I’ve been working an REO since February. Made an offer the 1st of the month every month since then. Bank started out at $189K; my 1st couple offers offer were $105K. After a few month, I’m up to what I consider my “maximum” price of $120K, the bank is at $135K.
The property ARV today is worth about $189K. ($189 is what I consider the “thirty day sale price” It should sell in 30 days at that price, not some pie in the sky realtor FMV) It will take about $10K of materials and 8-12 weeks of sweat equity to rehab the place. I do almost all my own work
My buying criteria goals are 10% cash on cash return and 30% equity. However, its almost impossible to actually reach those goals in my market but they are the goals.
Rent will be $1500/month. (I own one other identical property in this development I rent at $1500. I could ask for $1600 or more if I want it to be vacant several months before I rent it)
I offered all cash, no contingencies $120K yesterday after I discovered the bank had lowered their listing price from $155K to $135K. I found out by browsing realtor.com while looking up comps on another property. The agent never even bothered to call me.
Expenses are $3600 taxes, $1800 association fee, $450 insurance and I estimate 10% other expenses ($1800) based on my other 2 similar (1 identical) properties over the past 4 years. This gives me about 7.1% cash on cash at todays rent of $1500 and about 24% equity if purchased at $135K
Agent now says they have an offer “close to the asking price”. Should I up my offer to asking price?..Hogs get fed, pigs get slaughtered or is it pigs get fed hogs get slaughtered.
Are you using all your own cash or are you getting short term financing?
Are going to rent it or sell it?
It’s pigs get fed and hogs get slaughtered. Learned that one during my divorce. My lawyer forced me to be somewhat generous on some items with the ex, but it earned me full legal & physical custody of my kids.
I will be using all my own cash. I do not plan to refi. I plan to rent.
If you want a better ROI, perhaps you could look into financing 50% of it. Or if you could refi and are able to get your original investment back and also have positive cashflow (if the numbers work), your ROI increase substantially.
Thank you for your reply. Any borrowing will reduce the cashflow though I would break about even on a NOO mortgage (kinda hard to get for less than 7.1% regardless of your credit rating)
This really has me stymied. I don’ttwant to buy that far outside my guidelines but this is the cheapest fee simple property on the market, in my market.
IAfter rehab I’d wind up with about $50K equity but still only about 7.1% COCR. As unliekly as it seems, there is very, very little (nothing) in my market that is a good deal for cash flow because rents are so low in relation to purchase price, even when buying at 65% ARV. I understand I’m “buying cashflow” by paying all cash, but even 7.1% (that’s my worst case estimate) is still better than sitting in the bank. (I don’t trust the stock market. To me, its simply gambling with the deck stacked even higher against you than the casinos)
I really wonder if my guidlines are unrealistic.
How many properties can you buy with the money you have on hand? How many coukld you buy if you used that money for down payment only anf finance the rest. The cashflow would be less, but if you can buy 3 properties with the cash you have with the help of financing, wouldn’t that be better? I mean if you combine the casflow from 3 properties along with the equity that SHOULD be there when you buy, that has to be better than the buying just one property with your own money… doesn’t it? Am I missing something?
I have enough cash on hand to buy at least 15 properties in my market. My problem is not having the cash to buy properties. My problem is finding properties at a price worth buying in my market. I advertise weekly in the local “Shoppers Guide” type paper to the tune of $400/month plus use a direct marketing campaign 3 times/year to my optimum target audience (townhouses within 30 minutes of my base) plus mine the county clerks and surrogates office for leads. This is a tough market. Prices have held pretty steady for the past 2 years but DOM have increased almost 200% from 45 days to 120 days. We’re seeing a few REOs but not many. Since this is a somewhat affluent area, most forclosures are upside down on their equity and the banks aren’t really dealing yet, as evidenced by the one I’m trying to buy. It went to foreclosure in Sept 2007 for the upset price of $190K. No one bid on it and the bank took it back. It was on the market from Dec 2007 through June 2008 for $190K and only recently went down to $135. I really didn’t want to pay more than $105 for it but it is still within reason of my investing goals at $120. At $135, not so much, but ti is the cheapest non-condo property out there.
Although I have flipped properties that were a good buy but would not cash flow as a rental, I prefer to buy and keep. I’m looking for good, steady, long term income, not one time capitol gains.
If I was you and had that much cash on hand to buy real estate, I would just wait. You are going to be in heaven in about 6-12 months when nobody can buy anything after the banks shut down the lending.
I wish I was in that position, my bank sounds like they are cutting me off, too many bad loans to speculators and I am getting punished. My biggest fear is unfolding, not being able to stock up while they are cheap.
Thanks for your perspective. I think thats what I’m going to do. I still consider myself a newbie and don’t want to buy “just to have”. I paid too much for my first rental 4 years ago. Now that I’ve “retired” and do this full time I’ve learned a bit over the past 3 years. It has to make business sense. I’ve been actively looking since I sold my last flip in November.
Its just that in South NJ there’s a fair amount of investor competition and prices just haven’t dropped like I read about on this and other forums. I see other investors, some successful and some not, buying at higher prices than I am comfortable with. I review tax records and see what “buy and hold” investors paid and think, “How can they pay that and make any kind of reasonable profit?”. I know what rents are because I keep an eye in the paper for my rental competition so I can price mine in the same range.
As I mentioned, there’s about $50k equity to be made in this property if purchased at $120K, just not much cash flow.