Bad Deal?

7 Replies

I have a potential deal with a seller that has a 3 BR 1 Bath ranch in Roseville MI. The house is 1050 sq ft, sits on a crawl and has no garage. It was built in 2004 in an area where most houses were built in the 1950s. The overall area is predicted to appreciate at a rate of 4.2% in 2016 and this property may appreciate above the market prediction. The house is very clean and only needs about $3000 in maintenance. Its currently tenanted at $850 per month and is scheduled for a rate increase to $900 in the fall. The seller has a current mortgage balance of $80,000 and is only looking to get out of the mortgage. His current payments are around $800 based on the mortgage he took out in 2004. This looks like it may work for a buy and hold scenario (cash flow and appreciation), if the property could be bought with a 30 year fixed mortgage, 7% or less interest rate, and a 10-20% down payment. Based on this scenario, any recommendations?

How's the neighborhood?

As an investor in MI I would not do this deal. The numbers don't work for me. At 20% down through a conventional loan your not going to see much profit if any and have about 23k dumped into the property (16k down payment, 3-4 closing, 3 maintenance). You can spend your money better.

I also personally don't count on appreciation when I do my deals. I have to feel that I am getting good cash flow day one and/or buying the property at a discount.

Finally, I would say that 3 bedroom homes without a basement as less desirable to rent so it may be a tough property to keep filled down the road. Good luck!

"and this property may appreciate above the market prediction".  Don't get caught up in that game.  You're in Michigan.  No offence as I'm from IN originally.  Just my opinion.

Ignoring the appreciation game, these numbers are very tight.  If it were me, I'd move on.

What does the property appraise at?  My brother owns a house in Warren with similar numbers, but he is underwater on the mortgage (bought in 2004-2006 time frame).  Add in additional maintenance costs due to the house being older (1940's construction) and not maintained well previously, so rent does not cover costs.

Thanks for the responses. The neighborhood is blue collar with a mix of renters and owners. The crime rate is low (compared to other locations around the area)  and the rental rates have risen in the same range as the sold values (3-5%). The house hasn't been appraised since it was built in 2004, so I don't have that data yet. With it being a newer built home, it's hard to get comps that's truly apples to apples. I agree with Matt and Dana that playing the appreciation game is more like playing the slots, so I've decided to ignore this as a factor in my buy decision. At this point, I also agree with Matt and Dana that the numbers are tight and it's probably not a deal worth pursuing. Just thought I'd ask the pros to see if there was a strategy out there that I'm not familiar with for this kind of situation.

Hi Marion. I would personally stay away From Roseville MI. I grew up in Roseville for 18 years and just moved back about 2 months ago (With my parents until we buy our primary home out West some). My parents still live there. Don't go by what the charts are telling you. From a personal experience its been on a steady decline for about 10 years. School districts are horrible, crime is on the up, local business are going under and are not kept up, and residents are getting worse and worse.  I have seen the prices and quality of the city decline and its showing no indication of getting better.

Some home prices are increase over the last year but this was just due to the correction from the crash. Most people are still underwater buy quit a bit.

80k in Roseville is an awful lot as well. I would look at certain parts are Warren, St. Clair Shores, and Harrison Twp.  I know a lot of people don't play the appreciation game but I always make that a big factor when before I purchase a home. If the area doesn't show promise then I will pass. (By appreciation I want at least national average, Im not talking about making a killing off of it by speculation buying. But I don't look to loose money from it. I always want a desirable location)

In the three city's I mentioned you can expect rents from 1000-1200 for an 85k property with quality tenants.

Jerron,

Thanks for the response. No better intel on an area than from someone who lives there. I will take your advice to heart. 

Marion

Marion,

I grew up in St. Clair Shores and posted a thread on SCS.  I agree that SCS is so much more desirable because on the lake side of Jefferson Ave are homes with canals for private boats.  I'm in escrow to sell my parents' house with a canal now.  I recommended those homes because they are easily rented too.

Hugh

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