What am I missing?

Question

I've looked at about 30 REO's and short sale homes in modest close-in DC suburbs. Homes in these neighborhoods are going in the $200k - $300k range. Not only have I not found anything where the numbers work (rental or flip), I'm not really getting that close (i.e. would need to buy at $135k on a $225k asking price and estimated $270k ARV with $50k in repairs). So far, the numbers are working out about the same for everything I've looked at. Some of the houses have been on the market for over a year.

Having said all that, I don't know if it's a good neighborhood to be jumping into. Almost EVERY home on the market in there is a short or a REO.

Having said all that, I don't know if it's a good neighborhood to be jumping into.  Almost EVERY home on the market in there is a short or a REO.

Jeffrey K. · Answer

I have noticed that closing time and EM are only important if they are way out of line or you are against another offer very close in price.

NOE R. · Answer

Joe,
You will need to interview at least 3 Real Estate agents that specialize as â€œBuyer's Agentâ€ in the Areas you want to buy, and choose the one you feel more confident with.
I have worked with Buyers in my Area (so. Calif.) for my market these are the mechanics that have worked for me:
â€¢	Establish the criteria for my previously qualified Buyer (REOâ€™s, Short Sale, Price range, area, type of property, etc.)
â€¢	Talk to Loan officer about: Down payment, Closing Costs, Rate, Monthly Payment, type of Loan. 
â€¢	Set up my local MLS with clientâ€™s criteria and the system will automatically select properties.
â€¢	Revise properties manually and start showing to clients.
â€¢	Once my client likes a property, then I work getting compâ€™s, client gets estimates for Repairs (only if property needs).
â€¢	Write up an offer taking in consideration the points above mentioned, Lenders in some cases are asking for cross-qualification, before submitting an offer.
â€¢	If offer ends up as one of the finalist (only when the property is price right), Lenders gets back with a Counter Offer and Sellers Addendums.
â€¢	If your Agent keeps communicating with Listing Agent and responds fast, then youâ€™ll get your offer accepted, after that time to get in Escrow.
You may need to call local Buyerâ€™s agents before you decide.
Noe R.

Adrian Pillow · Answer

Try the Anacostia area of DC great deals there...  If you are a crackie.  LOL
            
            Fairfax county is still too strong to find great deals IMO.  Arlington/Falls Church/Alexandria/Vienna - too strong.
            
            I am going looking in Annandale soon as I know there are REOs in semi transitional nieghborhoods of white/hispanic built in the 40-50s.  That being said they would need rework to sell well.  
            
            A buddy of mine bought a luxury townhome 3 weeks ago and it sold in 4 days with 3 contracts on it.  Built in 2002 well appointed and maintained.  Nice homes sell!  Trash is sitting on the market, but will not yield in price..?
            
            Just my observations.

Joe Finnegan · Answer

Thanks for all the help so far.  Let me make a few assumptions based on what I'm hearing.

1.  Odds of a successful rental are slim given the area and price range I'm in.
2.  I need to make LOTs of offers and just keep pressing forward.
3.  Sweeten the pot as much as possible for the bank.  Big earnest deposit, quick close, no contingencies, etc...
4.  Look for places that have been on the market >180 days.

Jonathan Rexford · Answer

Joe,

Here is what I have done when researching our market place for REO and Short sales here in my area.  I went and pulled data from the MLS.  One to find out who is buying REO's.

What I have found is that some properties had a push higher than list price. Mutiple bidders on certian homes.

I also found out that properties were going 85-90% of final list price for short sales and a few REO's.

I made about 20 offers recently that were 60% of value on properties and of they were turned back or not even countered.

It is sort and sift.  But if you can get MLS data. Find out where and who is buying what.

Joe Finnegan · Answer

I may be a bit conservative on the repair costs, however this particular property needs some mold remediation (basement), kitchen and bath updates and standard paint/carpet.  It might not be the best example, but properties that need less are priced higher, and the "delta" seems to wind up being about the same. 
            
            I haven't made any offers yet because 1. I'm still a bit unclear as to the offer  "etiquette" when dealing with a bank.  How low is too low?
            2. Not convinced I can turn the property around due to the fact that there are so many REO's in the neighborhood.  
            
            Thanks for the responses.

Edit:  FYI.  Around here the low to mid $200k price range is a working class neighborhood.  Lots of extended families under one roof etc...

Jon Holdman · Answer

If you want to hold rentals, you MUST go into those "working class neighborhoods", IMHO.  I've yet to see any evidence anyone can make money with "nice" rentals.  You can use the rent in those cases to cover the PITI payment, and maybe some of the expenses, but those are really speculative plays.  You're hoping for appreciation.  Very, very dangerous, IMHO, in most places right now.

You're talking about being all in on a property at about $275K. You need $3650 in monthly rent for that to be break even.  On a $100K house, you only need about $1350 in rent to break even.  Its a lot easier, in most places, to get $1350 in rent than $3650.

Nice houses will work for flipping.  But, you have to find an area where nice houses are selling for good prices, and where deals are available.  My observation is that banks price their houses based on a move-in retail price less their estimate of fixup.  If fixup is fairly minor, chances are good a retail buyer will come along and buy it.  If fixup is large, like in your example, it may well end up setting for a long time.

My farm area has a lot of REOs and very few retail sales.  But its very competitive as investors are buying up the REOs for rentals.  Many of these investors have small or not so small companies, and have better economies of scale on their work than me.  So, I have to look at a lot of houses and make a lot of offers to buy one.  I had one offer fail this week, and two outstanding ones that are on life support, and a fourth one that just might work.  But, I'm still going out tomorrow and look at some more and hopefully, make three or four more offers.

Rachel H. · Answer

I've heard with REOs, you've got to put 100 offers to get one. How many offers have you made? Have they been countered? If they have not been countered or you have not had a response, you may need to re-submit. 
                        
                        I'm not an expert at REOs, I'm sure there's an expert here on BP - you might want to check around. 
                        
                        For my buying criteria, I tend to stick with neighborhoods I feel comfortable working in - there are some investors that buy on the fringe and/or war zones. Everyone has their own comfort zone. 
                        
                        If you're buying to hold, I'd recommend sticking with neighborhoods you are comfortable working in. Also, you need to check with property management to verify the rents in the area - make sure you know what it can rent for if you plan to hold. I've found property managers to be a great source of info and resource about the area. If you're buying to flip, your buyers should tell you their buying criteria and where they are looking to buy. 
                        
                        Hope that helps!

Jon Holdman · Answer

Around Denver, some neighborhoods just don't work as rentals.  Some do.  You have to find the ones that do.  $270K ARVs rarely work as rentals.

Are you confident about the repair costs?  $50K is a lot for repairs, unless you're talking really high end.

If you're in an area where nothing in moving, just start putting in low ball offers.