BiggerPockets

Hi All,

I am a new investor and was wondering if the more experience investor can give me some pointers/advice. I've been searching for 6 months and I hope I'm not rushing into anything because I'm too anxious. I am currently considering a foreclosure property in the DFW area.

Foreclosure Infomation:
-List Price:59k
-County appraisal:100k
-Neighborhood average value:120k (according to Zillow)
-Normal rent for that house size and in this area:$1200
-Condition: House looks in decent condtion (maybe 8k fixup), small foundation problem (hairline crack on exterior)
-Days on market:10 days (so I won't be trying to low ball for this foreclosure)

Tomorrow I am planning to submit an offer for $57,000. With this offer I am planning to include a $10,000 check for down-payment. Also included is a business card, stating "Real Estate Investor". I have two out clauses(inspection and mutliple offer) ready for sales contract.

My plan is to acquire property. Bring up the value by cosmetic fixup, landscaping and foundation fix. Then get an appraisal followed by a 2nd Mortgage on property when I find another good investment.

Would anyone do anything different? Would anyone focus on any different factors?

After soooo much reading (this forum and books) its finally time to test the waters and any advice would be appreciated.

Thanks for your time,
Ray

Don't know the area, so can't comment on that.

I agree with Sam that you need to get a better handle on values. In TX, sales prices aren't in public records, so you'll need info from and agent. Without that, you're flying blind. Zillow MIGHT give you some comps. Ignore any of the values from zillow. Only look at any real data. County assessors are also bad.

You won't get a second mortgage on an investment property. A year from now you MIGHT be able to do a cash out refi and get some cash. That won't be cheap, several grand in costs. And you'll likely be limited to 70-75% of the new value for the total loan.

A hairline crack in the foundation is either irrelevant or a pretty big deal. If its just minor movement, it can be ignored. If it means part of the house is sinking, its a bigger deal to fix. Have you had a foundation guy (or three) give you estimates?

Numbers wise, this looks like a good deal. Assuming your numbers are accurate, you'll be all in at about $67K and collecting $1200 in rent. If you put down $10K on a $57 purchase, and pay closing and fixup out of pocket, your loan is only about $47K, then your P&I is only $282. Allow $600 for expenses and you nave NOI of $318 a month, $3819 a year. Total cash investment about $20K. That's a 19% cash on cash return.

If the value really is $120K, and you can refi at 70%, your new payment would be $504. After paying off the old loan and costs, you would get $34K back. That's gets back your $20K plus $14K more. You still have $96 a month in true cash flow. Whether or not you can actually get a loan like this depends on a lot of factors, some of which (the general lending environment) are out of your control. If you wanted to do this right now, you would need good credit (720+), good income (enough that your DTI is good even without the income from the property) and some cash in the bank. Bad credit or self employed (i.e., you need a stated income loan) and you can forget it.

Lot of assumptions in all that math, so your task right now is to verify they're correct. As Sam points out, if you can buy any home in that neighborhood for $60K, or even $90K, its not such a good deal. You need to verify the comparable, fixed up value is at least $100K.

That's too much of a range to be meaningful. The best possible comp is the identical floor plan right next door. Failing that, you need to find properties with the same beds, baths, garage, size, and style. Closer is better, both in location and in sale time. You also need to find out if the sale was distressed (short sale, REO) or a retail sale of a move-in ready house.

ARV is the single most important factor. Its also a tough one to figure out. You have to get to know the area. Go have a look at those comps and see which ones are good comps. If they are all very similar, all recent sales, none near a major road or school, etc, then you have a puzzle. An appraiser would likely use a set of properties on the lower end. Once upon a time they might have used the top ones, but no more. You cannot count on them picking ones in the middle. So, given that set of information, you would have to use an ARV of $60K. Or, at best, the average of the lowest three.

But this is not an averaging process. None of these are identical to yours. An appraiser would use those differences to adjust the sales prices, then average (sort of, never quite figures this out exactly) the adjusted values.

@ Mr. Holdman - Unfortunately on Comp Analysis there are no identical property. Are there any other methods you would use to find properties with identical floorplans?

--Using Sam M's 30-60 days Comp Analysis, looks like houses with 3bd/2ba/2car for roughly around the same Square footage are slim. Only one match the same 3/2/2 but is 126 SqFt larger and sold for 112k last month in mid-February. Contacting my agent to find out if this property was distressed. Cheers to you Jon for giving such detail analysis. (almost feel like I'm in the big leagues now :roll: )

-Appropriate Real Estate Value seems like using tactics that appraisers use to define value. I would love to learn more about it later, when I have the time. Thanks for mention it.

Forget the check for the downpayment and the business card. Makes you look like an amature. Act like the seller should know who you are. I am worried about your rental rate, your ARV, and your repair estimate. Check them and check again. It is great you found BP. It should help you a lot as you first start.

I am such a tool. I've been sitting here for about 1 hour trying to Private message without succeeding. So far, I have followed you Michael P. Which added you to my colleagues list. But when I try to Private message you your name doesn't pop up. Can anyone show me how to PM?

@Michael P -Would much rather PM you, but I don't mind putting the address online (hopefully it can give me more feedback). Address is 4036 Random Circle, Garland Tx 75043. Well even though this is my first investment property (since my enlightenment), I've own one rental property which has done so well its inspired me to be a RE investor, ran into it because a friend told me it was a good deal. Had it for about 10 years. That property now has much worst foundation problems than this property. So I agree, hairline crack COULD be negligible.

Regarding your 40k spread, do you mean in instant equity? House condition is actually good, so definitely gonna get inspection bc I think its undervalue and there must be problems. Hopefully investment potential outweighs known problems.

Also Michael, I wanted to know your opinion. Is it hard to find a good deal these days in the Dallas RE market? I've looked so much and only found one deal. Regarding my exit strategy, kinda lame but I just thought that if I need to exit I would sell it.

@ Jeffrey Koenig - thanks for the feedback. I got the idea from a book called "Differentiate or Die by Jack Trout (great book)". I just wanted to separate my offers from the 'normal' offer. I don't think I will even talk to the sellers. My agent submits my offer, and pretty much everything is done though my agent. If anyone is willing I would like to get more feedback regarding this "Upfront Down-payment and business card"?

I definitely need to learn more about ARV, to become a good investor.

@Kendra Williams - Yeah these people are so great. I'm learning so much from one deal and feel like my second deal is going to be a larger learning curve. These experience Investors are so warm and helpful, I really feel so grateful for them and their feedback that I don't know how to express it.

I would also like to leave you with this quote. its based on my own 'waiting to make a move' process. Took me awhile to think that I can do it and actually take action. Now I don't really care, I'm going for it. Sink or swim style. "Whether you think you can or whether you think you can't, you're right." by Henry Ford

Yes, seller is currently processing my offer, so I think its currently under my contract. Thanks for investigating its comps.

Yeah my exit strategy is to fix it up to rent. Then lease it out. And within two years try to improve the condition of the house to increase its value.

Hi Ewa, I would like your opinion because it sounds like your an Real estate agent or know alot about this area.

(1) Do you consider it wrong to use more than one buying agent (I wouldn't cut the used RE agent out, but I turned down so many RE agent that I meet because I already have one).

(2) As a RE buying agent, what do you appreciate in buyers? (any traits that doesn't annoy you, but is really effective in buying a house).

(3) After I check out an house and determine its NOI and Maximum Selling Price, this is when I ask for a Market analysis. Do you think I should ask my buying agent for more Market Analysis (for ex. I only ask a very small amount of CMR, should I be asking for CMR at houses I haven't even stepped in - that would make searching for properties so much more efficient)