Little fixer upper in C-/D+ neighborhood
Real Estate Broker · Ephrata, WA · Member since 2016 · 19 posts · 4 votes
Hello,
A friend has offered to sell his rental property, a 2 bed/1 bath on a double lot with attached 2-car garage for $40,000. It needs a new foundation so he's offered owner financing. I would definitely jump on this until l considered the neighborhood. Out of 5 neighborhoods in this town, 5 being the best, this one ranks about a 2. It isn't the absolute worst, but is right next to it. Most of the homes in the area are very old mobile homes. There are just a few small stick-built houses. Some properties are well kept and others have junker cars. Tenants in the area are possibly not ideal. Would someone want to buy it if we flipped it? I'm not sure.
My initial decision was to simply pass on this, since we are in the midst of searching for a multifamily we can buy using an FHA loan, and don't want to complicate that process.
But then I started thinking about wholesaling, and wondered if there might be an opportunity for that. What do you think? Zillow says the value is $77,000. It's in Moses Lake, Washington. I would welcome any advice.
You make your money when you buy. Try working your way backwards.
What would the property sell for in whatever you imagine is your end state?
Calculate your rehab and holding costs and subtract. What will that foundation require to fix it or can it even be fixed? Your rehab plan B might involve a bulldozer.
Subtract however much profit you want to make from this deal.
What is left? That is the most you can offer.
I think it would be unethical to tell the property owner you are going to buy their property if you really have no intention of doing so and no buyer in sight to assign to. This is probably a difficult property to sell as is, especially if you have no idea where to value it nor what it would take to repair it. Think of what your pitch would be. Would you buy your pitch?
Zillow is not aware of the property and neighborhood condition. It might be useful as a general guide, but it only calculates what 2/1 homes with specs like that one in that area sell for. It is possibly more useful as an indicator of what ARV will be, but will probably be lower than a fully rehabbed or new house.
Thanks, James. I will think on it some more. If there's a way to do a fix and flip on this house while not messing up our chances of getting an FHA loan when we need to, will consider doing that. I just reviewed a BP blog article about investing in this type of home and it has given me the courage to at least consider it. Hopefully it isn't bulldozer material. I will take your advice and start at the end and work my way back. I will probably talk to my lender about the possibilities, as well, to make sure this can be done in a way that won't interfere with that.
@NA Loraine Nielsen So, your first step is you just ignore the Zestimate in Zillow. It's going to get you into more trouble than it will benefit you. I think over time the ol' Zillow algorithm will get better and better but it will never be able to assess if your property has foundation issues, mold, has flooded in the past, etc. So that pesky calculation (especially in a rehab) does more harm than good.
You can use Zillow to search for sold properties in the past year within a small radius and see what that yields. You can also drive around the area and see if anyone else is rehabbing properties. Is anyone else doing something like foundation repair on a property? If the answer is "no" then you're either a huge visionary or the free market and hte local investor community is screaming at you: "There's no money to be made here!"
One of the issues that can easily happen, it does in neighborhoods maybe 30 miles from where I invest (not live), is that that you never get the money back out of the property that you put into it. Let's say that you do fix the foundation, you still have a property with ___ year old cabinets, electric, HVAC, plumbing, etc. So you buy for $40K, rehab for $30K, are all-in at $70K but the price-ceiling on the neighborhood is $60K. Believe me, it happens. It doesn't matter how nice your rental is, how much money you put into it, etc. if the value is going to be dragged down by your aforementioned "very old mobile homes".
I don't know Moses Lake from a hole in the ground so that ugly scenario could be accurate or completely off-base. You'd have to look at (rambling now) sold comps, if anyone else is rehabbing, get an inspection, etc.
@NA Loraine Nielsen Another side note, when people *want* to do a deal they sometimes skew how they look at things. They know it's "D+" area but they look for signs that it's a "C-" area. They believe it's a "C" area but the financials look really good so they talk themselves into think it's a "B-" area. Believe me, it happens. You hear conflicting information and kinda just choose to believe the positive side of it.
And I'm not so arrogant so say I'm immune to this either. One my last trip I looked at a set of properties that were maybe 2 blocks from a Starbucks (a newer Starbucks going in is usually a good sign for the future) but my agent also tells me "well, it's kind of known that you can buy drugs somewhere in these group of triplexes". If there's one thing you don't want to own is a "well-branded drug selling location". But still, I caught myself coming up with what-ifs in my head to turn a "heck no" into a "yes".
Bottom line, I didn't pull the trigger. That's not the kind of property that I want to own, but I still thought about it way, way, way longer than I should have. If "owner financing" is your version of "Starbucks" in my example and making you tilt your neighborhood assessment, rehab assessment, give that overaggressive Zestimate a little too much weight, etc. you'd better find a way to level things out.
Not that your assessment has been tilted but it can happen to anyone. Well, it can happen to me, others here are way more astute than I am...
@Andrew Johnson Thanks so much, I wouldn't call it rambling at all. Very good points. As it turns out, we drove by the house earlier today and it was right out of a nightmare - cars in various stages of dismantlement all over the place, young people all over the place staring us down as we drove by, and just a general feeling of wanting to get out of there. Honestly, I've never seen a house and yard quiet that bad, it was one for the books. The Google pictures were about 5 years old and were obviously pre-current tenants! I told my husband I would want to take on that property if it was free. I feel so sad for the owner, but have to conclude he just didn't know what he was doing or he would have had these folks outta there long before now.
Anyway, I appreciate the tips. I will use them as I continue to look for a deal.
@Andrew Johnson Oops, wouldn't take it on if it was free, that is.