Buying a sinkhole house. Need to finance. Need advice.

Buying & Selling Real Estate
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Buying a sinkhole house. Need to finance. Need advice.

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Brooksville, FL · Member since 2013 · 20 posts · 4 votes

Hello, I'm a new member of BP and in a unique situation. I need to find a way to buy the house i'm currently renting.

I'm new to real estate experience wise but I've read just about every article on this site, none of which quite cover what i'm looking for. *if it's even possible.

Home: 3/2/2 built in 86 with settling damage in the early 2000's. *Damage is estimated to cost $20-25k to fix with piers. It is not a sink hole, it's simply built on clay. It's a normal home in a descent to nice neighborhood and it's the only home with settling damage. And yes, the owner already collected insurance $$ from the damage but it wasn't enough to fix it (or so she said).

The current owner (83 yr old lady) loves me to pieces and wants me to buy it for $55k, but no one believes it's worth it, Zillow says it's value is $53k but i figure 35-40k considering the damage. I've been renting for over 18 months @ 800/mo so i need to either move out and buy a duplex or get this place and keep it as a rental for the future. *cut costs either way from 800/mo in rent to around 300/mo mortgage.

The question is financing. I have descent credit and a good paying job but i know banks or FHA won't finance a mortgage on house with "sink hole" damage. What makes it more interesting is my boss/best friend (like a brother) who happens to be my neighbor wants to help me get the house (long story, we grew up together so it'd be awesome if we were neighbors again) and he's got tons of cash & collateral. But we both agree that it's best i don't borrow from him, but get a loan of some kind and make payments, but he'll either co sign or put up collateral so i can get the house. (I don't have alot of cash laying around).

So, is this scenario even possible? The house is worth it if i can get the owner to accept 40-ish to buy it. The question is will any financing institute help me get a loan on it since i essentially have near unlimited collateral/co-signer quality.

Your advice is greatly appreciated.

-Jon

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Patrick G.
Abingdon, MD · Member since 2013 · 193 posts · 60 votes
13y

Anywould would love you to pieces if you continued to pay them $800 a month to live in a severly damaged $50k property without making them fix it. I would literally bake you cookies once a week.

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  • Thomas Quinn
    Residential Real Estate Agent · Uxbridge, MA · Member since 2012 · 123 posts · 13 votes
    13y

    Foundation repair is not uncommon in some areas so possibly some type of rehab loan fha has there 203k. The number on zillow is only good for entertainment you need to get real comps from recent sold properties.

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  • Todd Plambeck
    Agent/Investor · Murphy, TX · Member since 2013 · 542 posts · 304 votes
    13y

    Did she do any of the foundation work or just keep all the money? Simple math is: worth $55k - $25k in foundation means at most it's worth $30k before you fix all the cracks that are going to appear after the fix the foundation so maybe another $5k for that. You are down to $25k now as the current value. You really need to know what the actual value will be after the repairs are done.

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  • Sam B.
    Rental Property Investor · Houston, TX · Member since 2013 · 476 posts · 294 votes
    13y

    Also, will this show up in the future as an issue? When you go to sell, surely any home inspector will see this issue? Even if it's been resolved, it would detract from the value?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Why not go for a 4 plex instead?? Your breakeven occupancy will be better than a duplex.

    You have more units paying the mortgage that way and the risk is spread out among 3 tenants performing instead of just 1. The 4th unit you will be living in so I am not counting that one.

    I know you like the lady and she likes you but emotional investment does not make you successful in real estate. If it's 25k estimate plan on it being much higher. Listen to what others are telling you. Is it they are trying to protect you with their experience OR is it that you see some amazing opportunity that they do not??

    So many properties to go after and this one seems marginal based on what you have said. Buying into a bad deal early on to help someone can kill returns for years. Sounds like to me she might have taken insurance proceeds and is now looking for someone to overpay for a problem house. I would use your partnership with your capital friend to land a better property.

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  • Patrick G.
    Abingdon, MD · Member since 2013 · 193 posts · 60 votes
    13y

    Anywould would love you to pieces if you continued to pay them $800 a month to live in a severly damaged $50k property without making them fix it. I would literally bake you cookies once a week.

    3Reply
  • Account Closed
    Real Estate Investor · Garland, TX · Member since 2013 · 46 posts · 7 votes
    13y

    Going by the information that you have provided it sounds to me that she is either unrealistic about the current value of the home that is in need of repair or she feels that she may be able to get $55k out of you because the two of you have such a good relationship. Have you asked her how she arrived at this number? She may see that you already have somewhat of an attachment to the home since you are living there and renting it from her.

    You need to find out how motivated she actually is to sell the property. I would approach it (nicely) more as if you are doing HER a favor by getting this property off her hands. I can't think of one 83yr old lady that wants to deal with $20-25k worth of work on a property. That's a big job and a lot of money!

    So if I were you I would wait until she sees that she NEEDS to get this property off her hands before it becomes WORSE. Imagine if she lost you as a tenant and had to try to rent this house out again. Does she really want to keep being a landlord at 83yrs old?

    I think that if you change your approach on the deal and use it as a way to improve the relationship you've already created with her then you may be able to find out how motivated she is a lot faster and get her down on her price.

    Of course always keep it fair and honest.

    Getting more comps and sharing them with her for a reality check is always a good idea.

    Also try to find out what it is that she REALLY needs the most right now..ALL of the money up front or just the monthly income. If its just the monthly income then see below..

    Do you have money saved up for a down payment on a loan?
    If so, then why not ask her for seller financing? Tell her you will give her a down payment of a few thousand dollars if she will bring your mortgage payments down to $300/mth (or an amount that you can both agree on). With the extra money you will be saving (while building equity on your seller financed loan) you can get the work done on the property or at least until its rent ready. Once its rent ready then sub lease it out (make sure you have this allowed in the seller financing contract you sign) at the market rent. If you are paying your landlord $300/mth and renting it out at $800/mth (assuming that's market rent) then there is your $500 monthly cashflow coming in.

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  • Account Closed
    OP
    Brooksville, FL · Member since 2013 · 20 posts · 4 votes
    13y

    She did take the money and didn't repair anything since it wasn't enough to pay for the repairs. That part i know she's not lying about. (Thankfully I can trust her.)

    The plan would be to buy it at the 30k range and not fix the cracks. I currently rent out one of the rooms to my roommate so that would pay for the entire mortgage. Essentially i'd be able to live there for free + build a little equity.

    The part that isn't apparent in this is that i'm only 0.9 miles away from work currently, i bike around town and am always next door at my friends house. The closest duplex (no tri or quads) is 20 minutes away and the gas/time to commute for work & friends would add a few extra hundred a month (time is money) since i'd be losing at least 40 minutes a day to commuting and i couldn't ride my road bike. (no gas, just calories)

    And i understand it's an emotionally charged situation. Which is why i'd love for it to be a loan and not a mortgage, that way i can still go out and buy another property with proper credentials and no issues.

    The owner will be hard pressed to sell it for less than 50k since she's currently renting it out. She used to be in real estate and won't do a personal note. She's sick now and might not have too much time. If i were in her shoes i'd keep the house as a rental and pass it onto my kids since it has more value as a rental.

    I'm just trying to see what financial loan options are even possible. like the 203k that Mr Quinn mentioned.

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  • Account Closed
    Real Estate Investor · Garland, TX · Member since 2013 · 46 posts · 7 votes
    13y

    Also if you got the lady to agree to seller financing with the down payment and LOW monthly payments (no interest!) you could also consider doing the following ...

    Don't keep this property as a rental. Flip it with seller financing.
    Find the investor that wants to do all of the work on it. Seller finance it to him with a HIGHER down payment than what she wants. And make him pay double the amount monthly that you are paying her WITH INTEREST!

    You will make a little bit of money up front from the down payment that you get from your buyer and a little bit of monthly cashflow coming in for doing nothing.

    Make it so the guy that buys its from you with seller financing has to get it all fixed up and sold within 4-6 months. Once that happens he will cash you out and you will cash out your original seller. Which you will also make money at closing during this time as well because you will be selling the house with seller financing at a higher price than you bought it for.

    Does this make sense?

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    Just an aside, if you got a personal loan/note that wasn't a "mortgage" you'd still have to list that on any future loan applications, unless you want to commit fraud. This seller doesn't seem be realistic.

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  • Account Closed
    OP
    Brooksville, FL · Member since 2013 · 20 posts · 4 votes
    13y

    Ha, cookies, i hear ya.

    The house is nice, cracks are only visible outside. I believe the market rate for rent is at least $850 for this neighborhood. (nice, quiet). Comps are higher, around $60-70k for sink hole damage on 3/2/2's

    The owner does need a reality check, and she is enticed by cash up front. I don't have alot of cash for a high up front down payment.

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  • Account Closed
    OP
    Brooksville, FL · Member since 2013 · 20 posts · 4 votes
    13y

    And FYI the only reason i'm remotely interested in this property is:

    1.It's less than a mile from work (no commute)
    2. I could live for free by having the 1 roommate that i already have.
    3. It's next door to my best friend/like-a-brother & we work together.
    4. I'd be around my god children (they have 2 kids) *i've been a huge part of their lives. So i'm REALLY weighing my options before moving further away & spending a whole lot more.

    0Reply
  • Cory BinsfieldPro Member
    Financial Advisor · Duluth, MN · Member since 2012 · 157 posts · 194 votes
    13y

    Being a new investor, I'd simply find a place to rent nearby and focus on buying an income property that is turn key or offers easy financing from the seller. You could easily lose your shirt on this one. A straight FHA loan on a clean, affordable duplex or fourplex would be a better option. Not sure if FHA first timer loan will work for Multi-Unit now. It worked for me back in 2000 and I still have this property that provides me solid monthly cash flow and enough equity and experience to launch my portfolio. My motto with sellers is to trust but verify. Most are decent people but the seller is not being realistic and it's better to move on and find a realistic seller.

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  • Account Closed
    OP
    Brooksville, FL · Member since 2013 · 20 posts · 4 votes
    13y

    Thanks! That seems to be the consensus. I'm searching for good duplexes around me. There are only two duplexes, no quads or tri's around. I'll keep searching, need to get out of this rental.

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