So, I’ve been looking at this duplex online for a while now. It was pending for quite some time, but I noticed yesterday that it came back on the market. I phoned my real estate agent for more information on it and to take a look at it today. He informed me that it is a short sale, and if it doesn’t get sold soon, it will go into foreclosure.
Here is the deal:
Duplex with 2,852 sq. ft., 3-bedroom each side. 2 story, with basement. Year built: 1976. 2-car garage.
Asking price: $119,000
Gross income: $18,000 ($750/month each side)
So, working out the numbers using the 50% rule:
20% down payment @ $23,800
Loan amount: $95,200
5% interest rate: $511/month P&I
$750 minus $511 = $239 cash flow
So, what do you think of this deal? I don’t know much about ‘short sales’. The only thing that concerns me so far is that he told me it’s going into foreclosure. How does an income property with the cash flow listed above go into foreclosure?? Something just doesn’t seem right to me unless I’m missing something. Any suggestions? How do I handle a short sale deal differently than I would handle a more conventional deal? Is there any way to find out why the property is going into foreclosure??
How does an income property with the cash flow listed above go into foreclosure?? The short sale price is the price the bank will currently take for the property. It is possible (likely?) the current owner paid WAAAAAAY more than that amount for the property and it will not cash flow at the price he paid.
You are not taking into account taxes and insurance. Where I invest, taxes on a $200K property run around $500/month.
How do I handle a short sale deal differently than I would handle a more conventional deal? In my limited experience, the main difference between short sales and any other sale is that it can take much longer dealing with the bank and seller to approve a short sale than with just the bank or seller alone. You still need to perform the same (maybe better) due diligence prior to singing any contracts.
Is there any way to find out why the property is going into foreclosure?? It is almost certain the reason the property is in foreclosure is the current owner stopped paying the mortgage.
Thank you for the reply. Forgot to mention taxes are $125/month. From what I learned from reading here (and I may be wrong) is that the other 50% of the gross revenue would be used to take care of property taxes, insurance, vacancy, maintenance. Then, you would use the remaining 50% minus the mortgage payment to decide whether it may be a worthy cash flowing property. Is this correct? Either way, with the numbers I have given, does it look like something worth pursuing?
And I’m sure you’re last statement had a pinch of sarcasm in it lol. Yes, I realize that it’s going to foreclosure due to not paying the mortgage. What I want to know is why is the mortgage not being paid? Is it because the property itself does not cash flow, or is it something totally unrelated, i.e. owner is going through divorce, owner has other debts that he’s using the revenue from the property to pay off, etc, etc.??
To answer your question, IF the rent is market based, then this looks like a profitable deal. Not awesomely profitable but it meets the 50% rule. It provides $100 per unit/per month cash income. You have a cap rate of 7.6% which is acceptable and a cash on cash return of 12% which is moderate. If you are patient and willing to wait the average 4 to 6 months to close a short sale, then I don’t see a problem with it.
I picture the owner used almost all the rental income to pay personal expenses to keep afloat and got behind on the mortgage payment for the investment and that may be why he is in foreclosure.
Ok, heard back from my real estate agent last night. Turns out the property is no longer a short sale. Owner has rehabbed the property, and I’m still waiting to get the details on exactly what has been done to rehab. However, the price of the property has now increased from $119,000 to $149,000.
I heard back from my lender also yesterday, and they are offering a 4.125% interest rate. Using this rate and the 50% rule is as follows:
20% down: $29,800
loan amount: $119,200
monthly payment: $578
$750 minus $578 = $172
If I were to expect $100 at each door, I could not pay anymore than $142,000 for the property.
Should I still pursue it?