Hello fellow investors,
I will try to keep this as brief as possible, however, I want to get you guys up to speed on my situation. In a nutshell, I'm located in the Chicago market, looking to not only network with others here locally, but to also begin investing. From others I'm working with, and BiggerPockets of course, I feel I've learned enough to get my feet wet in the business already, and I figured why not start with my warm market.
Earlier today, I spoke with a seller that I have a good amount of rapport with. This lady and her family lived next door to me for the last 15-20 years. I grew up with her kids, same schools, the whole 9 yards. One day back in 2013, her son committed murder, and they immediately moved out of the house. Since then, she had the property listed, lowering asking price several times, but never sold it. She recently took it off of the market. So I payed her a visit today and based on the information received, I was wondering if I had a potential deal here. It'd be cool if I could create a win-win situation for us both, and close my first deal.
The property is a 4/1.5 brick bungalow, about 1,750 sqft with a two-car garage on about a 6,600 sqft lot, and a full unfinished basement. Based upon what she told me and from what I can see/recall, it needs about $30K worth of work to bring it back up to par. I don't have a solid ARV yet, as the available comps aren't really good. However, a similar 4/3 brick bungalow, literally across the street, sold for $282K last Halloween. With a quick google search for an estimated value, (I'm aware these numbers may be highly inaccurate), I found the following:
Homesnap- $198K high est., $173K mid est.
She owns the property free and clear, says she only pays taxes, which she owes about $3,100 on. She wants $150K for the property, and seems firm on that number. She mentioned that an investor offered her $60K. Shortly after, another investor offered $100K, which she seemed totally offended by, declining both offers.
I was wondering, since it doesn't seem ideal to wholesale it, if somehow I can acquire the property, giving the seller her desired $150K and maybe I lease option owner finance it for perhaps $175K. But I'm unsure of the most profitable exit I could take on the property. My main question is, does this even seem like a deal or no deal? If so, what exit strategy would you exercise on this deal?
Thanks in advance for reading, any advice, opinions, thoughts or recommendations are appreciated. Some may be unwilling to complete my mini novel/autobiography. (:
The main thing is to get a solid ARV. You've got a range from $150,000 up to $282,000 although that top one had 3 bathrooms (?). If it's worth 275 fixed up, and it needs 30k in work, great, you've got a smoking deal. If it's worth 150k fixed up and you buy it for 150k and put 30k into it, you've got a steaming pile of, well, you get the idea. I might suggest talking to a real estate agent to get an arv and if you end up purchasing, give her the listing.
I agree with @Craig Shute that you need a more solid current value and ARV. If it is a good deal, I like the idea of buying and lease optioning to another, but watch out for Dodd Frank rules if you will be seller financing to the primary occupant. Get an RMLO to qualify your buyer and use their financing docs.
Another idea may be to ask the seller if she would lease option or seller-finance to you directly. Does she need to be cashed out to buy another place? Sounds like a great start. Treat her right so she tells her friends! Well done @Dre Lewis !
Craig brought up some really good points about ARV. You will definitely need to figure that out before even making an offer on the property. Zillow and other sites are not always accurate. What you need is solid numbers on comparable properties that sold in your area.
I think this could work in your favor with the seller carrying the note for you.
In order for this deal to work you first must research the rental rates in the area.
150k loan at 5% for 30 years comes to 805 per month. Taxes were 258 per month (3300 per year)
$1063 That is not including insurance, maintenance, vacancy, Property management.
A good rule of thumb is 10% of rent for maintenance, vacancy, and property management.
Without rental rates it will be tough to know if this is a good deal or not.
You could certainly rent this out as one strategy or fix and flip it. Or as you suggested do a lease to own type of deal and require the buyer to put some money down. If you go that route I recommend getting yourself a good real estate lawyer that specializes in real estate.
@Craig Shute Haha, absolutely. I guess I assumed that it isn't worth more than $200K based on the offers the other investors made. But I thank you, I guess I will have to get an accurate ARV before anything else.
Also, @Brent Paul mentioned the maintenance, mgmt, and vacancy. Just to be clear, a good rule of thumb is 10% for EACH of those, for a total of 30% of rent for those 3 items.
Thank you @Steve Vaughan , they're already in another apartment, I think she just made it up in her mind that it's worth $150K as is, and it's not.
@Brent Paul thanks, that's something I should figure out. Also I wish I could just wholesale it, being a potential first deal. But I don't want to just trash the lead and leave money on the table when I could have did something to help her and myself.
@Craig Shute excellent, I'll definitely note that.
@Dre Lewis , I agree with @Brent Paul in regards to an owner contract. price is not everything, but terms are! I have done a couple deals where we did the first 3 years interest only and then amortized or refied. Based on her needs I would look to extend it as long as she would allow. For example: 5 year interest only at 4% (gives you time and resource to do upgrades/updates through cash flow) then amortize the balance on a 30 year note at 4%. If she requires a balloon, push it down the road as far as possible. I would shoot for 10 years.
Of course, all of this is subject to negotiation, but this should leave you room for that. We did ours with nothing down other than closing costs, again that is also negotiable based on everyone's needs and resources available.
Once you have a handle on your ARV and market rents you'll be in a good position to start talking real numbers with her! Good luck!
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