BiggerPockets

Background: I am still looking for my first investment property. I have found a 3 bedroom, 1 bath for approximately $30,000 and I think it can sell for around $80,000 to 100k with ~20k in renovations. It is a 1.5 story bungalow with original woodwork, hardwood floors and is in a decent blue collar neighborhood with good schools. The major renovation issue is the upstairs master bedroom had the drywall and electrical ripped out by a previous tenant, it's essentially a clean slate. In the upstairs bedroom I am planning on adding a master bathroom and finishing the drywall and electrical. The rest of the house needs typical cosmetic repairs.

I walked through the home today with my agent and I thought the property had potential so we started laying the ground work for an offer. The property is owned by a Real Estate agent and my agent contacted him to see why he was selling it and get a background on the property.

The owner/agent said that the he had a couple of offers before and was not willing to sell the house through financing. He wants cash only...He said that the home has some electrical issues from the previous tenants and didn't think it could pass inspection or meet appraisal and therefore he doesn't want to waste his time with a lender....

My Thoughts: I am under the impression he has received other offers and they failed inspection and the financing fell through. I would like to get some innovative solutions/negotiating ideas for offers to convince the seller to sell to me. I am planning on calling him tomorrow to inquire more, but I would like to have some creative offers available at the time.

I would like to use financing to purchase the property and finance the renovations through cash. I was considering offering $26,000 through financing with $6,000 down. I would like to keep my cash investment to a minimum and save cash for financing the renovations.

If he wants a cash offer so bad maybe I should offer a cash offer significantly lower than asking price around $15k. Any other ideas?

Thanks for your help.

I am not familiar with HML...What kind of interest rate does a hard money lender charge typically? Do they require a larger down payment? What is are the main differences between a conventional lender and a HML?

That is a good question. The conventional lender that I am prequalified with will not finance a property that requires roof repairs, has water damage or foundation issues...however, this home has none of these issues...it sounds like I should give him a call to clarify what will disqualify a home from receiving financing....maybe my lender would be willing to finance this property and I can provide proof to the seller...any other suggestions?

Thanks for the quick response.

Hi David,

Requesting a cash offer is very typical of a seller who has a property that needs repairs.

Check with your lender. Most traditional banks don't want to touch a house that needs significant repairs like electrical work. Maybe you could look into getting a construction loan from a local bank. I know other rehabbers have success going this route.

We use cash and private lenders to fund all our rehab deals.
Do you have any family or friends with money in CD's or savings accounts making a lousy return (maybe a rich uncle)? Talk to them about funding your deal; secure them with a mortgage and pay them interest in the range of 8%-12%.
We usually fund the whole deal, purchase money and repairs, always staying under 70% of the repaired value of the house.

Good Luck,

David,
Many of yoru questions to the current owner are not necessary as it makes no difference what he tells you. How would you know it to be the truth? What you want to do is bring in your electrician and bid the project for you, also have the other items bid so you have an exact cost of repairs. What the owner owes currently can be found on your own through public records. Stay away from doing work on current owners house with agreement. This could turn out bad, especially because you are new and you have no previous relationship with the seller.

Selling without realtors - it saves money, but that is a seller's cost and as a new investor, you may want to have a solid agent represent you in your transaction.
YOur last question refers to a wrap mortgage. This is an advanced strategy and can become conveluted and difficult to accomplish at times, depending on seller and lender could call note due (due on sales clause).

I recommend you get as many answers to your questions from your own resources and only ask the seller how long the property has been in this condition and how it got this way, i.e, why the last tenant destryed the property and stole the items. Not that this really matters anyways, but information is always good.

Then I would make an All-cash offer to this seller after calculating rehab costs and exit value confirmation. If the home could be sold for $75k very quickly and if the rehab was $20k, then your offer should be no more than $25k, placing you all-in at $45k which is 60% of $75k ARV (quick sale). This gives you $30k of cushion for re-sell costs ($5,500 or so), holding costs (insurance, taxes, utilities, etc) mistakes (you will make some)and debt service (private loan of $25k at 10% with 6 months interest is $1,250) and you should be able to flip this much quicker than in 6 months. After all is done, you could expect to walk away with a pre-tax profit of around $20k which is great for a $45k investment in total.

Basically you're screwed - knowing he's behind on payments stay away from anything that keeps him on the deed - you need to buy it for cash (given the repair issues) as others have stated. You should at least talk to a HML just to find out for sure what the costs would be and then build those costs into your numbers just like the repair costs and adjust your offer accordingly. Your offer needs to make sense for your situation, not his - although in this case the bank will have to weigh in as well on the short sale...

And don't get too hung up on one house - there are plenty more out there...

good luck

Good advice...it may be time to move on...I am not even considering HML or Credit Lines...

The only other option is to involve friends or family who could lend me the money at 6-8%....

Thanks for your help.

Thanks everyone for your input...it may be time to move on, but a couple of other basic questions:

Why would a seller be willing to sell at $32,000 when they have a loan balance of $87,000? Why would he not flip the house himself or rent it out?... He will have to pay $55,000 out of pocket if it sells at listing price.

Also, does the mortgage company have to approve the sale even if the seller accepts an offer at $32k?

If I purchase the house in cash from the seller through an agent should I get title insurance? Does this guarantee that I will be granted the title free and clear?

Consider 100 houses, look at 20-30, make offers on 10, buy 1.

Jon,

How does that process work?

It seems to me if you make an offer on 10 houses contingent upon inspection then that is potentially $4000 out of pocket on inspections ($400 each house) Or are you comfortable performing your own inspections?...Also, what happens if you get more than one offer accepted at the same time?

Thanks!

You are only doing an inspection on a property for which the offer is accepted. So, you may make 10 offers but it's unlikely that all 10 will be accepted. If more than one offer is accepted and you only want to do one property at a time, you'll have to choose which one you wish to pursue.

Once the seller accepts the offer you have a contract contingent upon inspection, correct? [i] In Iowa, you can buy "as is" or with a home inspection. If the offer is accepted, you have a period of time that you stipulate in the contract to do a home inspection, after the inspection is done, the only way that I know to get out is if the seller either refuses to fix the items at issue or if they will not reduce the price. [i]

In that case, if you have more than one offer accepted how do you get out of the contract without doing the inspection? [i] You don't. [i]

On your 10 offers do you give an earnest money deposit on each? [i] In Iowa, yes, that is how you let the seller know you are serious. [i]

If so, it seems if you have more than 1 offer accepted at a time with only the intention of buying one you would have to forfeit the money for an inspection or your earnest money deposit in order to get out of the contract correct? [i] I believe you would just forfeit your earnest money but they could sue you, if you make an offer and it is accepted, you now have a contract. If you are only interested in one property at a time, you had only better make one offer at a time. It is normal to set a time and date for the seller to respond to your offer so you should know pretty quick if yours was accepted or not. [i]

I bet if you bought this property "as is", with a proof of funds letter from your bank, the seller would accept it. Every property I have bought since I started has been bought as is, whatever it is, we can fix it.

Good luck!