Is this deal worth pursuing?

Question

Property value after repairs  $350,000-$360,000

Estimated repairs  ($20,000-$30,000)

Balance of 1st mtg (Everbank)  ($271,985)

Balance of 2nd mtg (HUD)  ($ 24,482)

Cost to cure loans-est  ($13,000)

Est equity  $10,533-$30,533

Puchase:  100% cash

For:  primary residence

Plan:  Offer owner $x ($5k??) (Depending on actual balances)

I am a total newbie.  I was inspired by reading a long thread from @Sam Alpha where he was trying to buy from owner prior to foreclosure.

This is a nice home in a great school district near where I live.  Have been looking for a home such as this to allow us to substantially reduce our housing costs.  Houses sell quickly in this area.

I noticed this house is in preforeclosure and scheduled for auction.  This person has had some problems and got a loan mod on 3/26/14 to $263,601 (but foreclosure notice shows full original loan balance of 271,985).

Some questions:

1) Is this worth pursuing?  No idea if it really needs $20-30k repairs.  Assuming if being foreclosed, some deferred maintenance.  Used one year of interest for est. cost to cure loans.

2)  How do I contact the trustee to find status?  Have name of trustee.  Have name of law firm.  Very difficult to find trustee contact info.

3)  From reading other postings, it sounds like newbies have a hard time buying at auction.  Anybody on BP that is familiar with the Montgomery County TX auction (Spring/The Woodlands)?

4)  Should I pursue a short sale?  It is not an obvious negative equity situation…

Regards,

Carolyn

Joel Owens · Answer

Why would you pay all cash for this??

You are dropping almost 300k on a house to live in. Home mortgages are at all time lows. It would make more sense to save that cash and put 5% down etc. and have mortgage interest write off and invest the money.

Basically if mortgage is in the 3's then you do not have to get much on your money annually investing to make it worth your while.

Example if I have 300k I can invest and get 15 to 20% annually on that money. So why would I then have  a paid off house with dead equity year over year becoming less valuable with inflation??

Now if you have a bunch more money and just want a paid off house that is different.

Carolyn W. · Answer

Wow, I really appreciate everyone's input here.  And thanks for looking at the big picture instead of just answering my questions.

@Scott Weaner/@Joel Owens   I realize that from an investment point of view, tying up $300k in one house does not seem to be maximizing the investment.  But I feel more comfortable with a paid off house, when we do (finally) retire.  So I see the ROI as 6%, non-taxed, based on the fact that I don't have to earn $1500, pay taxes, to get $1000 to pay the  3.5% mortgage.  Not an unreasonable rate for a secure investment that does not require the time, trouble and risk of buying a rental house instead.

But that being said, I would of course rather get 20-30% return instead.  I have owned rental properties in the past and the rents did not keep up with the expenses.  Some of that was due to our high property tax rate.  So I do plan to keep reading BP and learning more.  Who knows, here in the Houston area we may start to get more good deals with the lower oil prices.

@Jean Bolger I made the newbie mistake of including too much information, about cash purchase, age, school district.  Hard to balance enough info/too much.  So to add more information, my dh is 60 but I am younger and we have a 15 yo so schools are critical.  In our area the difference in school districts can affect the price by 50%.  Or more.  And our taxes are around 2.4% so yes, YIKES is right.  No state income tax, but it does increase your annual expenses a lot.

@Brent Coombs Yes, this particular house is appealing to me so that is why I started looking into the whole process.  This is one of those borderline deals for the seller that I don't think he could break even if he sold it with a realtor due to commission/closing costs.  So really, depends on the condition of the house if I would save 10-15% of the market price, so I guess that was my question about whether that was worth pursuing further.  I believe I read on another post that 70% of market price is a good figure to look for...which this is not.  So it could be one that should bought at auction, but I am not (yet!) qualified to do that I don't believe.

So are there any tips on how to find contact info for trustee?  Do people just become familiar with the trustees in their area, and just know that information?

Brent Coombs · Answer

Looks like you are less interested in a "deal", but more interested in this particular home?

On the surface, it just looks like you will be paying fair market value as-is for your own personal residence, so your emotions may get in the way of whether it is a good "deal" or not.  Your choice.  Cheers...

Jean Bolger · Answer

There's a lot of parts to this! You're getting some good advice- even though some of it may contradict. It's all stuff to think about, and you just need to figure what works for you at this point in your life. Speaking of which- why is a good school district important to you if you are 60ish and looking to reduce your living expenses? And $7200/yr in taxes on a 350k house? J-Christ-on-a bike, that takes my breath away (but I don't live in TX, maybe that's normal there)

Anyway- my point (and I do have one, lol) is that I think you would benefit by narrowing down what exactly you are trying to achieve. A house in a great school district is usually a good investment. It's good for a family with kids, it's good for a rental to families with kids, and it is good for resale value to families with kids. But if your primary concern is reducing your expenses as you near retirement them that factor is really not very important at all.

Being debt free is awesome- having experienced it for a short time I can tell you it is (initially at least) exhilarating. But having income from your wealth rather than sitting on equity is also awesome - it didn't take me long before I wanted to pull that equity and put it to work.

Anyway, you've got some food for thought here- good luck!

Jay Hinrichs · Answer

@Joel Owens

she could always go down the reverse mortgage route.. I know as I get older and having been one who has leveraged for 40 years I want to pay my home off and will in the next 36 months and it has a 7 figure value..  and at that point I am completely debt free.. as we get older there is just something to be said about no debt whatsoever.  All though I always know I can throw a LOC on it any time want with my commercial bank if I need to pull some cash for a screaming deal   LOL... and I am sure that will happen

Joel Owens · Answer

"totally see your point about paying cash versus financing, but we are 60ish and it seems prudent to pay cash for the next house."

The house is a non-generating asset.

So you are retired but yet you can have an investment that throws off 60,000 a year by investing your original 300k cash. You have equity and then the income stream each year. With increased annual rents you keep up with inflation.

That versus a paid off house where the money is deflating in value year over year. An emergency happens and you take out a reverse mortgage on the house. Before you know it the money is gone and now you have large mortgage payment with no money coming in.

It's all about the residuals meaning your investment throws off way more than your cost of living. Whether you get sick, can't work, etc. then the money still comes rolling in.

If you have 2 to 3 million then paying off a house might make sense for your peace of mind. If it's instead that you have 300k to spend and the house is paid off and with social security or other retirement you eek by then I would think about if I want to do that or not.

I get it that people want peace of mind but I think that comes more from a recurring income stream.

Can you imagine having 100k,200k, 500k a year coming in from investments and you only live off of 70k?? The rest you keep buying each year and rolling the money and assets upward. I am 40 now. I am not planning on social security or a paid off house to be my nest egg. I am planning on monster cash flow from my investments.

Carolyn W. · Answer

I totally see your point about paying cash versus financing, but we are 60ish and it seems prudent to pay cash for the next house.  That is actually why we are looking for a less expensive house, so we can pay cash...in our area $300k is "a less expensive house" although the property taxes will still be $7200/yr.

Is this deal worth pursuing?

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