I think I have a deal, but I'm not so sure

Bird Dogs, Wholesaling
1

Hi all,

I am a n00b, but very passionate and excited about real estate investing. I’ve been reading the forums here about finding a deal and how to analyze it. So from what I’ve come up with what I have in mind is a good deal. I’m mostly analyzing it now as I do not have the cash to make an offer and I’m RSVP’d for my first REI club meeting, but I have yet to make any contacts… Ok, the numbers… Oh I live in Colorado Springs also. This house I am looking at is within 5 mins of an interstate highway, two shopping centers, and has great views of the mountain range.

It’s a 5 bedroom, 3 bath split-level house with about 3200 sq. ft. There is also a two car garage and a little backyard. It is in foreclosure. From what I can tell from the pictures it just needs cosmetic work…

FFW a little bit… I’ve just come home from looking at the house and it’s even better than I thought! There’s even a little space to put a powder room in. There’s an old intercom system that I imagine would have to come out, but other than that I think I was right about it just needing mostly cosmetic work.

Right, the numbers. So, like I said it’s bank-owned. The price is $234,000. From the research that I’ve been able to do the after repair value would be about $400,000… (this is a part I’m not sure about because I’m finding it hard to find any hard evidence of this, but I’m pretty sure it’s a close estimate). Also don’t know how to get a good handle on the cost of repairs without having a contractor look at the place and I don’t really have any way to get a contractor over there unless I’m in contract with the house right? So I just said like $30,000 for the repairs.

So…
ARV $400,000 x 65%= $260,000 - $30,000 for repairs = $230,000

So the end result would be more than what I should be paying, but I may have overestimated on the repairs… or underestimated. I am in touch with an investor that works with foreclosures and she said she looks for any fixer-upper that is a 25% below market minus repairs… So for that math…

Market $400,000 - 25% = $300,000 - $30,000 = $270,000
So this would be a good deal for my investor right?

I know it’s a bank-owned property and I probably shouldn’t be anywhere near it in this stage of my investing development, but I just want to know if I’m sort of moving in the right direction as far as what I should be looking for.

2

The asking price looks very favorable based on your numbers. But remember you don’t have to offer them what they’re asking…in this case simply offer less.

Say you wanna wholesale it and make $10k. MAO is $230k. They’re asking $234k. Simply offer what works for according to your math, which in this case would be $220k (perhaps a bit less assuming they will counter you). If the bank has held the house for a while or is otherwise motivated to sell they’ll likely accept your offer.

Incidentally, you don’t need to use a formula to figure out if a listed house’s asking price makes it a potential deal, simply look at whether the asking price is somewhere close to MAO or below. If they’re asking near MAO or below it’s a good prospect. If it’s way higher than MAO it’s not. Simple as that. Your investor friend’s formula is fine, but it’s essentially the MAO formula with a few percent added into the multiplier.

3

Thanks NSU!! I am so green. I just assumed there was no way to haggle with a bank owned property. I am glad there is some wiggle room. Like I said, I do not have any contacts as of yet, I would love to find some soon. The investor that I was talking to asked her partner to run comps (after she mentioned to him that she thought I must be smoking crack :rolleyes . I guess she didn’t know that I could see her message to him also) and he couldn’t find any comps for split-levels in the area. The properties with way more square footage sold for between $380 and 400k and he said most houses in that area took 6+ months to sell. So I guess it’s just not such a great area. I’m pretty miffed about that crack crack though. I guess it can’t be helped. I didn’t let her know that I saw it in my response. I just apologized for wasting their time and thanked them for humoring me… :anon

so the question is… do i look for more professional investors or just completely leave this house alone? it just seems to have so much potential. what i wouldn’t give for the credit to just take out a loan and do the work myself, but then if it does take like half a year to sell I’d be in trouble… sigh

4

I just ran the numbers again and it seems to me that if I could talk the bank down a few thousand dollars I could still get a pretty good deal. The comps that they could get said that ranches in the area sell for about $350k. So…
$350k - 25% = $262,500 - $30,000 in repairs = $232,500

which is already $1,500 below asking price, but if I could haggle a lower price… (from what I’ve been able to come up with it’s been on the market for a little over two years without being sold (this is only information from Zillow, but i can use them for sales information right? just not comps) I could still subtract an assignment fee (I think about $2k would be fine with me) and make a profit. So my MAO would be $230,000. When it went on sale in 2008 it was listed at $365,000. I’m not sure when it went into foreclosure though, but obviously the price has dropped dramatically since then.

I’m really just throwing ideas around. Right now I am making an ad on craigslist for investors to contact me. Should I mention what type of house I am looking at or should I just ask for details about the types of homes they are looking for?

I love this forum, by the way. I’ve been lurking and you are all so helpful. I also have a meeting scheduled with a representative of the company that is handling the house tomorrow to discuss process and options.

5

Be very very careful in determining your comps/ARV/FMV. Do your OWN due diligence, don’t count on the numbers from the bank or a real estate agency. Be damn sure your estimated selling price is accurate or you could be left holding a bag no one wants or will pay for.

jmd_forest

6

I would suggest getting some COMPS for a good ARV. Very important

7

I third that motion, and it’s especially applicable for bank-owned properties because you’ll need to put up a comparatively large deposit (probably 1% of the purchase price) and it’s non refundable.

How do you plan to get out of this deal? You can’t just assign an REO contract like you can a FSBO.

As you eluded earlier, REOs aren’t a good place to start out if you’re new.

8

Thanks for all the help guys. I’ve decided not to go with this property for just the reason that NSU mentioned. I can’t just assign the contract so there’s no reason to really mess with it. I did manage to get a good contact out of the whole ordeal though. I met with a buyer’s agent today to talk about buying houses and what not. She was very friendly and is also looking to get into investing. I know a lot of investors recommend against using agents, but I think the MLS resource would be very useful. Also she’ll be someone I know when I go to my first REIA meeting in a couple weeks. I’ve done even more educational research and I’ve decided to take a hard look at neighborhoods and do some prospecting.

Now I’m going to go scour the forums for lease option information… Thanks again!

9

Interesting situation. I applaud your work on the deal. As a new investor myself I would stay away from the price ranges you are talking about because if you miss calculate just a few percent here and there you will find yourself in a very deep hole.