BiggerPockets

Max,
Cash is always good. $1,100 gross - (50% rule) = $550 net per month = $6,600 net per year.
So you can get at $33,000 a 20% CAP rate,. But check before for any issues or needed repairs.

-Uwe

Max, some other things to consider - how long are the leases for? Have you seen documentation that the tenants are paying the rent? If it is a foreclosure, are they paying the bank? Did the bank find the tenants or are they a holdover from the previous owner?

The numbers appear to be a good buy. 35K for $1100 in rents. Let us know how it goes on Saturday.

Thanks guys for the responses. Yeah, the deal looks good on paper. I will post more information after I look at the property on Saturday.

How much would you make your initial offer for if everything looks good.

So I just got off the phone with the listing agent and she said there's already an offer on in from another agent, so I am going tomorrow morning to look at the property. I asked her about the rent payment. The rent is being paid to the bank and at least one tenant has a lease a lease through Oct of this year, and the other is month to month (she wasn't 100% sure).

So I am going to go look at the property tomorrow and if I like it, I will move ahead with the offer. I will keep you guys updated.

All of you guys who have experience dealing with REOs, anything that I should be looking out for?

All great responses and much appreciated!

I do REOs. That's all I do mostly, sometimes private sellers, but mostly REOs.

Seeing that there are tenants in the property, I wouldn't assume the property is in horrible shape, but then again, people sometimes have no choice but to live in not so safe/clean/functional housing. Things to watch out on are what you'd watch out on any property -- all of the major elements of the home, plumbing, electrical, mechanical, foundational/structural, roof issues. Those would likely be the major things.

Foreclosures are usually "as-is" without any disclosures, so, I'd DEFINITELY get an inspection from your inspector--make sure it's thorough and because you're local, you should be there when the inspector's there.

Also, regardless of the price you come in at (even if it is full price), you'll want an additional stipulation in there that says the rents will be pro-rated as of the date of closing and that you'd like to negotiate a lease with the current tenants prior to closing (or even prior to the end of the inspection period). A month to month tenant means they can leave in 30 days (and, if they want, tomorrow--and you have little recourse) and if you have one leaving in October, that's pretty soon. Also, October gets into the colder months which is generally a more difficult time to rent properties. If you can negotiate new leases from say, August 1st, 2010 (I don't know if the bank will allow it), you might really be able to do some good stuff with this deal.

Check and re-check the numbers, but the basic formula for a cash flow property is:

1) Figure out max payment... Market rent - desired cash flow (net income per month you want) - management fees (if any) - maintenance/vacancy reserve = Max payment (PITI)

2) Use this PITI figure in a mortgage calculator and figure out the original loan amount.

3) Figure out offer... MAX OFFER PRICE = Loan amount - Rehab - Holding costs - Closing costs

There are several unknowns, so generally, 50% rule makes you money. So your max all-in should be $55K including closing costs, rehab, & holding costs. Depending on the rehab, this looks like a pretty nice deal.

Assuming, the property is in decent shape and the tenants are paying near current market rent, I'd offer $1000-3000 more than asking price.

So, I looked at the property on Friday morning. Property was in a decent shape except for some minor rehab work that was needed. I made a cash offer for asking price, no contingency except inspection. I found out today that my offer didn't get accepted because the other offer had no contingencies what so ever. I am little upset, because the property was in good shape with tenants who had been staying there for 4+ years. Had kept the place in good shape.

Oh well, on to next one. :-)

Originally posted by abhyler

Max,
You will have to inquire and see if this is a popular property....are there a lot of others looking at it ? Has it been on the market long? Who is getting rent pmt. right now? Things that would make a difference to the Bank if they take the first offer or try to get the highest possible. You don't want to get into a bidding war at all...but at the same time....I would offer somewhere between $28,000 -$30,000. (if everything is in good shape that is). Good luck and keep us updated.

The experts, to whom us new investors should defer, have state numerous times that once the numbers are run submit Highest & Best and that's all. Expect a low "conversion" on properties that meet your business plan ROI.

The short point: The offer process overall should be seen as high volume, not the number of offers on the same property.

The experts, to whom us new investors should defer, have state numerous times that once the numbers are run submit Highest & Best and that's all. Expect a low "conversion" on properties that meet your business plan ROI.

The short point: The offer process overall should be seen as high volume, not the number of offers on the same property.

(sorry for the duplicate - posted with an old account)

sounds good but i dont think most banks will take that kind of thing. they are guys in back rooms who read through a portal and just look at a very few things. many people who dont do this often and gurus want to make it seem like it is not totally random and about a few key numbers. The bank often does not care if you close in two weeks or four. They do not care if you put down five percent EM or ten percent EM. They care about CASH and PRICE. Make your offer clean and come with your best or very close to it if it is a good deal.