Which method should I use?

Question

Hello All, I currently have an offer in on a single family home that has been repossessed. The offer is 45,000 and that is what they are asking. The property sold three years ago for 90000 and around 96000 five or six years before that. The house would need about 5,000 to have it be a rental and around 10,000 for a flip. I already know I can get a traditional 30 year mortgage on the property with 20% down around a 4% interest rate. My question is: Should I use this method or does someone have a suggestion of a way to keep  the 20% in my pocket? I've seen some things on HML's and just wondered what other options are out there or what someone with more expertise would do in this situation. Any advice is greatly appreciated.

J Scott · Answer

You haven't told us how much the house is worth -- all you've told us is what it sold for years ago.  That information is absolutely meaningless.

Do a comp analysis and determine what the actual after-repair-value of the property.  And have a good general contractor walk through and give you a bid on the renovation work.  I've done many dozens of rehabs, and have never rehabbed a house for $10K or less -- I'm not saying it isn't possible, I just don't tend to find houses that can get to their ARV with that little investment.

Terry Hershberger · Answer

20% down, 30 yr. mortgage at 4% is a great deal if the property cash flows! Not much thinking needed for that one. Good job!

Ronnie Sparrow · Answer

Nate,  you have lots of good advice here on this forum but ultimately it is your decision.  You need to determine what your long term goal is and then work backwards from there.  If you want to be a landlord and your long term goal is cash flow then this deal is a buy and hold.  Having said that you need to run the numbers. What are the taxes, insurance and HOA fees. Just run the numbers and see what the cash flow would be.  Know what your minimum cash flow you would accept.  I would try and use the least amount of your own money on any deal.

If you need quick cash now then wholesale it.  This is pretty simple and quick cash for you. You could probably make a quick 5k on it.

Hope this helps.

Will Barnard · Answer

OK Nate, based on that follow up info, let's go with the .$90k value. As far as a rental, $800 in rents and I could not see paying more than $60k for that and that would really be pushing it. ($60k would include purchase plus rehab). So if you sell to a holder, keep that in mind.

For a rehabber, if the exit is $90k, then I personally would use the 65% rule since the exit is below $100k, so $58.5k less repairs of $10k and my max offer as a rehabber would be $48.5k. Now subtract out your wholesale fee and that is your max offer.

Nate Downs · Answer

There are two comparable properties that have sold within the last year from 90-100,000. Two of my are within a half mile of this property and not as big. They rent for 650 and 700 a month. Judging from other advertisements from houses this size and calling some property management companies I don't think it would be a problem getting 750 maybe 800. There is also a shortage of rental houses in this town at the moment so big plus. Really appreciate all the feedback so far.

Will Barnard · Answer

I was just about to comment on the fact that the first post makes no mention of the "current market value" and then saw that Jason stated just that. All of the responses are based on previous value mentions thus, may not be applicable other than Bills point that lining up 30 year financing upfront as opposed to refi another loan later.

What is the current market value and what is the current market rent in the vent this becomes a buy and hold or wholesale to a buy and holder? Then we can move forward with discussions.

Bill Gulley · Answer

Getting private or hard money is going to cost you, so will a refi and refis are under different rules than purchase money loans. I suggest you get the 30 year in the beginning, use those refinancing loan costs to reduce the costs of repairs. And if you aren't holding this, Bryan's suggestion will give you the best ROI! :)

Ronnie Sparrow · Answer

Wow Nate sounds you've got a great deal on your hands.  With the numbers that you have shared sounds like a keeper.  My suggestion to find private money for the purchase and rehab and then refinance with a 30 year note at 4% just like you described.  If you cant find private money then hard money will work.  Either way try to use the least amount of your own money on this deal.  With hard money it should be no money out of your pocket.

Nate Downs · Answer

Thanks Justin. I will crunch some more numbers.

Which method should I use?

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