should I walk away from this deal?

13 Replies

I recently offered and got a property under contract. It is a single house divided into 2 units. The listing price was 225K however The seller is currently out of town and agreed to sale it for 217K. After thorough professional inspection, there are a lot of minor issues which may cost me up to 8500$ to fix it.  The seller offers me just 1500$ credit. The house is renting for 2450$ per month. It is an old wood house and was built in 1929. Should I accept this offer or walk away from this deal?

@Por Ataxic  

Question:  Should you walk away from this deal?

Answer:  No....RUN.

There's no equity, no cash flow...why are you thinking of buying it?

Real Estate Investing is a game of numbers.  The numbers are how you keep score of how you are doing.  The number of properties you acquire is not the number that you use to keep score.  The numbers with a $$$$$ in front are...and it better not have a "-" in front of that...for any deal, at any time.

Joe Villeneuve
REcapSystem
A2REIC

There are positive cashflow actually even though it needs some repairs upfront. But I'm afraid that it will cost more down the road as it is an old wood house.

@Por Ataxic  Cash flow?

2450    Rent
1200    PI (80% cost of loan)
 245    Maint/vac
 245    Prop. Mngmt
 960    GCF
  650    Tax/Ins (est)
$310     Cash Flow/month
$3720   CF/Year

$44,000   Cash still in (20% down)
8.5% CCR
11 years to recover cash

...and it's an old house just waiting for things to fall apart.

 Joe Villeneuve
REcapSystem
A2REIC

First I would verify all the numbers that the seller is giving to you. Often times a seller or agent can overestimate rent or underestimate repair costs to get you to buy the house.

I don't know the exact numbers in your situation but it doesn't look like a high cashflow property. Do you know who is paying for utilities like water, electric and gas? Given the general information you have provided I calculated $294 per month in cashflow. This is using the general 50% rule. $2450/2 = $1225 - 931 = $294/mo cashflow.

$294*12 = $3528 yearly return. Your money invested is estimated at $43400 for the down payment and the other $8500 for repairs for a total of $51900. At those numbers you are pulling in a 6.7% CoC return which is even worse than the stock market.

All the numbers provided above are the best case scenario if you are paying 50% of expenses. For a house that old and with the water bill most likely being paid by the owner your expenses will be much higher. Most likely closer to 60% expenses.

I would pass on this one.

I really appreciate Joe and Joseph input. Here is actual number.

2450 rent

905  P&I

245 Maintenance

333 tax

125 Insurance

245 Property management

80 Utilities

517 cashflow/Mo

6204/(43400+8500) = 11.9% first year

6204/43400 = 14% second year

Is it worth it?

@Por Ataxic  Based on your numbers.  How much are you financing and how much cash do you still have in the deal.

@Joe Villeneuve  financing for 173,600

I have paid 1100$ already for inspection and appraisal fee

Originally posted by @Joe Villeneuve:

@Por Ataxic  

Question:  Should you walk away from this deal?

Answer:  No....RUN.

There's no equity, no cash flow...why are you thinking of buying it?

Real Estate Investing is a game of numbers.  The numbers are how you keep score of how you are doing.  The number of properties you acquire is not the number that you use to keep score.  The numbers with a $$$$$ in front are...and it better not have a "-" in front of that...for any deal, at any time.

Joe Villeneuve
REcapSystem
A2REIC

Hi Por

I agree with Joe.

There are so many better deals out there. Here is an example.

Just bought a 4 bed, 2 bath home in Ohio for $35,000. Needs $15,000 in renovations and will rent for $1,200pm.

Around 20% cap.

Walk out the door price is $80,000 - $85,000.

Look into the Midwest. Some great deals here.

Also, feel free to check out a blog I wrote for BP about what something similar Joe mentioned above.

http://www.biggerpockets.com/renewsblog/2014/06/21/predictions-futile-invest-real-estate-based-numbers-alone/

Thanks and have a great day.


Originally posted by @Por Ataxic:

@Joe Villeneuve financing for 173,600

I have paid 1100$ already for inspection and appraisal fee

 So what.  Do you play poker?  Do you "know when to fold 'em, know when to hold 'em, know when to walk away, and know when to run"?

Joe Villeneuve
REcapSystem
A2REIC

@Engelo Rumora  

I am interested in this property because it's in a great location and tenants are decent.

The deal that you described seems surreal to me. I'm afraid of dealing with bad tenants.

Originally posted by @Por Ataxic:

@Engelo Rumora 

I am interested in this property because it's in a great location and tenants are decent.

The deal that you described seems surreal to me. I'm afraid of dealing with bad tenants.

Thank for your comment Por,

You don't buy tenants. You buy a property and the numbers in the deal.

Those numbers should get you a step closer to your end goal.

There are plenty of deals out there.

Just be patient and the right one will come along.

Thanks and have a great day.

@Engelo Rumora  You nailed it.  The numbers don't lie.  The tenants are the riders.  You don't want to get a bad tenant, but what's worse is getting a bad deal.  

A far as saying it's a good tenant in a good property.  See above.

As far the "great location".  Is this the only property in this location?  The only things that makes a good property is  good deal.  This is not.

JV

Originally posted by @Por Ataxic:

I recently offered and got a property under contract. It is a single house divided into 2 units. The listing price was 225K however The seller is currently out of town and agreed to sale it for 217K. After thorough professional inspection, there are a lot of minor issues which may cost me up to 8500$ to fix it.  The seller offers me just 1500$ credit. The house is renting for 2450$ per month. It is an old wood house and was built in 1929. Should I accept this offer or walk away from this deal?

The rent/cost is only about 1%, so it's not going to cash flow well if at all. It's also an older home, which can definitely present problems (put a contigency into your rehab budget for sure). The big question is what is the ARV and what is your exit strategy. Unless your plan is to flip the ARV is around $300,000, I would walk.

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