Good Deal?

Question

I found an REO that has been listed on MLS for 12 days now. The Bank took bank possession on 02/02/09. I am new to this as I have never bought a foreclosure before and not entirely sure what to expect. The house built in 1961 is 932 SF 3 Bed 1 1/2 bath. 1 car garage with 2 car covered carport. I carefully examined it inside and out (of course I am not an inspector). Anyway, The asking price is $52,950.. (Market Value $72,000)The most (comparable)recent sales in the neighborhood were $36,000 and $71,500.. The average market value(based on county assessor) per square foot is right at $68/sqft.  My intentions are to keep it as a rental property.

The garage is partially converted and I was thinking about having it framed in adding a window and siding to close it off, it already has ductwork ran into the garage. This would had about 250SF. I believe this would make it more appealing as a 4 bedroom since it does have ample covered parking? Thoughts? Cost?

It needs exterior paint, interior paint which I plan on doing myself. And it needs carpet.

I believe that It would easily rent for $650-$700 as just a 3 bedroom (based on local rents) and then $750-800 if converted the garage to 4th?  I am nervous as I don't know what other unknowns I may find?  Any advice on whether this a good deal and/or if I should convert the garage? How much lower would you offer?? As always I greatly appreciate all the wonderful information/resources here on BP. Thanks.

Owen Dashner · Answer

No worries Jason, that's why the forums are here- to ask questions.  What I mean by "look at houses in your target area", is that you need to physically go out, go through and inspect a lot more houses in your area before buying one.  Don't rely on just what you see online.

Carve out time in your schedule where you are going to be doing nothing but physically walking through houses.  Or at the very least, do a ton of driving around your area and looking at the exterior of houses for sale.  Once you have personally looked at a BUNCH (some say 100 is a good number) of houses in your area, you will have the market value down cold.

I firmly believe you should not skip over this step before you make an offer.  I sunk way too much repair money into my first foreclosure investment property because I relied too much on online information (including assessor values) instead of physical inspection.  There is no substitute for personally walking through neighborhoods and houses.

Look at 10 houses a day over 10 days and you are at a hundred- that's manageable, right?  Pick out your target price range, neighborhood(s), and style/age of house.  Then make a list and get crackin' on the walkthroughs.  Look at enough and you will be able to tell very quickly what makes a house worth $60K vs. $80K.

Good luck!

Jason S · Answer

Jeffrey & Owen- Thanks, I figured it wasn't the best way to get a true market value, but perhaps a start.  Owen when you say look at a lot more houses in my target area, what exactly do you mean. Sorry to sound ignorant but what should I be looking at then?  Thanks!

Owen Dashner · Answer

Jeffrey is correct.  The tax assessed value has no relevance in determining market value of a property.

I bought a house in December for $60K, and it had an assessed value of $127K when I bought it.  That is quite obviously a gigantic difference between assessed value and real value.

You need to look at a LOT more houses in your target area.  This is the only way you will gain a solid understanding of true market value.

Jeffrey K. · Answer

The county assessor does not know crap.  The only people who use that number are the tax man, realtors trying to make a sale, and home sellers trying to pull a fast one on someone who does not know.

Jason S · Answer

J Scott

I see what you mean. I was getting the market value based off the local county assessor website as well as my comps. There has not been many recent sales in the neighborhood, however the last 2 were the $36,000 & $71,500. I am probably not going about getting my comps correctly because I don't know what kind of condition they were in when they sold but they are on the same street but after further research the one that sold for $36,000 is actually about 350SF larger. The one that sold for $71,500 is very close in size and has a current market value of $76,122 (again I am getting my info from county assessor) as I probably should be getting them from a realtor.

I Greatly appreciate your time and your advice and MikeOH makes it quite clear as well. Thanks!

J Scott · Answer

Jason,

You said:

"(Market Value $72,000)The most (comparable)recent sales in the neighborhood were $36,000 and $71,500.."

If the most recent comps were $36K and $71,500, why do you believe that the market value is $72K?  Market value is what you can realistically sell this property for in a reasonable amount of time.  Unless the market is appreciating, there's no way the market value would be higher than the most recent comps.

Do you see where I'm going with this?

Also, it's unlikely that one of your comps is twice as high as the other -- this likely means that not both of them are comps.  What was the difference between these two properties, in terms of location, condition, size, etc?  Which one is more like your property?  That's probably the more realistic comp.

I would do the analysis exactly the way MikeOH does above, which indicates that you shouldn't be paying more than $35K for the property (acquisition + rehab costs).

Jason S · Answer

Mike & Jeffrey: Thanks for your replies.
I was planning to offer less than the $53k asking price. I was thinking between $36-$40,000 as my offer.?? Thank you.

Jeffrey K. · Answer

Make a lower offer.  All they can say is no.

Michael Rossi · Answer

Here's how this deal would look:

Gross rents:  $650
Operating Expenses:  $325
NOI:  $325

Mortgage ($53k, 30 yr, 7%):  $353

Cash flow:  -$28 (LOSS)

That doesn't include the repairs that it needs (paint, carpet, etc).

I'd keep looking!

Mike