What is my next move?

Question

I moved to NC back in February.  I've since bought 3 rental houses, average price was $75k, average rent is $900+.  I just came across a house that is way underpriced, sold for $180k 4 years ago, now selling for $90k.  All issues are cosmetic.  I REALLY want to buy, but am down to my last $10k cash and don't want to take reserves any lower.  All my rentals have 25% equity.  What strategy could I use to get this new one with minimal cash outlay? I could pull $30k from a 401(k) loan, also have about $10k in Roth contributions I could pull out.  Ideally the value of the home would warrant no money down.  Any ideas? Thanks in advance!

Account Closed · Answer

First check and see if there is an outstanding mortgage on the property. If it sold for $180k 4 years ago and financing was used, then it is underwater. If they paid cash and the property is "free & clear" you can use "owner financing", a land contract or a lease option to control the property for a small amount of money.

Ian Olmsted · Answer

Good advice on providing multiple options.  Roth IRA principal can be withdrawn tax and penalty free....just not the earnings.  401(k) loans are similarly allowed and not taxed or penalized.  Sorry if I was unclear on the specifics before.  I like the idea of offering generous terms to get the seller to finance.

George Skidis · Answer

If you are under 59 1/2 years of age taking money from a 401K or IRA can result in both penalties and interest. This should be last resort money. The cost could be as high as 20% of the withdrawal.

Draft three or more deals that you like. Go into the meeting giving the seller options. It is all about the terms. So make the terms work for the seller.

With your potential income tax penalty, Would you be willing to will pay $100,000 with 3 % down, $1,000 a month balance due in 36 months? And yes no interest on the loan since a larger purchase price negotiated.

Play with this and see what the buyer will accept.

Ian Olmsted · Answer

Thanks fot the insights everybody.  I'm leaning towards a line of credit to take it down, then convert to a traditional mortgage.  I absolutely understand past sales price does not equal current value, but it is in a neighborhood that has been going up in value and is very desirable.  I will definitely inquire about the current mortgage situation to see if it is underwater.

Mike H. · Answer

One. You're likely going to need to pull some money out no matter what you do.

But when it comes to preserving capital, I've found hard money the best way to go. Most HML's will lend 90% of the purchase and 100% of the rehab. I've been using mine and they let me do 100% of both.

After I rehab and rent, I then refi and since most banks are much more lenient on the rate/term refi as opposed to cash out refi's, I'm able to essentially be all in at about 5k to 10k total out of pocket (closing costs, points, etc).

Worst case is, use hard money to take down the deal and then flip it.

One thing I would add though. The value of the house today has nothing to do with what it sold for any time in the past.  So be careful with using that as a way to estimate the ARV.

Here in Illinois, in the lesser areas, there are a lot of homes that have previous sales prices much higher than the current values.  Those areas have simply not come back much and/or were artificially inflated during the boom.

So just because there was a previous purchase of 180k on this house, you should not assume it will appraise out at 180k.

Richard Sherman · Answer

@Ian Olmsted Talk with the buyer about and owner carry but only if it is paid off AND have title do the paperwork!  Talk to the bank about a line of credit against all properties.  Also, is it financeable?  Rehab loan through bank?