TEAR THIS IDEA APART

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

7y

You won't be able to borrow the down payment...as per fha plus no HML would make this 2nd mtg loan.

You’ll have substantial closing costs/prepaid taxes and insurance also, more than $15k likely.

No way your insurance is $840/yr

8 Reply

Megan Phillips

Rental Property Investor · VT · Member since 2017 · 233 posts · 147 votes

7y

Verify the specifications for 203k rehab loans - I was under the impression that they can be used for "needs" (house *needs* a roof or hot water, house doesn't *need* granite countertops and new cabinets) and not necessarily so much for aesthetic upgrades. I have not used this program, so I can't confirm but I feel like I read into it a bit and it had some restrictions, so just verify before assuming they will pay for all of your cosmetic work.

2 Reply

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

7y

Cosmetic and upgrades are fine with a 203k, as long as the appraisal supports it.

2 Reply

Matthew G.

Specialist · Pasadena, CA · Member since 2017 · 133 posts · 86 votes

7y

@Albert L.

1) HML wouldn't take a 2nd position to lend you a downpayment plus they wouldn't allow an owner-occupied property.

2) It doesn't look like you've include MIP required for FHA loans.

3) As for rehab costs, it's hard to guess without any pictures of the interior. The house might just need new paint and flooring or it might have major structural and fire damage.

4) Rental prices are absurd in the Bay Area, so I'm guessing someone will pay it.

5) What do the comparable say the ARV is worth? If comparable are around $875k then why are you doubting yourself?

3 Reply

Lynnette E.

Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes

7y

Are your rents comparable for the size --square footage-- of those apartments. I'm guessing the 2 bedrooms are maybe 700 sf, the 1 bedroom maybe 500 sf and the studio 300. The rent seems high for the tiny size. BUT you know your market, not me, but might be worth checking the rent vs. size...especially a studio with no perks (e.g assigned parking, spa, gym, yard, somewhere to go outside etc.).

0 Reply

Rick Pozos

Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes

7y

As mentioned, hml will not take 2nd position.

Who is going to pay the 6k mortgage for 3 months while your contractor takes forever to complete the rehab?

What if the cost of the rehab goes higher??( every contractor knows that you are stuck with them throughout the 203k process and they will use it against you) and it will.

If it was a great deal, it should have sold quick. There are several other properties in the area about the same price. If this one needs work, it is way over priced. Your rents might be a little high also.

0 Reply

Albert L.

OP

Bay Area · Member since 2016 · 82 posts · 55 votes

7y

All great points, thank you everyone. Good to know about HML and 2nd position. I guess the exercise for me here to was to see if it was even feasible to use the FHA loan in a creative way to cash flow in a hyper-competitive market like the Bay Area.

I'll dig a bit more into this property but I was really just using it as an example for potential other foreclosed properties that has would fetch the rental and ARV to make numbers work.

If there's anyone that's done anything creative in the Bay, I'd love to connect and learn!

0 Reply

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

7y

Way too many assumptions which makes the cash flow result questionable. I expect home of this vintage will be worth very much what you pay today if not lower, knowing the asking price since Feb 2017 is just +5% more and it still does not sell after 69 days with the area steep price hike.

You budget 2X for reno, rent has vacancy rate. I can tell you the $2700 for 2 br in Oakland Lake Merritt.

is not going to cut it.

Unless you have carefully confirm your assumptions it is just an exercise..

2 Reply

Account Closed

Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes

7y

Originally posted by @Albert L.:

I just finished the 1st chapter of No/Low Money Down and learned about FHA + 203k Loans which gave breath to some ideas.

Tell me why this won't work!

For example...

Say we found a foreclosed house in Oakland. Let's use this one for example.

https://www.trulia.com/p/ca/oakland/925-e-11th-st-...

Let's say I was able to negotiate it down to a purchase price of $650,000 and added another $50,000 in renovations (cosmetic upgrades, new hardwood floor, kitchen cabinet, paint, bathroom vanity/shower, etc etc).

I wrap up the purchase price and rehab in a FHA 203k loan for a total of $700,000 with a 3.5% down payment at 4.9% interest rate.

Assuming I'm able to rent out the (2) 2BR/1BA for $2700 each and the (1) studio for $1900 and my wife and I living in the 1BR/BA, the income would be around $7300.

Factoring in PITI, repairs, vacancy, capex, maintenance, sales expense, and MIP fees, I would be cash flowing around $1,100 and see a CoC return of 45%.

Calculations here.

Furthermore, let's say we didn't have the upfront downpayment needed ($24,500) and used a HML to help us out who charges us a 9% APR which would bring my total to around $27,000 that I owe there.

Let's say we live there for 6 months or so, (I think that's the required seasoning period of FHA 203k loan?), we have it appraised for $875,000 which I think is somewhat reasonable with the upgrades and the appreciation that are is seeing.

We can then do a cash out refinance with the $199,500 equity that's been built up and pay back our HML.

Lastly, let's say in 2-4 years my wife and I decide to move out and we rent out our 1BR/1BA which would add to the total cash flow.

But...if it was 'this easy' I'm sure everyone would be doing it.

SO, here's what I think I'm missing and I invite you to critique away as well as I'm sure I'm missing a million obvious things!

Why this won't work:

1. This is California, let alone the Bay Area. Cash rules! Ain't nobody will want to deal with your FHA 203k loans!

2. 50k for rehab...cmon now. It's going to be closer to 100k

3. Do you really think it'll appraise for that much? Those repairs ain't going to do nothing!

4. Those rental prices are astronomical. Yes craigslist gave some suggestions but that's a bit outlandish given it's still all in the same property!

5. The timing doesn't work out. There's a ton of paperwork with foreclosed houses AND securing a FHA 203k loan. This won't be rentable for quite a while..

Your turn, how else can this go wrong?

Thanks BP!

You forgot the most important part...and one that could "tear this idea apart"....this is Oakland, and the property is occupied.

Did you think you could just give them a 60 day notice? Don't think so.

You need to pay them to leave. Do they have to accept? Not a chance.

How much? It's Lake Merritt...so my guess is at least $20-25K/unit. But they could dig their heels in and ask for $50K.

Then what?

Not trying to smash your plans...but this is why the barrier to entry in the Bay Area is high.

3 Reply

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

7y

Each "what if I..." you stacked on top of the next has only a 10% chance of success on your first rodeo. You stacked at least 5 things.

203k purchase in the bay area.
Contractor working for free in the bay area.
FHA on a multifam, hoping it passes the self sufficiency test, in the bay area.
Somehow sneak borrowed funds into the transaction without the underwriter knowing.
Negotiating the price down that far on something MLS.

That works out to a 0.001% chance of success for someone just starting out. A lottery ticket would be a better investment.

"Plan A" in a rodeo can't be to use your mind control abilities to subdue the cow while Spiderman helpfully shows up at random to tie its legs up with spider silk followed by the Queen of England arriving via rocket ship to anoint you rodeo champion and offer her granddaughter's hand in marriage to you so you can be the next King. If you think that's what's going to happen, you're just going to sit on the biggerpockets.com forums forever and not actually do anything. Sorry. :\

If you want to pick one angle to work for your first rodeo, absolutely go for it. Look at adding others as you continue to move forward from the first to the second, to the third, and so on. In the real world it's easy to write a biggerpockets.com post, it's quite another to pull off something so improbable.

7 Reply

Albert L.

OP

Bay Area · Member since 2016 · 82 posts · 55 votes

7y

@Chris Mason - love this, thank you for the straight forward advice.

1 Reply

Doug Pintarch

Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes

7y

@Albert L. Nice legwork for your example! Please take this with a grain of salt from a newbie.

Here's what scares me in your summary:

"Let's say..............we have it appraised for $875,000 which I think is somewhat reasonable with the upgrades and the appreciation that are is seeing."

You're using that assumption to refi and pay back your HML. (I realize this is an example you put together). That is WAAAAY out of my comfort zone to continue analyzing on a deal like this example. We are buy-and-holders and aren't banking on any appraisal or appreciation to do anything, and will consider any higher appraisal at sale time in 10+ years to be gravy.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

least of all Uber competition from cash buyers for foreclosures.. don't see this happening just on that stand point.

maybe off market were no one knows about the deal.. but if its a foreclosure then Property Radar has it and then 1000 people know about it..

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

1 Reply

Account Closed

Garden Grove, CA · Member since 2017 · 50 posts · 19 votes

7y

This is fun and right in my wheelhouse!

Everyone keeps missing the point[and maybe you too] , you are buying for equity, not cash flow and sell in a year or two and you get a huge tax break. [hold it for 10 years and you pay zero tax because its in the new opportunity zone [https://cafinance.maps.arcgis.com/apps/webappviewe...

Then you build up a huge nut to buy something else for cash flow and as you make $400k on this deal you can thank me later.

Cash Flow is tough, granted, If you want cash flow go to Ohio or Bakersfield. You need to look and see what not is there but what can be.

I am making some assumptions about you.

1. Buying as owner occupied [key requirement for FHA]

2. Have at least 580 fico score [if not work on this first]

3. you have a w-2 income you can document [They like those that play within the system, sorry, if not get a co-borrower that can, partner up if need be]

4. You have the 3-5% down payment [if not borrow it from someone]

This is a perfect owner occupied slow flip. No money down and low money down is the bane to your existence as a real estate investor but there are some real great programs out there for FHA renovation loans.

Surprise FHA just made that property more valuable by raising the 2019 amount of Loan Limits for everything!

FHA 2019 Loan Limits for 3 Units is $1,100,000.00, 4 units $1,397,000.00

New Plan, beat out other investors by raising your offering price and asking for a credit, big credit like 3%

Low down and no down you always have other high closing costs. Like 2-3% extra, especially with FHA 203k. The fact that its on MLS is not a big deal, this would sell in a heart beat if it was not overpriced, use this discrepancy to your favor. But be careful with the below info.

Here is what I would do based on these assumptions.

Look at the cost of replacement and add a unit. Look at land value and build up. [Rough estimates the existing structure and land value is $689,750.00[minus repairs] so offer that with a whopping 3% credit or start lower all they can do is say no. If the seller wont take an FHA offer, then get your loan prequal rock solid and offer more! Money Talks, he is not selling it at $712,500 and just did a price reduction so most are missing this because of the work needed or its old inventory, or low rents [is there rent control, if there is it makes it a bit harder but not impossible but your rents will be lower and you just adjust your calculations accordingly.

Just so you know,here are what other investors or where hard money lenders are evaluating the property.

Asking $712,500.00

Rehab $150,000.00 [adjsut accordingly]

ARV $875,000.00

They do about %30-20% of Value minus Repairs

$875,000 - $150,000 - 20% =$580,000 or less

You can beat out other investors [if they even have any offers]. Remember you are comping to 4 units just have to minus out the sq footage and if adding another unit is even feasible. [The city wants more housing so might be easier than you think, but permitting might take awhile. Find this out in your due diligence.

You can offer based on current economics like 12-15 GRM but look at adding a unit and you can do that with the FHA 203K Loan. Based on your rental estimates a 15 x Gross in the profoma rents is $1.3m

I assume this property needs a boatload of work. But borrow enough to add and fix and if you can get a 15x gross and good rents then you have a great exit strategy.

the only caveat is that being so old it might be on a brick foundation and not sure if FHA will allow that and if you have to put a new foundation in that is costly.

Oh and hard money you would need at least 10% down and points 2-3 points so just FYI! And HML will not do a 2nd TD. But you[or someone you know] could possibly get a Hard Money 2nd on another piece of property to loan/gift you for the down payment.

So do your due diligence, get your loan lined up, make an offer[with lots of contingencies to protect yourself, but not unreasonable so the seller says forget it], and kick ***!

Also if this is too big of snag out of the gate look at these options too with FHA203k and New Fannie Mae Renovation loan

1. Buy a fixer condo, fix up live in and sell in 1 or 2 years, leverage to someting bigger.

2. Buy a SFR you can fix and convert to a ADU [FHA will allow this too]

If you were in OC I'd get you a great deal!

Keep us posted.

Rob - PM me if you get stuck

1 Reply

Account Closed

Garden Grove, CA · Member since 2017 · 50 posts · 19 votes

7y

Originally posted by @Megan Phillips:

Verify the specifications for 203k rehab loans - I was under the impression that they can be used for "needs" (house *needs* a roof or hot water, house doesn't *need* granite countertops and new cabinets) and not necessarily so much for aesthetic upgrades. I have not used this program, so I can't confirm but I feel like I read into it a bit and it had some restrictions, so just verify before assuming they will pay for all of your cosmetic work.

Quartz counter tops cost only marginally more than laminate and are so much more durable and look awesome that its an easy add on

0 Reply

Kam T.

San Francisco, CA · Member since 2008 · 59 posts · 50 votes

7y

Per City of Oakland, it looks like this building may legally be just 2 units (not 3 units as listed), so one of the units could be non-conforming. Given it's in the HBX-2 zone, the zoning supports more than 2 units, but it would hit your rehab budget to bring that 3rd unit to conform, and you'd need to officially work through the Planning Department to get the entitlement for the new building from the city (and pay the $23K impact fee + zoning/building department fees + whatever hard costs necessary to bring it to code if it currently isn't).

A major constraint with new units is that you likely have to provide parking and group and/or private open space for the additional units beyond the existing 2 conforming. It's a constraint, but not impossible to work through. If this unit is non conforming parking and open space requirements were probably not considered in creation of that 3rd unit.

Might want to stop by the planning department drop in hours and ask them what it would take to add a unit at this address. They're pretty helpful with hypothetical questions like this.

Thinking longer term, this lot could be developed up to 7 regular dwelling units (or more via the CA state density bonus, if you include at least one affordable housing unit):

Lot size: 6,750
Zone: HBX-2
Density for HBX-2 zone: 1 regular dwelling unit per 930 sq/ ft. of lot space, or 1 rooming unit per 465
FAR: up to 3.0
Building has a minor historical rating (see link below)... So would need to work through that constraint if you wanted to tear the whole building down and do new construction. It's not impossible, but there is a lengthier process than if it had no historical rating.

http://gisapps.mapoakland.com/planmap/planmap.html...

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TEAR THIS IDEA APART

TEAR THIS IDEA APART

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