1st deal in process! Should I Close?
1. My background : Hello everyone! I'm new to bigger pockets. Started listening to the podcast on my regular drive from DC to harrisburg PA. The host and guest were persuasive on the value of utilizing the BP forum. Anyways, im new to real estate, but have experience in stocks and general finance.
2. Deal background: My question today is about if i should go ahead and close on a deal. There is a house that a current owner (realtor and investor) is selling. She presented the opportunity to a friend of mine that is currently doing seller financing on the house he is living in. He brought this deal to me about 2 weeks ago after i told him i wanted to get into real estate. The seller appears semi-motivated, as she is an older indian woman and this area is quite rough(when i visited the place there were candles on the front porch as someone was shot and killed there recently).
3. Deal basics: Caveat is that i met with my friend and seller yesterday and not much of finer details were discussed and that my friend and the seller have terms in place; although im assuming they can be changed. Anyone that sees a better option to structure the deal let me know.The current terms of the deal are seller financing, we will both put $2,000 down and pay standard amortization schedule over 4 years. The monthly payment to the seller was alittle over $900. My friend and i would be responsible for utilities. We will split risk/reward 50/50. He will handle tenant management and contracting work.
4. Income strategy: My friends thesis appears solid. The area is primarily african american low income and he is originally from the area. He believes that a majority of people that live in this area, especially those who are single, dont have the down payment/1st/last month rent for a traditional apartment. So he wants to cater to that market by doing rooms for rent and setting up the rent payable weekly, although if the person gets paid in wider increments we could make an exception. We are expectin gto rent eacj room out for $400- and he already has a couple family members in place to rent 2 or 3 of the rooms. My friend wants to furnish the rooms with a bed and a nightstand.
5. House specs: There are 5 bedrooms and two bathrooms. a basement. dining room. living room. kitchen.
5. I have an llc. should i use it to sign the sellers agreement for the deal?
I have identified what i believe to be the two primary risk factors. I would very much appreciate some guidance. Also, if anyone thinks of any other pertinent risk factors, please let me know!
Risk: 1. There being a large cash outlay ( something foundational etc) within a few years of purchasing the property. How can we mitigate this? What type of person can i hire to check for the quality of the house?- and can they provide a timeline of expected costs by inspecting the property? Also, how much would this service cost?
When i asked my friend about this he said that an inspector would not be able to provide info on foundatiolnal work as it is not in open site.
risk 2. how would you suggest performing market research on expected vacancy rate? I was thinking about going on craigslist and posting some fake adds to gauge demand for the room-for-rent at the $400 price point n this area.
Piggybacking off of this point, what is you're opinion on rent elasticity? - such as, if we have 3/5 vacancies for a few months and find ourselves highly motivated to fill th space- how low should we drop the price? $375? Then wait a week then another $25 drop?
This is my first (potential) real estate deal - and i just found out about it the past 2 weeks. The seller says we will need to purchase by july otherwise she will look fo a single-gamily tenant - which doesnt give me much time to analyze the investment. With that said, the time-pressure is somewhat beneficial as it will force me to work fast and make a quick decision and action steps.
Any experienced investors out there- i would like to gain experience by helping to analyze deals with them . I would be willing to do analysis legwork on deals you are looking at. This would be a win-win. I could also benefit you potentially by performing stock analysis on a ticker or our choice. If you are interested in viewing my stock research please contact me.
Have a great day!
Christian Sgrignoli