Bad Deal—Help for 1st Investment

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Bad Deal—Help for 1st Investment

Turner WrightPro Member
Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

My first RE investment may be a bad investment, according, to two realtors who specialize in the market area. I estimated an ARV of $310k after rehab, but they say I will be lucky to get $275-285k. Below are the details:

PurchasePrice: $177k

Cash to Closing: $22k

Rehab Budget: $60k

Interest Rate: 11.25%, 12-month term, interest only

Monthly Payment: $1,659-$2,175 per budget used

Both realtors are advising me to rent the house to minimize my losses, but I’ll lose about $200-300 per month with a max $1,550 rent. So, I have considered the following options:

1) Sell as-is and take my losses (approx. 30k)

2) Full remodel and get what I can for it

3) Mid-level remodel and get what I can

4) Rent out and eat cost, little by little

* Will prevent me from buying another property

for a while

5) Owner/Seller finance

* As-Is and at cost, or

* After mid or full rehab

6) Lease Option

* As-Is and at cost, or

* After mid or full rehab

I want to ask experienced and creative investors out there for their help in minimizing my losses. What do you suggest? What would you do? Thanks in advance!

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Dominic Pizzi
Lender · Freehold, NJ · Member since 2022 · 236 posts · 85 votes
3y

Hey Turner! You brought up some good options, I think a cash out refinance might be useful to you as well. It will get you out of that 11%+ interest rate and can maybe get some money out for you if your payoff on the property is low. This way it would minimize your losses on the property, will get you residual income, and can potentially get you some cash out to put money into another property.

Send me a PM and maybe I can help you out with this!

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    I still can’t figure out the numbers but it appears even if it was worth $310 they would still lose money.

    Not sure how $177k purchase +22k closing +60k rehab is $259. Tack in $20k in interest it’s still $279k

    I don’t see the $30k loss?

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  • Turner WrightPro Member
    OP
    Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes
    3y

    @Chris Seveney

    If I was lucky enough to sell the property for $310k, then I would make about $33k profit. $177k purchase price plus $22k cash at closing plus 60k rehab plus $18k agents’ commissions = $277k.

    $310k — $277k = $33k profit.

    However, realtors are saying I'm lucky to get $180k as-is. So, ($277k + $22k + $16,800 for 6% commissions) from $180k = -$35k, a big loss. This is why I am reaching out to the REI community for help.

    What other strategies are there that can help me minimize my losses?

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Turner Wright

    Your numbers continue to change can you fill in the blanks

    1. What did you pay for the property?

    2. What are your closing costs?

    3. What was the renovation cost?

    4. What are carrying costs and estimated closing costs ?

    5.What is the agent telling you can sell it for?

    Your last post said you paid $277k and only sell it for $180 so that’s over a $100k loss…..

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  • Turner WrightPro Member
    OP
    Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes
    3y
    Quote from @Chris Seveney:

    @Turner Wrigh

    Your numbers continue to change can you fill in the blanks

    1. What did you pay for the property?

    2. What are your closing costs?

    3. What was the renovation cost?

    4. What are carrying costs and estimated closing costs ?

    5.What is the agent telling you can sell it for?

    Your last post said you paid $277k and only sell it for $180 so that’s over a $100k loss…..


     Sorry for the confusion.  Per your request:

    1. What did you pay for the property?  $177k

    2. What are your closing costs?  $22k

    3. What was the renovation cost?  No renovation, yet.  But, $60k budget.

    4. What are carrying costs and estimated closing costs ?  $2,200/m and $10,800 for commissions (6% x $180k)

    5.What is the agent telling you can sell it for? AS-IS, $180k.  $250k if we rehab it and get it on the market in a few weeks.  Remember, this all started because I thought I could sell it for $310k after rehab, which the appraiser also concluded to.  But, interest rates have gone up 3 times since I started the buying process and the market cooled down in the area.

    So, I think that is where the confusion is--AS-IS vs REHAB.  I'm losing out, regardless, whether I rehab the property or sell AS-IS.  Two realtors said I should rent it out, but the most I could get for rent is, $1600/m.  I was quoted a rate of 8.125% for a 30-yr fixed refi, which puts my monthly payment over $2,200 ($232k + TITI), so I'm losing out on rent, too.  I'm aware of Owner Financing, Lease Options, and Room Sharing, but are there other creative strategies I could consider to minimize my losses?  I'm leaning towards Owner Financing.  Thank you for your interest and any help you can provide!

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  • Leo R.
    Investor · Member since 2021 · 591 posts · 695 votes
    3y

    @Turner Wright I'd be very skeptical of any ARV right now. The market has already changed so much that most comps are almost meaningless, and the market will likely only continue to depreciate in the near term. Bottom line: now more than ever, NOBODY knows what the market will look like in the future, so if your plan depends on hitting an ARV, you're making a gamble.

    I didn't run all your numbers, but at 11%+ interest on your current loan, I can't imagine that your current loan isn't a significant problem to your numbers...

    If it's in the right area, turning it into a STR could work (though, that comes with its own challenges and risks, and the STR market is also getting very difficult right now).

    Can you move into the property, refi into an owner occupant 30 yr fixed, and house hack?

    If the property is in an A or B neighborhood with appreciation potential, house hacking it for a couple years and then holding it as a LTR might be a viable option....

    ...if it's in a D or F area (or even a C-), that's a whole other set of issues to contend with (and you'll want to read up on that topic)...

    Good luck out there!

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  • Turner WrightPro Member
    OP
    Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes
    3y

    Thanks for your reply!  I have decided on converting my 3/1.5 into a 7/3 room-sharing rental with PadSplit.  I have already started construction and hope to have rooms listed by the first of January.  Considering the market right now, as you mentioned, I believe this will be the best option for my situation.  At least, I'll be coming out ahead.  I'll be turning a $1,550/m rental into a $5,600/m rental before PadSplit fees, utilities, etc.  I'll update the BP community on my decision and progress, soon.  Thanks again!

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  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    3y

    @Turner Wright

    just a couple questions for you to think about...

    1 - you may be rock solid on this already, but do local laws allow for both the conversion and the room-sharing?

    2 - are you paying for the rehab with cash? if it appraises low, won't you still have to pay off the HML and have a bunch of cash stuck in it?

    good luck!

    0Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    You can't sell via owner finance, you have to pay off hard money first. I would finish fixing it up, cash out refi, instead of taking a loss keeping it as equity in the home, then sell it via owner finance to recoup the equity stuck in there 

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