BiggerPockets

I just made an offer on a 3-1-1 REO SFH in a good location. In great interior condition, just needs to be washed/mopped and install a washer/dryer. Exterior I will fix some minor roof shingle issues and dye the parched lawn.

It auctioned in May and is listed on MLS for only about 2 months so I know the bank may not be hungry yet.

Offered $148k
Earnest money $2k

Listing price $223k
-but the foreclosed loan was only $185k; listing agent must have an inflated opinion of the property.

ARV $230k+

Bank (GMAC) requires closing with their attorney.

Contingencies/special requests:
- inspection (including termite)
- bank pays closing costs up to 2% of purchase price (wanted to request more but lenders are limiting this # for investment property loans)
- bank pays seller and buyer transfer taxes
- bank pays buyer's title insurance policy
- bank provides recent property survey
- [wanted to allocate most of purchase price to BUILDING vs. LAND for depreciation purposes but my realtor doesn't know how]

Must close Aug 7, 2008.

Giving them 2 days to respond.

At $148k purchase and expected rents of $1500/mo, this should cash flow a bit positive for me.

Any thoughts on this offer?

Will let you all know what happens.

Sure Matt, here are my calculations. Thoughts or questions?

purch price $148,000
repairs $3,000
down pay $29,600
closing costs $4,000
mortgage $118,400

Holding costs (PITI) $1,233 Total
monthly mortgage paymt $727 assume 6.25% rate on $118k
monthly maintenance $50
insurance (monthly) $83
Utilities (avg monthly) $10
taxes per month $333
property mgmt fee $-
termite bond $29
advertising fees $-
HOA fees $-

est'd taxes $4,000
taxes per month $333

opp'y cost -down paymt $92 [I assume a 3% non-compounded rate per month]
ttl per month cost $1,324

rent > this amt to not lose $ $1,324

fair market rent in area $1,500

VACANCY CONSIDERATION
annual costs $15,892
# months rented 11
projected monthly rent $1,475 491.67 per person at 3 occupants
amount income $16,225
profit (loss) $333

Total annual rent $16,225
Yield on cash outlays 44.3%
Yield on cash outlays + annual exp 30.9%

The 50% rule is a good one; I'm not familiar with the 2% rule. Keep in mind that my calculations don't really set aside a good rainy day fund for those occasional repairs/replacements that many of the experienced posters here talk about. I may get a home warranty to deal with a lot of that stuff, and I will likely be the Prop Mgr for a while until rents creep up enough to afford one, but if I can cover my costs (or come real close) the first few years then I expect rents to rise along with my equity and it will become a more solid investment.

In the spirit of full disclosure, I don't want you to think that you can pick up a bunch of deals that cash flow like this and sit pretty as a landlord; maybe 1 or 2 at most until the rents edge up, and even then only if rents increase faster than other costs. I'm really counting on buying it below market value and then getting some additional appreciation, what some would call " speculation," but I'm willing to do this based on factors such as location (intown Atlanta and near a major university and hospital, historically low county property taxes, good condition home, potential to add onto the home for forced appreciation).

Anyway, let's see how the bank responds to my offer...

I've done 1 REO - my 2nd flip attempt. Did it 3 years ago in the height of bubble-mania up here in W.Wa. Boy did I learn alot :)

Found it via a realtor I was working with, listed for under an hour as a 3/2 colonial for 190k. We went and looked at it. It was actually a 4/2 (on septic for 3) that had only surface cosmetic issues and would be worth 220k arv. We put an all cash offer of 170k with only an inspection clause (3 days) in place, which in hind-sight was far too good an offer. The next day, they said they had another offer and wanted us to raise ours. We declined. The next day, they countered at 180k and we said we would stand pat at 170k. They accepted. Yeah, sort of.

So, we had the place inspected and it turns out there was a fairly major pipe-leak in the up-stairs bathroom. We told the bank and they actually offered to fix it for us in place of lowering the price. Sweet I thought. They had it fixed in under a week and we closed. Spent roughly 1 month doing cosmetics (I didn't really know what I was doing, but I was learning.) and roughly 12k on patching drywall, painting, new carpet, re-graveling the driveway, and landscaping/stump removal. Tried to sell for 6 weeks as a lease option without gettings even a nibble (didn't know how to advertise well either.) Listed it with my Realtor for 220 and sold it a month later for 210k. A very thin, lame deal.

It gets worse though. I let the buyers move in 2 days early on a lease to allow them a place for their stuff due to their previous lease being up before close. Dumb. It turns out the bank actually had not fixed the leak in the wall, but had just cut the old drywall out and replaced it with new! Uh oh. Now, because I rented the place to them, I was in a bit of a bind. Luckily, they accepted a 1.5k check for the defect and said they'd fix it themselves. Now for the numbers of my " Killer" deal:

210k - 170k purchase - 12k repairs/holding - 20k closing costs - 1.5 oops check = 6.5k of profit. Woohoo party. I made bumpkins for the risk and work I had to put into the place. I did earn a lot in education though.

This is an old REO story but was a successful one. In 1996 I offered $30K each cash on 2 2 bedroom condos in a complex that I was familiar with. In 1988 these condos had sold for $90K each. The lender accepted; closed in 30 days, rented 30 days later at $1000/mo, net after tax/maintenance was $800/mo. I continued to rent until 2005 (height of the market here). Sold one for $150K and the second for $160K. I'm hoping those days will come back again real soon!!!!!!!