I need advice

11 Replies

So I have a family member that wants to sell me a house. I'm not real sure if it's a good deal or not ( well or worth the hassle ). Family members inheritated a house in Austin tx that is in pretty rough shape. They got it appraised at 240k, but  which is on the low end of comps in the area. But there are things that I know it needs that the appraiser didn't see. I think I might could get it for closer to 200k I think that if I put 70- 80k in the rehab it would have an AVR of around 370k.  I would ideally want to hold it and make a rental out of it.I have some emotional attachment to the property so I'm not sure it is clouding my judgement. The numbers are attractive but I'm feeling very unsure about it. Also having to deal with family is a pain. Any thought would be very helpful. Thanks

How much rent could you get?  Are you going to manage it yourself?

Assuming you buy for $200K with a conventional loan, 20% down, 4.5% for 30 years and pay the rehab costs of $80K out of pocket, I'd want to see rents around $2800 a month.  That gives me about a 10% cash on cash return, and there's a lot of cash in this deal.  $40K for the down payment and another $80K for rehab.

Now, there may be a speculative element here, too.  I put break even rents around $1250 assuming self management.  If you think values will continue to rise this may be OK.  But values can go down, too.

At some point you might be able to do a refi and get some of the cash back.

@James L.  

based solely on what you arrived at as far as valuations and possible purchase price, it sounds like it may have great potential. However, investing is purely a numbers game...emotions can skew your thought process and override your logic, so don't let it happen.

I'm just on the south side of Austin if I can be of any help...just reach out to me.

I don't like to mix business with family, personally. That being said it if you going to have to deal with it, it should be a GREAT deal. 

@ guy giminez  I agree with taking emotion out of it which is why I thought I would bounce it off some people who didn't have a stake it. And I'm sorry Jon the rents in Austin are pretty high right now. I believe from the numbers I've seen in town and depending on how nice  I make it . I could safely pull 2400 a month in rent. The area is near downtown, I've seen some places that size going for 3k a month. My plan would be to try and get it at 200k and do a 203k loan for the rehab so I would only be out of pocket 60k. It's in an area that has appreciated  120% in the past 6 years. So yeah I guess some speculation is involved but I feel it's  supported.

@James L.  

203K's are a real pain, so have your patience well stored up. Would the other heirs allow you to O.F. the place for a year or so with a respectable down payment? You may want to negotiate price first, then offer them a tad bit more if they'll O.F. 

Just a thought.

I don't know Guy. It's a complicated deal my mom and half sister are the owners. My sister needs out so she can afford a nicer house that needs less work. Mom doesn't know what she wants but is approaching retirement in the next 6 months. Part of me thinks any kind of long term deal would only cause problems. If it was only one of them involved it would be easier to solve there underlying problem and work a deal, ( like sub2 or O.F. )but there wants and needs are different. They only owe 45k on the property. I might could convince them to do a carry back on it. Use my cash to rehab, then refi in a year.

Why not JV with the family members? Okay, hundreds of reasons, but read on anyway. They can own the home, you can manage the repairs, and when the repairs are done, sell it and split the profits. Agree on a value of the house, and a strict budget for the rehab, and then a fair split of the profits.

I'd probably set up an LLC with your family members as partners. Talk to an attorney to get the particulars figured out. Dan Castro is a good one in Austin, and is the attorney I used to set up my LLC.

Also consider who pays for a loss.  It's a hard truth, but we always have to consider at some point stopping the bleeding and getting a place sold.  Without a mortgage or hard money, the carrying costs are much lower, but you should still consider the possibility that you'll need to get your cash from the rehab back.

$70k is a lot for a rehab in a neighborhood where you can get a house for 3x that. Get a Realtor to do a desktop CMA for you, without giving them your $370k target. You're going to need an honest and reality based comp profile.

I think the bottom line is you need to find out what each of the heirs need, then you'll know how to proceed. I can think of at least a half dozen ways to structure a deal like this but  until you know what the heir's real needs are, we can only speculate on available options.  

Sounds like your mom is living there....how about a home equity loan or HELOC to buy out the other party and then you guys work a deal from there. If the house is in rough shape and they sell, it will likely have to go to an investor...so someone needs to get it in retail shape.-- you guys or the buyer.

Should you help your mom get it in shape to sell or buy it yourself for a rental?  

buying pros: leverage, possibility of owner finance, get discount because no realtor and flexible,  & possibly do the exterior repairs etc while your mom lives there (no holding costs).

your question on clouded judgement might be cleared by 1 Is the location good enough to attract quality renters when the cycle turns and 2 do I have time and is this how I want to spend time? 

So here's an update, the family now really wants me to buy the house. They had it re appraised at 280k, they re on board with doing a refi for 250k. They would take the cash and run then doing a sub 2 to me. That means I wouldn't have a down payment and would just have to cover the rehab. It's located in the Windsor park area near muller. Arv's are now 400k. Should I decline? Or run with it. I've been told that I could probably get 2200 a month in rent which is break even.  @ guy giminez

I agree -if you can separate out your emotions from the numbers--go for it. 

if not,your thinking may be too clouded to make intelligent decisions in order to profit .

when it comes to money , it's all about the numbers. period. 

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