Is this deal worth it?

Question

Looking for my first rental and had a proposition from a friend trying to get rid of his. It’s a house he owned then turned it into a rental. Comps in the area are in the 175-185k range. He owes 130k but the house needs 40k in rehab if you sell it. He wants out and will sell it to me at 110k and 1/2 closing cost. The current renter has been there for 7 years and always pays his $1,000 in rent on time. Downfall is that they don’t take the best care of it or even tell them when things break/water leaks etc. subfloors in both baths have mold and rot and will need replacing. I’m a contractor so it’s not that the work bothers me. I was thinking about doing the deal and letting the tenant stay since the damage has been done! Maybe take a home warranty out though! If I buy it and the tenant moves out it may ruin this deal because I couldn’t get another tenant in there in the current condition and not sure there is room for a decent profit if I flip it. what are your thoughts?

Anthony Dooley · Answer

@Phillip Rowe there are a lot of videos on youtube that can explain how to calculate the return on an investment property. You need to learn how to calculate the numbers. If you knew, you would not have had to ask that question. A bonus tip for you is that if someone bought a house at retail price as their primary residence, it almost never makes a good rental property based on cash flow. Invest in education, which is free, online.

Jason D. · Answer

@Phillip Rowe run away. It sounds like this has been a perpetual loser for him and now he's trying to dump it. The ARV doesnt support the purchase price plus renovations and the rent doesnt support the ARV. It's simply not a good investment

Sam Shueh · Answer

In our area sellers pay some and certain tax is shared by both parties 50-50.

Dennis M. · Answer

Even if you bought for 110 and it was worth 110 the deal still wouldn’t stand up to the 1% rule because your rent is only 1k . Not enough income on this one

Robert Biggerstaff · Answer

The great thing about harsh truth and comments they always make you think. No matter how much we massage the numbers they do not lie

Jason D. · Answer

@Phillip Rowe at $90k this makes more sense, if the other numbers are correct. I agree with you that he should get rid of the tenants, renovate, and then sell. That will minimize his losses

Phillip Rowe · Answer

Thanks for the reply’s...even though some comments were pretty harsh. I already wast feeling the deal was worth it but wanted some others thoughts. The owner has the means to pay off the rest of the mortgage and closing costs! As a friend of his I’m suggesting he remove the tenants, renovate and sell it as apposed to just letting the home go into foreclosure. Saves his credit, dignity and the 30k he’s going to lose if he does find a buyer at 110k! I think he’s ha big a hard time emotionally about it because this was his home. From my calculations you’d have to get this for under 90k to make it worth it.

Nathan Gesner · Answer

I wouldn't do it and I doubt many investors would. You can't guarantee the tenants will stay so you would have to be prepared to renovate at any time. Thinking "the damage is done" and letting them continue destroying the home is also a mistake. Do you honestly think they won't make it worse?

If you buy it, make it contingent on the tenants being out. Buy it vacant, renovate, and move on.

Odds are, it's not worth the price he's offering you. Figure out what price would make it a good deal for you and offer him that. Otherwise, walk away.

Joe Villeneuve · Answer

Read this post carefully.  I can only add one thing to it.  Where it says "...run away...", I would add "fast and as far away as you can get".

Did you actually add up the numbers?

Here are my questions, as far as the numbers go:

1 - Who is going to pay off the $20k balance of the existing loan after the seller takes the $110 you give him and uses it to pay off the first $110k owed.

2 - What is the seller going to use to pay the other half of the closing costs (about $9-10k) <see #1>

3 - What is the cash flow going to be if you were foolish enough to go ahead with this deal? (I'm guessing it will be negative).

4 - After you pay $110 + $40k (and as a contractor, you know it will be higher), and sell it for $175k, and pay the closing costs ($10k), and REA ($11k),...which McDonalds will you be spending your remaining profit on for dinner after your flip closing?

Is this deal worth it?

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