Why would a duplex be foreclosed on?

Question

The question I am wondering is, why would I do better? How can someone fail at renting. Duplex? Did they not maintain tenants or the property?
I have the potential to purchase a duplex for about 60k in good shape. But if the previous owner failed what positive things should I be considering?

Rob K. · Answer

I always ask rental applicants on the phone why they are moving. (Some of the answers are suprising). Many of them state that they are paying their rent, but the landlord is not paying the mortgage. This happens all the time. Someone will buy a house or duplex, rent it out, now the value has dropped by half or more, so they stop paying on it. Hopefully they will get caught in the end. I hope that everyone who walked away from their mortgages will have to pay the bank back one day. This is also the reason why you pay a higher interest rate on a rental property than a primary residence. You're more likely to walk away from it.

I wouldn't worry about the previous owner or why he lost it. I would look at the duplex and make sure the numbers work and it's the building that you want.

Steve Babiak · Answer

One word: mismanaged.  Lots of factors to consider, many already mentioned by others.  I'll add that if they had a bad tenant that trashed a unit, that unit could have been a long vacancy, with a high repair bill on top of that - this gets quite expensive, and if this owner was not adequately capitalized ...

Kevin Romines · Answer

The simple answer is that they didnt pay the mortgage and now comes the foreclosure...

Crazy, but bad financial managment or a cash strapped owner for other reasons than the rental....could be many reasons.....but in the end, lack of paying the mortgage is the most obvious.

David Beard · Answer

If it was in good physical condition, then probably:

The loan payment was just too high relative to where market rents are, and they had no reserves.  So if they have an eviction situation, leading to zero income for a few months, and then more money needed to get the unit ready for the next tenant.... TOAST.

They probably bought, or cash-out refinanced, in the 2004-2006 time frame, top of the market, appraisers were just making up numbers for values.

Will your gross rents be at least 3.5x the P&I of your loan at 75% LTV?  If so, you should be OK.  If less than 3.25x, then reconsider or negotiate a better price, as cash flow will be too tight.

Justen Ashcraft · Answer

I'm mostly concerned with tenant placement.

David Beard · Answer

Those PM fees are on the very high end, and would amount to 18% if you have annual turnover.  If this is one property in your hometown, the management won't be that difficult, and the savings will be substantial.   BP has great guides and resources for landlords, plus the veterans in the forums.

Justen Ashcraft · Answer

Rich, I believe so. I've been researching, but it seems he bailed some time ago. Jon, I'm very conservative. I want to make sure my first deal goes well. I also am a full time chef and don't intend to give up that cash flow. The property will be professionally managed. Which will cost me first months rent plus 10% every month, but for peace of mind it will be worth it.

Jody Young · Answer

Justen Ashcraft Is it too late to find the owner and ask then, and attempt a short sale?

Jon Holdman · Answer

Many, many new buy and hold investors fall for the grand myth of rentals:

phony cash flow = rent - piti

Agents even write such silliness into their MLS listings.  Sellers always spout this when promoting their properties.   People buy assuming this is true.  They might buy a deal where the computed cash flow is small, assuming over time they can raise the rents.  Or that it will jsut eventually be paid off.  Or, maybe they think cash flow will be a bit larger and they spend the money.  But stuff happens.  Tenants move.  They don't pay the rent.  Things need fixing (I'm going to spend over 50% of a years rent replacing a sewer line on one of my properties today.)  Its just the reality of the business.

I'm sometimes accused of being overly pessimistic and "popping bubbles".  But a more realistic estimate of cash flow is:

cash flow = rent * 50% - P&I

If your property works with that formula, and you have some cash in the bank for hiccups that occur soon after you buy, you'll do OK.  If you assume that "phony cash flow" formula is true, you'll soon be in trouble.

Justen Ashcraft · Answer

Thanks for your responses. If my numbers are right I should be able to cash flow this property.

Why would a duplex be foreclosed on?

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