I noticed a property listing on Craigslist, titled “$150000 THIS IS THE BEST DEAL IN TOWN” and decided to take a look. Since I was about to find out about the best deal in town, I was really anticipating what was to come. Sadly, what I found was just another loser property. If you’re new at investing in income properties, this post should be quite helpful to you. With that in mind, I thought it might be interesting to find out just why this deal was so good and decided to ask the poster . . .
THIS IS THE BEST DEAL IN TOWN AT $150,000.00 EACH OR BUY BOTH FOR $300,000.00! LIVE IN ONE AND MAKE MONEY IN THE OTHER, RENTED NOW AND INCOME OF $900.00 EACH CAN AND WILL RENT AT MARKET $1,200.00 A MONTH . THIS IS A CHARMING VICTORIAN DUPLEX, GORGEOUS INSIDE AND OUT! IN PRISTINE SHOW HOME CONDITION AND EVERYTHING IS RE-DONE TO BRING BACK THAT OLD WORLD CHARM! EACH SIDE CONSISTS OF 3-BEDROOMS/ 2 FULL BATHS: MAIN FLOOR: ONE BEDROOM, FULL
RE-MODEL BATHROOM WITH BODY SHOWER AND UP TO DESIGN SHOW BATH ROOM! LIVINGROOM WITH NEW CARPET AND WOOD FLOOR ENTRY, FIREPLACE WOOD BURNING, DININGROOM WITH NEW GLOSS WOOD FLOOR AND DESIGN LIGHT FIXTURE, EAT IN KITCHEN WITH NEWER APPLIANCES AND LARGE PANTRY NEW FLOOR AND COUNTER TOPS AND RE=DONE CABINETS, HALL WAY WITH THE LARGEST CLOSET SPACE THERE IS IN HOMES TODAY! DOWNSTAIRS: TWO BEDROOMS WITH NEW CARPET, LARGE FAMILY ROOM NEW WOOD FLOOR WILL BE PUT IN, FULL BATH WITH NEW EVERYTHING!! LARGE LAUNDRY ROOM WITH WASHER AND DRYER! BACK YARD FENCED IN WITH ONE CAR GARAGE FOR EACH HOME AND PARKING NEXT TO THE GARAGE ON EACH SIDE, FRONT YARD HAS MANY FLOWERS AND 8 FOOT SUN FLOWERS FENCED IN, FRONT DECKS AND WONDERFUL CHARM! EVERY ROOM IS PAINTED IN DESIGN COLORS! THIS DUPLEX IS WONDERFUL AND A MUST SEE, THE PRICE IS RIGHT AND 5280 MAGAZINE FEATURED THIS AREA AS THE NEW AND UP AND COMING TOP INVESTMENTS! CALL (names & numbers removed) FOR A WONDERFUL SHOWING!
I was immediately impressed by all of the CAPITAL LETTERS used in this ad. It must really be something special!
Upon looking into the ad, I noticed that this was a duplex selling for $300,000. The agent selling the property is also trying to sell the units independently (as in condos?). Intrigued, I wanted to find out why this was the best deal in town and decided to crunch some numbers. I sent the following email to the agents listed:
(names removed) -
I just wanted to make sure that you saw that the deal you are offering as the best in town is a money-losing proposition. Why is it being offered so high?
Cost of both units = $300,000
Gross Annual Income = $28,800
Expenses = $14,400 (average rental expense approaches 50% Gross Annual Income)
NOI (net operating income) = $14,400
Even with 20% down ($60,000) with a 30 year loan of only 7.25% , your monthly debt service would be $1637/month.
This property would lose $437/month
What kind of appreciation is the area seeing to make this the best deal in town?
I look forward to your thoughts.
First, I was astounded that I’d heard back from these people. I was further impressed by the response (I hope you sense my sarcasm by this point):
Thank you for your input and thoughts, always good to hear from others. The average price in this area is $165,000.000 for a home of 2-bedrooms and one bath and one living room. The duplex has 3-bedrooms, family room ,2- full baths in each and both have been full upgrades, with the market in Denver for a condo going between $200,000.00 and $450,000.00 and it being only a one bedroom, I would say the duplex is priced as the best deal in town. Also keep in mind that the area was zoned for many years as commercial and not residential.. as of August 2006 it is now zoned as residential. As stated in 5280 and many other resources this is the area to buy now! With a market of many homes for sale, and to be honest they are ,let’s say, not worth walking in the front door!, it is refreshing to see a home or homes in this matter, that are show home design. One can always add up a guess of what the cost and profits would be, but it all is set on ones credit with a mortgage and the rates one will get, what kind of residents one has in the homes and how one approaches the matter! The current owner has 16 years in property management, property marketing and sales and turst me, owners do not spend 50% of the year income by far. Market plans are: monthly fee for garages, resident pays electric, water/sewer, gas and rent and the year dranage cost by denver about $45.00 a year. So to end, 6- bedrooms, 2- living rooms, 2- family rooms, 4- full baths, 2- dining rooms, 2- kitchens, A brick home and 2- car garage and 2,900.00 SQ feet. I would say THIS IS THE BEST DEAL IN TOWN!
Essentially, his USP (unique selling proposition) is that a magazine and other sources which are un-named, say that it is in an area which you should buy in, and that the property is in showing condition. He compares the property’s price to that of SFHs (single-family homes) and completely blows off my simple and dirty analysis of the property. In addition, he provides no solid numbers on appreciation (I requested those), and the only real number he mentions to me is a drainage cost of $45/year. It seems that my “guess” of what operating expenses are (I used 50% for simplicity – as do many other experienced investors – over my experience and that of others that I trust, these costs typically range in the mid to upper 40% range) were WAY OFF. He tries to explain that cost and profits are determined by mortgage rates and “what kind of residents one has in the homes and how one approaches the matter.” Why then, does it matter what the property can rent for? The logic just makes no sense.
Even if I used a much better mortgage rate of 6.00%, debt service on this property with 20% ($60,000) down is $1,439. Since his argument was that some people can get great rates, I’ve accounted for that, and the property still results in a monthly loss of $239.
If we were to drop expenses to 45%, we’d see annual expenses of $12,960, leaving NOI at $15,840 or $1320/month. With the 20% down, 6% loan scenario, this property loses $119/month.
Is it still the BEST DEAL IN TOWN???
Remember, that the role of an agent is to SELL. There is a reason that real estate agents have “Real Estate Sales” licenses. This one may or may not be experienced in working with investors or investment properties, but it certainly doesn’t sound that way. If you’re dealing with these kinds of properties, make sure that you fully understand basic property analysis before going and getting sold on an income property that just doesn’t cut it.
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