1st deal in process! Should I Close?

7 Replies

1. My background : Hello everyone! I'm new to bigger pockets. Started listening to the podcast on my regular drive from DC to harrisburg PA. The host and guest were persuasive on the value of utilizing the BP forum. Anyways, im new to real estate, but have experience in stocks and general finance.

2. Deal background: My question today is about if i should go ahead and close on a deal. There is a house that a current owner (realtor and investor) is selling. She presented the opportunity to a friend of mine that is currently doing seller financing on the house he is living in. He brought this deal to me about 2 weeks ago after i told him i wanted to get into real estate. The seller appears semi-motivated, as she is an older indian woman and this area is quite rough(when i visited the place there were candles on the front porch as someone was shot and killed there recently).

3. Deal basics: Caveat is that i met with my friend and seller yesterday and not much of finer details were discussed and that my friend and the seller have terms in place; although im assuming they can be changed. Anyone that sees a better option to structure the deal let me know.The current terms of the deal are seller financing, we will both put $2,000 down and pay standard amortization schedule over 4 years. The monthly payment to the seller was alittle over $900. My friend and i would be responsible for utilities. We will split risk/reward 50/50. He will handle tenant management and contracting work.

4. Income strategy: My friends thesis appears solid. The area is primarily african american low income and he is originally from the area. He believes that a majority of people that live in this area, especially those who are single, dont have the down payment/1st/last month rent for a traditional apartment. So he wants to cater to that market by doing rooms for rent and setting up the rent payable weekly, although if the person gets paid in wider increments we could make an exception. We are expectin gto rent eacj room out for $400- and he already has a couple family members in place to rent 2 or 3 of the rooms. My friend wants to furnish the rooms with a bed and a nightstand.

5. House specs: There are 5 bedrooms and two bathrooms. a basement. dining room. living room. kitchen.

5. I have an llc. should i use it to sign the sellers agreement for the deal?

I have identified what i believe to be the two primary risk factors. I would very much appreciate some guidance. Also, if anyone thinks of any other pertinent risk factors, please let me know!

Risk: 1. There being a large cash outlay ( something foundational etc) within a few years of purchasing the property. How can we mitigate this? What type of person can i hire to check for the quality of the house?- and can they provide a timeline of expected costs by inspecting the property? Also, how much would this service cost?

When i asked my friend about this he said that an inspector would not be able to provide info on foundatiolnal work as it is not in open site.

risk 2. how would you suggest performing market research on expected vacancy rate? I was thinking about going on craigslist and posting some fake adds to gauge demand for the room-for-rent at the $400 price point n this area.

Piggybacking off of this point, what is you're opinion on rent elasticity? - such as, if we have 3/5 vacancies for a few months and find ourselves highly motivated to fill th space- how low should we drop the price? $375? Then wait a week then another $25 drop?

This is my first (potential) real estate deal - and i just found out about it the past 2 weeks. The seller says we will need to purchase by july otherwise she will look fo a single-gamily tenant - which doesnt give me much time to analyze the investment. With that said, the time-pressure is somewhat beneficial as it will force me to work fast and make a quick decision and action steps.

Any experienced investors out there- i would like to gain experience by helping to analyze deals with them . I would be willing to do analysis legwork on deals you are looking at. This would be a win-win. I could also benefit you potentially by performing stock analysis on a ticker or our choice. If you are interested in viewing my stock research please contact me.

Have a great day!

Christian Sgrignoli

It's a real dangerous deal but it sounds like you can make a good amount of money.  you say Your partner/friend knows the neighborhood and the risks and is willing to gamble.  I guess its a classic  case of "Your money or your Life"  He will be the one going to the house and collecting the weekly rent?  

 It would be good if you put down the total income projected.  How many rooms will you  rent?

You stae:  "expenses over $900. My friend and i would be responsible for utilities"

How much are utilities a month???  $300??  so thats a minimun off $1,200 there.  How much is Insurance?  How much Garbage pick up?  How much is the cleaning person for the common areas?  Add those expenses in.  Is it 300?  400? 500?

How much are the 4 Beds and plastic covers and 4 nightstands, and blinds going to cost?  

How much updating like painting and rehabbng do you have to do?

You do have to have the foundation looked at by a foundation expert company.  Don't worry they can figure that out.  How old is the house?  What condition is the electrical and the plumbing in?  Any extra costs there?  What does the roof look like?

House specs: "There are 5 bedrooms and two bathrooms"  So the income is  $2000 a month?  What is the cash flow you are looking at?

Is your partner/friend going to pick up the cash for the rent every week?  How dangerous is that?  What is he driving?  Not a Mercades I hope?

About the foundation?  If that's a problem you must look at the cost. 

Lets hear it for the expenses and income?

@Christian Sgrignoli ,

I would say pass on this "deal".  You have WAAAY too many red flags on this:

1.  You are inexperienced.

2.  This deal seems to be very complicated (lots of variables and unknowns.)

3.  The seller may be motivated, but you shouldn't be pressured into buying your first deal until you're ready, and having a July deadline to pull the trigger puts too much pressure on you.

4.  It sounds like a D class neighborhood.  As a first time investor, I think you should target more stable neighborhoods until you have the experience/cash reserves to handle the inevitable contingencies of dealing with a D class neighborhood.

5.  @Barbara G. rightly points out that the expenses involved are not clearly defined, and the income doesn't seem to justify looking further into it if you're already at almost 50% of the income from your debt service alone ($900/mo payment to the seller).

6.  The rewards are too meager for a D class neighborhood.  Those types of neighborhoods typically have a higher visible cash flow because of all the additional expenses they incur (vacancy, property damage, legal fees, etc)

I would suggest you do more research on this particular type of strategy.  It's usually used for college areas, where you're renting to college students while they attend school.  Try to find someone that rents rooms for low income tenants, and get their advice on how to proceed, and what type of numbers they would look for when approaching a purchase for a new property.

On the positive side, it's good that you're trying to think creatively about putting a deal together.  Definitely continue to look for creative ways to do things, and then feel out your ideas here on BP to see what others with experience and/or knowledge have to say.

Good luck in your endeavors!

Thanks alot josh and barbara! Yeah i am far from done collecting all the info. Ive only had one short meeting thus far. Im going to continue to collect info and will update as it comes along.

But the reason this deal is particularly attractive to me is that if i have full utilization ill have monthly rent of ($400 * 5 = $2000) which is around $1000 over the seller financing. Yeah i know i have alot of cost to still figure out.. what is especially nice is that the contracting and property management will be completed by my friend-as well as he knows people living in that area already to rent to.

But i will for sure update the cost info. When i have the costs numbers, a better idea of the vacancy rates for room-for-rent in the area, and have a professional inspector, ill post on forum and reevaluate.

Another question :

What is the inspector called that i would pay to inspect the place? Simply a property inspector? Should i just google for them in the harrisburg area? what is the cost for this typically?

There are people that just do property inspections.  You can ask them just what they will be looking at and tell them you are partiularly concerned about the foundation and the electrical and the plumbing?
How Old is the house?  Hw old is the roof?  There might be some BP people in your area that can reccomend one.

You can even call a foundation company and ask them if they can give you an estimate on the foundation.  Is there any reason that you are particularly asking about the foundation?   Usually an inspection just costs approx $300?

What are your costs for Garbage, and insurance and House cleaning and Utilities?  Will the tenants  be using a shared kitchen and how are you handling that?  Or are you doing away with the kitchen and using tht a another Bedroom or Bath?

@Christian Sgrignoli what's the address on the property. I invest in that area and can certainly give feedback. However, based on what you said I would sprint away from this deal. Not walk, not run, sprint! Soooo many red flags. PM me if you would like to talk more. I'm originally from dc then moved to Harrisburg after college. There is a real estate group named Carpoa that meets tomorrow in camp hill. I would strongly encourage you to attend . It's a great place to learn and network.

Originally posted by @Christian Sgrignoli :

Another question :

What is the inspector called that i would pay to inspect the place? Simply a property inspector? Should i just google for them in the harrisburg area? what is the cost for this typically?

Another thought Christian.  I think you need more income to make this deal work so I would suggest you convert the kitchen into another Bedroom, or better yet make it into a studio room.  Throw out the stove and the full size refrigerator (sell it to a 2nd hand place or donate it).  Make a small Hotel style very small Kitchette in that room.  Use a small bar sink and a small  undercounter refrigerator and a microwave (like they have in a hotel suite.) Put a door on the kitchen and rent it as a mini studio.  Do the same thing with the dining room and raise your gross another $10,000 going from $24,000 to $34,000 gross.  Then it will cash flow.

How much are you buying the house for??

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