commercial lender there, not a residential lender.
If they cant, then your purchase will need to be done by a hard money lender. They can get you up to 65-70% of the after repaired value including the purchase + fix.
You should be able to do a cash out refinance on this after rehabbing.
If you have cash/credit and the subsequyent rent will support it (provided your numbers are accurate), here’s what I do:
- Buy the house cash and close in a week.
- Rehab the property with cash or by putting on your credit cards.
- Put a tenant in the property on a 1-year lease at market rent. A $65K house should rent for at least $600-650.
- Take your lease with you to the lender (to prove income stream)
- If your numbers are correct, the lender’s appraisal should come in around the $65K mark.
- Take out an 80% cash-out refi based on the higher appraisal. This would be $52K.
- Pay off your credit cards
At end-state you will have:
- Positive cashflow in excess of $150 a month
- $13K in equity ($65K appraised - $52K mortgage)
- All of your initial cash back
- $15K (± after closing costs) in cash that you don’t need to pay tax on (at least for now!)
Keith
Thanks Keith, I’d like to be able to play ball that way sometime in the not too distant future. But unfortunately I don’t have that kind of cash or revolving credit at this time.
I have about $15k of cash (which is frighteningly close to the $12k of repairs needed!!) And $2,000 of revolving credit. I know it seems like a small deal, but it’s pretty scary for me at this point in my life.
It is scary and hard to do at first, but if your serious about making money then you have to step up to the plate and swing the bat. It sounds like a win win situation from what you have given us. If your really not to confident to pull the trigger, offer them $15,000. You probably wont get it, but if you do, then your that much further in the game.
I submitted my offer of $20k. This property is REO, so I don’t expect them to accept such a low ball offer as it is. But we shall see.
The property right next door was just rehabbed by an investor, and he’s asking $80k for his. I think he’s too high, but if he manages to sell for $80k, it will definitly help my ARV!
good luck on your offer. I wish i could get my rehab sold so that i can get another one to do, but cash flow is low right now so im not gonna get over my head.
Post back about how this goes.
I’m with Black all the way here, you’ve done your research and you are clear about your deal. It sounds solid.
SO many research themselves to death and never do a thing. I am mentoring a person right now who cannot seem to get off the stick and make that first offer. They’ve brought GREAT deals to me for review, and they are too scared to make the offer.
People if you are serious – get going! The worst that can happen is someone says NO to you. You know your numbers, and know what you want to achieve.
Good luck.
It’s a similar type of situation that DMiller is going through in another thread. They counter offered $32k even. Down only $900 from their original asking price. I countered $21,350. Using Robb’s strategy a little here, making it look like I’ve done way more research than I’ve actually done into the cost of repairs.
Travis this is a trick I learned from REOConsultants, and it blew them away when I did it. So give it a try.
Make your counter with a check for the full amount as your earnest depost ;D Don’t go up. Just show them you are serious.
Good luck to you.
I’m using a realtor for this one, and I think he’s doing everything by fax. Should I give him a check for the earnest money to fax over with the counter offer? Or would that be kind of silly faxing a check.
Travis,
Tell your realtor you want to meet the seller and offer the check. Tami is right, money on the table is a powerful motivator. I use this in my business to buy machinery. Wave the green under their nose and then start to leave with it in YOUR pocket, and they may come around.
Luck,
DB
Hi Travis.
Investments should be a little scary. If not, an investor may not be evaluating the down side (too optimistic). It sounds like you completed a pretty good analysis. It also sounds like a pretty good investment to me. Here are a couple of things to think about.
instead of a traditional loan for the purchase and using your $15,000 cash for rehab, consider putting your $15,000 in a CD and getting a loan for $32,000 at your local bank, with the a draw feature. The first draw would be $20,000 for purchase with subsiquent draws for rehab expense (like a construction loan). Repayment terms set up as interest only monthly or quarterly (what ever works best for you). Use the $15,000 CD as additional collateral on the loan. When you refi the loan just don’t pledge the CD (assuming your investment property is sufficient to support the new loan). The CD may reduce the overall risk from your banker’s perspective and maybe reduce your interest rate.
Talk to your banker about completing an evaluation on the property to support your loan as verses a State Certified appraisal (this would reduce your fees). Appraisal requirements are governed by 12 CFR 34 (this is a regulation cite). The regulation requires State Certified appraisal on transaction greater than $250K. Below this number only evaluation are required (your banker can complete the evaluation). Secondary market investors require State Certified appraisal.
ORE, most bankers refer to this as OREO (Other Real Estate Owned). OREO is a non-interest earning assets. Bankers don’t like this type of asset. 12 USC 29 (a law cite) requires banker to liquidate OREO property within 5-years. Bank examiners will cite a violation of law if they hold it longer than 5-years (Bankers also don’t like this). Bankers can request, threw bank examiners, to hold for up to another 5-years, but bank examiners usually only grant another 1-year at a time. Bankers also have to come up with a good strategy for liquidating the asset.
Another thing to consider about OREO is if this is OREO at a local community bank, talk to them about financing. Depending on how you structure the financing will determine if the bank can reporting this as a new loan (earning asset) or continue reporting as OREO (a non-earning asset). This is governed by FASB statement (sorry don’t remeber the number its too early). But basically, if they finance 100% of purchase price they can not report under sales treatment (moving it to a loan or earning asset).
When a bank forecloses on property, they have to complete an appraisal (this is required by banking laws). Remeber, the banking industry is probably the most highly regulated industry. The bank must charge down the asset to its market value (appraised value). Example: Bank has a loan for $50K on a property. They foreclose the property and have it appraised for $40K. They charge off $10K and move the remaining balance from loans to OREO. I think one of the important thing to remeber here is the bank has a real good idea what the value of the property is. You do have some bargining points like how long the bank has held the property and is this a small bank or one of the mega banks. Also, the bank wants these assets bank on the earning side.
Hope this helps.
Well after I made my counter offer ($21,350), the listing agent informed us that they have multiple offers and asked if we wanted to modify our offer or not. They would accept the better of the multiple offers. I offered the original list price ($32,900). This offer was accepted. I don’t think I’ll be able to cash flow at this price, so this property has switched to a rehab and flip strategy.
Here are some “before” photos of this rehab in case anyone is interested. The after photos do not exist yet 
http://www.flickr.com/photos/travistx/sets/1358366/
Sweet, Travis…looks like you’ve got a winter project to knock out! It appears to me to have some potential, though!
As far as the ceiling coming down, that’s pretty common with these popcorn ceiling. Spray the rest of it with water using a garden mister and the rest should come right off with a putty knife. Look in the attic to make sure that there are no roof leaks!
Keep us posted!
Keith
Update on this property.
I tried to turn on the electricty for a couple of days so my home inspector could get out there and do his thing.
The electric company wouldn’t turn on the electrcity until someone from the city went out to visually inspect the electrical system and make sure it was safe to turn on the electricity. When asked why, they said this was because the house had been vacant for so long…
When the city inspector got out there, he gave us a long list of things that needed to be brought up to code before he would allow the electric company to turn on the electricity. Furthermore he told us that this house was scheduled to be demolished by the city :o. And the only way to prevent that would be for a contractor to present a plan to the city on how they intend to bring EVERYTHING up to current building codes. This house was built in the 50’s so that’s a lot of work (and money).
So I decided to not buy this house. Hope the person that does end up buying it does their due dilligence!