Engineer · Stratford, CT · Member since 2015 · 22 posts · 4 votes
Hey all,
Looking for some help. This is my first property, and i am having a hard time understanding the numbers.
Reo for 218k
I want to offer 170k, this is a 203k with estimated 50k in repairs. i am asking seller (bank) to cover closing cost. Arv is 240k. After repairs i would like 10k in equity, that is why i am offering 70% of value. I know this property will cash flow, but dont want to pay more then the value of the market value. i will be holding and renting this property. Can some one please explain the breakdown below? Also, i am not sure if this is legal or ethical to post, it does not contain personal information, but if this shouldnt be posted please advise so i can delete.
Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
10y
lol. Yeah they are. I was focused on the numbers. What's the market rent for this property in the area?
Just out of curiosity, why would you go this route? You are basically buying retail and renting it out, but you are having to take the risk of rehabbing this property. If you aren't wanting to buy wholesale, then just buy a turnkey rental.
Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
10y
Your offer should be 70% ARV minus rehab costs. What's your exit strategy? Are you flipping? Are you buying and holding for rental? Are you using cash? Hard money? A lot of your question is based off answering my questions.
Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
10y
lol. Yeah they are. I was focused on the numbers. What's the market rent for this property in the area?
Just out of curiosity, why would you go this route? You are basically buying retail and renting it out, but you are having to take the risk of rehabbing this property. If you aren't wanting to buy wholesale, then just buy a turnkey rental.
Engineer · Stratford, CT · Member since 2015 · 22 posts · 4 votes
10y
market rents are 1200 for 3br and 1100 for 2br. i would like to buy whole sale but with the finance route lower offers dont seem to be entertained. "Turn key" in my market are overpriced and comes with deffered maintaince.
CT REOs are averaging 85% of value in todays market, based on my research and BP fourms.
Then there is no deal there. You can't make money buying at 95% of ARV. You're setting yourself up for disaster. So you don't think there will be any unanticipated expenses or cost overruns? Rehabs rarely go as planned. $10K leaves you no margin for error in your construction costs plus it doesn't take in to consideration all of the soft costs like insurance, taxes, interest etc that will be incurred while you're doing the rehab with no income coming in. Do yourself a favor and some time educating yourself on how to evaluate a deal and what the true costs are. You'll save yourself a tremendous amount of heartache and expense.
Real Estate Agent · San Jose, CA · Member since 2015 · 172 posts · 66 votes
10y
I agree with the rest of the posters. It's simply not worth the risk and effort to manage 50k worth of rehab repairs for 10% equity. I don't know your specific market but you should be able to get a better deal. If not, be on the lookout or a short sale, you can get 10% equity in that without having to do the rehab yourself.
Investor · Tallahassee, FL · Member since 2015 · 15 posts · 8 votes
10y
This does not look like a good idea from the numbers. You're not covering your expenses with the avg. rent in your area and you are not accounting for the hold time, unexpected repairs cap ex, ect. I strongly suggest figuring out what you want your rent rate to be, bare minimum at 1% but 2% is ideal. Use the BP rental calculator it makes this easier to see; at least to me.
Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
10y
The purchase price is 240,088. Your loan to value is 96.5% which means you have to bring 3.5% down payment to the table.
The repaid are items this loan requires you to prepay so that when they are due, they can be said out of it. It's similar to escrow. The difference is prepaid items are required at closing and escrow are required in certain cases.
Looking for some help. This is my first property, and i am having a hard time understanding the numbers.
Reo for 218k
I want to offer 170k, this is a 203k with estimated 50k in repairs. i am asking seller (bank) to cover closing cost. Arv is 240k. After repairs i would like 10k in equity, that is why i am offering 70% of value. I know this property will cash flow, but dont want to pay more then the value of the market value. i will be holding and renting this property. Can some one please explain the breakdown below? Also, i am not sure if this is legal or ethical to post, it does not contain personal information, but if this shouldnt be posted please advise so i can delete.
Jared-
Looks to me that you are getting a $240K home for $10,000.00 out of pocket and getting the bank to finance your renovation essentially because you are using a 203k - this is an owner occ. type of loan, it was not clear to me if this is a SFR or Duplex?
It looks like you're existing equity based on $240K ARV is only about $4-5K - this is immediate equity though.
You can roll many of your fees into the loan, I think they have by the looks of this document you presented. Also you can roll up to 6 months of payments into your loan, to mitigate your carrying cost during construction.
If this is a duplex and your perceived rent is going to be $1200 + $1100/mo - this is $2300/mo in rental income - assuming a favorable interest rate + tax + insurance = $6,000/yr cash flow aprox against your $10,000.00 investment, not to shabby -
Again, everyone has a different strategy, you want to make sure it fits your criteria, if you are getting started, this could be a nice learning curve with a few good elements to learn from as you will be covering a wide spectrum of REI with this one deal. In parallel you will have renters paying down your loan for many years to come, eventually you will have $250k in equity on your hands, with a small investment of $10,000 today.
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
10y
@Jared McCool I would suggest you sit down with your lender and go over these estimated costs, as they will be able to better explain each item in more detail than can be done in a forum post.
When buying a house, the costs are broken down into groups; purchase cost, closing transaction costs (settlement) and prepaid costs.
The purchase cost is the sale price.
Closing transaction costs are related to the loan costs (points, origination charges, loan doc fees, inspection fees, title services, recording fees, etc). On your sheet, this is the "Estimated Closing Costs".
Prepaid costs are related to required things like PMI, insurance, taxes and any interest that must be paid due to the date that the loan closes (payments are due on the 1st, so if you close on the 5th, you owe interest at closing from that partial month).
The reason you loan is more than the price is due to closing costs. Based on the 203K loan, and your purchase price, they do not seem crazy.
One more thing, you might want to look into the 203K loan, as I think it is designed for owner occupant purchasers and likely has a 1 yr resident requirement. This will be an issue if you immediately try and rent it out. Also, as other people have said, if your rent is only $1300/month total, this is not a buy and hold deal (your mortgage payment alone is $1,880.
Engineer · Stratford, CT · Member since 2015 · 22 posts · 4 votes
10y
hey @Steven Gesis thanks for the input. This is actually a triplex with a finished inlaw apartment attached to the first unit with two separate entrances, but is not considered a legal 4 unit. So total rent would be 1200+1100+1000 for the 3 units, and I would occupy the the in law apartment, living for free. After I move out I could most likely receive 1400 for the first floor with the in law apartment instead of the 1200. Based on your input and my added details, this deal doesn't look to bad? My goal was to understand the loan paperwork, but since everyone is putting input on the deal analysis I guess I should add those details as well. I didn't think the bank would entertain and offer of 240000 X 70% minus 50k of repairs for an offer price of 118k, so I was thinking and offer price of 170k which is 70% of market to be realilistic. I would live for free, cash flow, and have a little equity to help bring down the LTV to closer to 80% so I can refi out quicker. Does this make sense still or should I try to offer a lower price or move to a different deal.
hey @Steven Gesis thanks for the input. This is actually a triplex with a finished inlaw apartment attached to the first unit with two separate entrances, but is not considered a legal 4 unit. So total rent would be 1200+1100+1000 for the 3 units, and I would occupy the the in law apartment, living for free. After I move out I could most likely receive 1400 for the first floor with the in law apartment instead of the 1200. Based on your input and my added details, this deal doesn't look to bad? My goal was to understand the loan paperwork, but since everyone is putting input on the deal analysis I guess I should add those details as well. I didn't think the bank would entertain and offer of 240000 X 70% minus 50k of repairs for an offer price of 118k, so I was thinking and offer price of 170k which is 70% of market to be realilistic. I would live for free, cash flow, and have a little equity to help bring down the LTV to closer to 80% so I can refi out quicker. Does this make sense still or should I try to offer a lower price or move to a different deal.
Jared-
If this is a triple, you are in good shape, sure I think if you could offer $170K for it and this is something they are willing to entertain great! Living for free and then transition this to a triple rental for income, I think you will be much more ahead then some of the other posts suggest. As I said everyone has a different strategy, but if this gives you some passive income today + you live for free. You can save the money you were going to be paying in rent and buy your next home with conventional financing, or refi this home to conventional drop the PMI and do another 203k with only 3.5% down --- not bad!
Here is some additional 203k advice for you:
1) Use an experienced 203k lender, not someone that has done (1) or (2) just google 203k lender for your immediate area, call (3) get best rate, listen to experience pick (1)
2) Its all about value, in some cases you can go 110% of appraised value, giving you more money for your renovation if you need it, depends on your situation and market. Be REALISTIC! do not get carried away, play conservative on your first deal, leave some room for error.
3) Find a qualified and experienced contractor, do not settle for cheapest, you want experience here, because their is a significant administrative burden not only paperwork, proper formatting, but also financial constraint on the contractor as these sometimes have $0 prepayment to contractor. Keep it simple, search the 203k contractor database, you wildlife one in your area, call a few then pick best one.
These are the basics if you need more help send me a private message, happy to help.
...eventually you will have $250k in equity on your hands, with a small investment of $10,000 today.
If only it was so simple. But instead, I foresee $10,000 today PLUS hundreds of dollars PER MONTH outlay, for as long as, er, foreseeable...
Brent, why hundreds of dollars per month outlay? -- As you said, if it was only that simple, based on rough estimates and considering he is renovating the units to a good quality standard, he stands to make a few bucks on the deal and live for free. I agree, still need to dive deeper and understand utilities, taxes, vacancy, insurance --- using basic assumptions this deal for an owener occ living for free and renting (2) units is not to shabby. I do not know the area or its growth potential, but from a 30000 ft fly over prospective, not to bad.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@Steven Gesis, we were all reading and replying at the same time, so I hadn't seen that it was a Tri-plex with even further potential too. It's just that as far as I can tell, the mortgage alone will eat up most of the cash flow, and you KNOW that there's bound to be normal and abnormal expenses occurring, even if the rehab job does keep them to well below the "50% Rule" ratio. Cheers...
Just out of curiosity, why would you go this route? You are basically buying retail and renting it out, but you are having to take the risk of rehabbing this property. If you aren't wanting to buy wholesale, then just buy a turnkey rental.
It's only my opinion, but I disagree. I find awesome fixer-upper deals on the MLS all the time.
Engineer · Stratford, CT · Member since 2015 · 22 posts · 4 votes
10y
@Stone Teran are any of these MLS fixer uppers forclosures? In your experience what kind of offers are these properties entertaining? What was the property listed for, and what offers are they accepting? Average percentage of market value?
@Stone Teran are any of these MLS fixer uppers forclosures? In your experience what kind of offers are these properties entertaining? What was the property listed for, and what offers are they accepting? Average percentage of market value?
Usually they are foreclosures. The "desperation" level depends on a variety of factors....the most important is buyer demand. I've purchased at 61-93% of listing price, so you can see a lot of variability there too. I hope that helps.
Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
10y
Yeah the word triplex wasn't mentioned for a while. That changes the deal and makes it better. You are house hacking now. I was under the impression it was a SFR.
Welcome to BiggerPockets! House hacking with an FHA mortgage is a great way to start with purchasing up to a 4 unit property Multifamily and only 3.5% down.
Also a 203K Loan is part of the FHA loan program. This is another great way to start.
This is a great way to learn how to be a landlord, you can live there for free with cash flow
Look for a small local Community bank or small local credit union.