Deal or No Deal

14 Replies

I've got a property in Chicago that I'm picking up for 276K. 4 Units currently renting at $1150 for three units and $950 for the garden Unit. It's a beautiful brick and Lime Stone 4 story building with a 4 car garage. The seller owes exactly 276k on the property and doesn't want to short sale. She has other offers but is under contract with me. Appraisal came back at 242K. My family is giving me some 25k to cover the shortage. 

I still want it. The cash flow is awesome and I'll buy it with FHA. I like the building so much I will probably live there for a while and if I leave... big money.

BTW average rents for the 3 bed 2 baths of which I have 3 units is $1300 in this area. But my units need a little renovating for all that.

So with mortgage, taxes and insurance we are looking at about $2100 for expenses and with the whole building rented as is we are at $4400 gross rents.

DUN DUN DUNNNNNN!!!   What would you do??

Honestly I would never buy a house that is that far under appraisal. It really looks to be too good to be true. What are the other expenses. If she can rent it for so much more than the value why isn't she.

She is still living there and has for the last 27 years. She wants to move to Vegas with her friends and not worry about managing a property. 

I don't know for sure but...27 years, owing 276k and Vegas...Sounds like someone likes to play the tables with their home equity.

There are also some comps in the area for the last year where a 4 flat sold for 425k which of course the appraiser didn't use. There are also two other buyers willing to the cash shortage. Which makes me believe that if I had to offload it I could still get the purchase price back. But considering that this area is on the up and up and wanting to hold on the it because it is a cash cow I think it will appraise much higher in the future.

@Michael Garcia  I tend to agree with Elizabeth Colegrove if the property appraises lower than purchase price then I'm out.  You are sold on the unit and hope you can make it work, but I tend to want equity at purchase and have great rents afterward too. 

Like @John Weidner  said @Michael Garcia  what neighborhood is this in? I'm not sure I would go in that much under, but if you can make it work, then more power to you. Just could cause some of us 'risk management' people a huge anxiety attack! Ha!! Good luck and keep us posted!!

How does yours compare to the one that sold for $425k?  That's a big difference - it sounds like it might be a different class of property.  Either that or you could just have a home run :)

Originally posted by @Michael Garcia:

I've got a property in Chicago that I'm picking up for 276K. 4 Units currently renting at $1150 for three units and $950 for the garden Unit. It's a beautiful brick and Lime Stone 4 story building with a 4 car garage. The seller owes exactly 276k on the property and doesn't want to short sale. She has other offers but is under contract with me. Appraisal came back at 242K. My family is giving me some 25k to cover the shortage. 

I still want it. The cash flow is awesome and I'll buy it with FHA. I like the building so much I will probably live there for a while and if I leave... big money.

BTW average rents for the 3 bed 2 baths of which I have 3 units is $1300 in this area. But my units need a little renovating for all that.

So with mortgage, taxes and insurance we are looking at about $2100 for expenses and with the whole building rented as is we are at $4400 gross rents.

DUN DUN DUNNNNNN!!!   What would you do??

The cash flow does sound great, but I would be very, very hesitant to buy something below the appraised value. Is there nothing else around there that is cheaper and would work? Basically, why settle for being $30,000 under water when you could get something better? That is, of course, unless you disagree with the appraisal. What do you think the property is actually worth?

Like already mentioned...you really have to know the market you're investing in. The first step for me is always feet on the ground. See what others offer at price points, talk to the neighbors, get reliable comps, and make sure you really breakdown all of your expenses...lawn/snow care, garbage, vacancy, capex, repairs, prop. mngt, past electrical, water, & sewer bills, possibly flood insurance. Use the BP calculator to estimate your cash flow.

All units have separate utilities w/central air. There is a rock garden out front and a cement pad out back w/the four car garage. (No lawn care) three tenants in it now. One has been there for 14years, 3 years and 2 years. I will occupy one unit and manage property. The property is bigger than all the ones used in the comparables and I believe is much better built. It's 200 yards away from the golf course, 1/4 mile from the Lake Michigan and the City looks to be investing money in the area, fixing up the beaches, putting in new sidewalks and gas lines.  

Oh and property shark.com appraises it at 171k, only 5k less than asking.

As you can tell I love this property and want to make it work. I just hope it's a good decision.

BTW it's in South Shore/Hyde Park

If you live in one unit it looks like you will gross about $3450 minus expenses of $2100, leaving you a net of $1350 (x12 = $16,200 yr).  Even with your $30k down payment that's a 54% cash-on-cash return!  I know people who spent money on a basic refi that will take longer to recoup than this deal! Buy for the cash flow and you'll never be forced to sell.

Vacancy and maintenance are real expenses, do not convince yourself that you will not have these expenses with this property.  If this property is really owned by somebody addicted to gambling then there is likely deferred maintenance.  The unit with a 14 year tenant almost surely has a lot of deferred maintenance.  If you truly want to live there then go for it but go in with your eyes open to the real numbers.  Even if you only break even, living rent that is still awesome.  You do not come across as an objective investor though, you sound like an emotion driven owner occupier who has fallen in love, not trying to offend just putting it out there.

Originally posted by @Brant Richardson:

Vacancy and maintenance are real expenses, do not convince yourself that you will not have these expenses with this property.  If this property is really owned by somebody addicted to gambling then there is likely deferred maintenance.  The unit with a 14 year tenant almost surely has a lot of deferred maintenance.  If you truly want to live there then go for it but go in with your eyes open to the real numbers.  Even if you only break even, living rent that is still awesome.  You do not come across as an objective investor though, you sound like an emotion driven owner occupier who has fallen in love, not trying to offend just putting it out there.

Even if you only break even, living rent free is still awesome.

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