I recently came into some cash and am doing what I've always wanted to do: Invest in RE. I've spent years educating myself and feel like I know what I'm doing. I'm pretty analytical and thorough in my though processes.
So here is the first potential deal: Its a 3br 2 ba house in a growing town with me, built in 1977 and has 1,400 SF. Good schools, good family area, etc. And the market is hot right now.
The sellers want out but not being the most sophisticated people in the world, they are advertising it only through a small Facebook group which is how I found it. They are asking 75k, told me the least they'd take is 73k. I had a realtor friend do a CMA for me and it's worth 90 to 95k in this market.
I'm meeting a house inspector at the property today to make sure the bones are good, but from what I've seen of it - inside and outside - the house is in good condition. I won't do much to the house unless something comes up on the inspection except for taking down a wall (non-weight bearing) that someone built in the garage. They made the back part of the garage an office and the front part storage. You can't get a car in there now (one car garage) so the wall has to go.
My exit strategy is to lease option this house. I'm asking minimum 3% down for option consideration at a selling price of 95k and 900 a month rent with 100 of that going towards the down if they buy. After two or possibly 3 years, they must buy or they are out. I've ran ghost ads with these terms and have had some good interest.
My loan will be 15% down, 4.5% interest amortized for 25 years. At 73k I would put about 11k down plus 1500 closing costs and mortgage the rest through a private local lender I'm working with. Taxes are 70 a month and insurance 100 plus or minus a month. So PITI would be around $500 per month.
I would be cash flowing around $400 per month plus if they exercise their option to buy after 2 years, the sales price would be around 90K after taking off their option consideration (3% = $2850) and the monthly credits (24 [email protected] $100 per month = $2,400).
I would have at least $75,000 into the house by then so I profit $15,000 from the sale of the house plus the $400 per month cash flow which adds up to $9,600 after two years. That's a net profit of nearly $25,000 after two years.
Obviously there will be other expenses which may make the total closer to $20k but that's the gist of the numbers.
Am I missing anything here?
Thanks in advance!
I pulled this up and then found out we're in the same town, pleasure meeting you. I only see a couple things that I would point out but overall I'd say for our area this is a pretty good deal. I've done some of Rent-to-Own in the past and I can tell you that the likelihood of a tenant actually being able to get lending in 3 years is pretty slim. I know several folks in town that do this sort of thing and it is a fantastic concept and when it does work it is fantastic for everyone involved. If that is your plan I would recommend finding a local lender who would be willing to work with your tenants on really figuring out how or if they will be able to get them a loan in 3 years.
Secondly, in our area $900/month for a 3/2 1400 sq ft is pretty high. There are always people out there who will have the cash but I'm not thinking you could realistically get that much. If it is in maybe Nixa, Ozark, Republic or south Springfield you might have a shot but still I'm not too sure. Right now we do lots of rentals so if you would like to send me a general area I could give you a better number on what it would rent for.
Making sure that the tenant buyer gets the mortgage within three years is not an easy feat
These are my steps that are used to be able to get the tenant buyer properly funded with a mortgage
Number one I prequalify the tenant buyer on a 1003 universal mortgage application
I'm looking for 43% of debt to earnings ratio
Then when I do is I have but tenant buyer prospect go to FTC.gov and type in free credit report
I have them hand me the report to look at and then I have them email that report to my credit improvement company in Texas
This is not a credit repair company that just contests negative marks like Lexington Law
The person that runs the company has a huge amount of underwriting experience with FHA and conventional mortgages
They will charge $50 to look over the report and spent 30 minutes with them on a plan to improve their situation and get financed
If they want to hire that company, it will cost $200 to set up and $100 a month over 4 to 6 months
Now in cheap markets for the houses are 50,000 to $100,000 in ARV, that might sound like a lot of money
In markets 200,000 to 1,000,000 that's a cheap cost to get qualified help in mortgage approval
I think most mortgage brokers will not spend a lot of time with people who need rehabilitation in their credit reports
Having a credit improvement specialist give an honest opinion upfront that is not doing the mortgage origination but has eight or nine years experience in mortgage origination I think is a valuable first step for the tenant buyer prospect
Thanks for that valuable info Brian! I'll do just what you said. I can see most people paying the 50 bucks but maybe not the cost to actually hire the company. I plan on contacting a few different lenders and seeing what plans or suggestions they may have. The point is that it's in everyone's best interest for the tenant to be credit worthy enough to get a loan. There is a gentleman by the name of Merle Woolley who made his living in this area doing the exact type of deal I'm trying to do - buy around 20% below market and selling on a LO. I think he still does it but maybe not on the scale he used to.
@Brian Gibbons That's some great information. Any way you'd be willing to share that the company you use in Dallas, that would be a great resource.
Anyone wanting the info can pm me.
The credit improvement company consults 1 on 1 for $50.
Unlike most other companies, you get all these other services at no additional cost.
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Cease-and-desist letters to collection agencies when necessary
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