Possibility of acquiring this property or should I move on?

Question

Good morning BP!

I've been looking for a good property for my family (we have 2 toddlers) to house hack.  We're located in the northern Chicago/ Jefferson Park area.  There's this one near us that we like but it's been on the market for close to a year, the price never drops and I find that really weird.   Normally a property like this in this neighborhood would be gone within a week with multiple offers.

After some research, it turns out they're still underwater.  Based on the loan history, I'm guessing the owner overspend years ago and rebuilt the whole house (around 2011), their loan is still at around $500K-ish, the current asking price is $525K, but the market value is most likely under $500K.

This is a two, 3-bedroom 1-bath, units building, finished basement but a bit short so I'm not sure if it can ben turned into a 3rd unit, 2 car garage, close to a decent school and shopping, very nice neighborhood.  Open space, high ceiling on both units, double sinks in the washroom, all bedrooms are pretty spacious, definitely move-in ready.  Rental for this kind of unit nearby can be around $1600-1800.  Currently, both units are rented to one family with just $1300 per unit.

Any creative way to acquire this property?  Or should I just move on?  Thanks in advance!

Amily Yi-Chieh Tseng · Answer

Thank you @Mitch Messer.  I knew I missed something in my post.  Thanks for pointing all those out!

My goal is for investment while having a comfortable home for at least 1-3 years.  That's why I calculate it like an investment property now and want to make sure it'll cash flow later.

1.) Yes, they can move out and are currently month-to-month.  I thought about potentially offering them to downsize and continue living there with a higher rent if they would accept the terms.

2.) I'll find out about potentially taking over the loan.  Is the info on Remine dependable ($508K, 4.5%, originated in 6/2019)?  With the $500K loan, it's going to be hard to cash flow, that's my main concern.  (Tax is close to $10K)

3.) Investment property.

Thank you!

Sarita Scherpereel · Answer

@Mitch Messer I agree. I like what you said about “making their problem yours”.

I’m encouraging Buyers to make offers because I think that there is a lot of seller motivation given the virus. It’s possible that they have just never been motivated to lower the price because they haven’t had any wrote offers to show them what market value is. You’re the buyer you create the market value. And sometimes sellers need to see that in writing.

For me, I would write the offer how it makes the most sense for ME and submit it. I would submit this with comps and estimates for any updating the property might need. If they say not. I would wait them out. Keep in touch with the listing agent and keep sending them comps as I see them. I would keep looking at other properties so that I don’t miss other opportunities.

Another thing you need to talk to your agent about is the FAR rules and zoning for the basement. Even if you have the ceiling height and the egress needed. FAR is more complicated and so is the zoning. It is often not worth the investment for an illegal unit for ARV in some areas. I don’t know you’re properties specifics so I’m just thinking about things I would check.

Mitch Messer · Answer

Good morning @Amily Yi-Chieh Tseng and welcome to BiggerPockets!

Yes, there are several creative ways you could acquire the property, but I'm not sure listing them here would ensure you earn a decent return on this particular investment.

Way more information is needed.

You mentioned house-hacking, so I assume your plan would be to live in one of the units and rent out the other. Let's also assume that the basement cannot be used as a third unit. This plan only works if the existing tenant doesn't have a long-term lease and can be out before you move in. Is that the case?

One way to acquire the property would be to take over the loan payments (AKA purchasing "subject-to"). But first, you'd need to know exactly what the current payments are and the complete terms of the note (fixed/variable interest rate, amortization period, escrow amount, etc.). Only once you had that data could you determine whether this deal even cash flows. Can you get that from the seller?

Lastly, is your real goal here to secure a great place to live that includes a rental unit to offset your costs, or are you trying to create and maximize a passive rental income stream as quickly as possible? Are you looking for a home or an investment?

Let us know what you discover/decide and then the BiggerPockets Community can help you think this opportunity through!

Good luck!

Mitch Messer · Answer

@Amily Yi-Chieh Tseng Thanks for the additional info!

Yes, I agree with you 100%: It's going to be nearly impossible to make a property in this price range work. In addition to being underwater, I wouldn't be surprised if the owners are also seeing negative cash flow.

At $2,574/mo in just principal and interest ($508K @ 4.5% with 30-year amortization) and another $833/mo in property taxes, you're looking at a $3,407 monthly loan payment, of which at best $1,800 could be offset by the rental income.

That means you'd be on the hook for $1,607/mo + repairs + maintenance + management + vacancy + insurance, and all for the privilege of living in a 3/1 unit with ZERO equity right next door to your tenants.

Given all this, I don't see that making their problem yours is the best way to go here.

I would take a hard pass on this one, personally!

Michael Facchini · Answer

@Amily Yi-Chieh Tseng, do you know if the seller is current on their mortgage, and if it's an FHA, VA, or conventional loan?  Taking over the payments is not something I'd necessarily recommend, not to mention many residential mortgages are not assumable...meaning, they can't be transferred from one borrower to another.  But if the seller is behind on their mortgage, would they be interested in looking at a short-sale?

Amily Yi-Chieh Tseng · Answer

@Mitch Messer thank you so much for confirming my calculations!  :). Super helpful!

Possibility of acquiring this property or should I move on?

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