SFH Analysis

12 Replies

Happy Friday, everyone!

I'm dying to get started in real estate investing. I'm trying to analyze multiple deals every week to get better with numbers. I would also like to increase my presence here on BP to learn, and give back in return.

Yesterday I found a foreclosure on the MLS. Its a Fannie Mae property and has been listed for about 2 weeks. The current price is $109,900. Its a 3/1, 1800 SQ FT, 1974 ranch.

I try to analyze each deal as if money isn't a factor, so I'll talk about the entry/exit strategies first, then financing.

My realtor told me he's been in the house and it needs a little bit of work. It would need HVAC for sure. He mentioned there's a moisture issue in the basement which could be due to a grading issue. He thinks that the house in "tip top shape" would go for around $123k.

Lets also say I added an HVAC system ($10k?) and had other repairs (maybe up to 10k? contingency)

So, 70% of ARV = (used $115k for conservative) = $80.5k - 20k for HVAC and other repairs = $60 purchase.

Is it crazy to think that I could get this house for $60k?

Financing

My wife and I don't have a lot of money to get started. We have 1, and possibly 2 investors that are willing to work with us. Investor 1 has committed $50k at 8%. Investor 2 MIGHT commit $40-50k at 12% (high rate I know, but its an option). My pitch to both of them is to borrow the money in full, and I will pay all of the interest up front, with a balloon payment at the end of whatever term we decide for each deal.

My long term strategy is to hold rentals, but I understand that some properties may not be feasible and I may look to flip opportunities to increase my startup capital.

With above property, if I were able to acquire and do said repairs, and refi, I could possibly be into the property for $80-85k. With a $115k appraisal, I would be able to get a refi of $92k @ 5% (~$500/month). Paying the investors back would leave me with $7-12k in pocket. 

The downside to this is that I don't think the house would bring enough rent to make it work well.

Assumed rent = $750 x 12 = 9000 minus 500 for insurance - 1100 taxes = 7400 NOI minus 6000 for DS = $1400 CF.

The cashflow doesn't seem to be very substantial but maybe that's all I'll get just starting out? The 7-12k from the refi makes me feel more comfortable as far as an emergency fund, but at the same time, an unnoticed issue with the house could eat all of that up. 

What are your thoughts on this rental analysis?

If I were to flip and sell for $115k, I would profit $30-35k, minus closing costs...I think.

Would I be crazy to combine funds from both investors to tackle this? If I borrowed [email protected]% and [email protected]%, I would be 8800 out of pocket, just for acquisition. It would be nice if I could structure so that I didn't have anything out of pocket to start with though.

Thanks in advance for your time and advice!

-Andrew

@James Weikel

Honestly James none of these numbers look to attractive to me.. As far as the purchase price please do not ask yourself "am I crazy for submitting an offer".. all you can do is run your numbers that make sense for you as an investor and submit the best offer you can. If 60k makes sense for you then submit it. 

As far as the rental numbers I don't see where you factored in for CapEx, property management (even if you are just going to do it yourself it is good to factor it in), repairs, vacancies, and such... If you factor all this in then you would have negative cash flow. Especially over the years.

Thanks for the response, @Micah Copeland .

Just an update, I looked at the property this weekend and it looks pretty good. Does need a few high cost items such as HVAC (8k), tie to sewer (2k). Other than that I would just be updating the house. I've put together a $25k estimate (including the above items.) 

Something that is a concern for me, and I would really appreciate some input on, is that there is a decent sized horizontal crack in the basement foundation. The crack runs along the mortor joint and has a laterial shift of about 1/2" at the worst spot. There is a letter from an engineer that states that the crack is fine, so in that case, I would just plan to correct it cosmetically. There was a little puddle of water on the floor, which I assume had come through the foundation, which concerns me. I've contacted a foundation repair company to get another opinion. There is a sump pump in the basement.

Any thoughts/opinions/experiences with this?

One of my two investors has backed out on the deal, as the return isn't as high as what he would like to see. 

If I can get another investor, I would like to place an offer of 70k on the house, and after the rehab be in for around 95-100k, then resell for 125-135k.

Thoughts?

Thanks,

Andrew

James, I'm certainly not the most experienced investor here but I think I would pass on that house. In my experience that basement problem is serious just based on what I see here, especially if you want to resell that house. A tenant may or may not be willing to accept a wet basement with a cracked wall but it sure won't help you get a higher rent. I think your offer should be around 45k. If you're relatively certain that wouldn't be accepted, I think you should look for a better deal.

These days I will not make an offer on any house that has foundation issues. Despite the fact that I've had contractors tell me that such issues can be fixed easily and economically, my experience has been it always entails more than you originally thought.

Maybe I should share a bit more on my thought process. As far as the foundation wall, I've seen various methods like wall anchors etc. and I haven't yet seen any system that I would say is satisfactory. What I've seen is that they fail to hold the wall where it is (let alone straighten it) and they will move right along with the failing wall. I think that wall will have to be dug from the outside and replaced, and the outside pressure from the soil minimized by eliminating water (footer tile) and back filling with gravel. 

Also I think that water in the picture is coming up from the joint between the floor and the wall. This will require a perimeter tile inside the foundation walls at the footer, probably draining into the sump. Meaning the floor will have to be cut and partially removed and a trench dug all around the basement on the inside to install the drain tile. This in addition to a drain tile outside the foundation walls at the footer. 

I think this is the only way to address these issues and be sure there will not still be problems. Of course all of what I'm saying will be costly to do.

Now, I keep saying things like "I think" and "in my opinion" because I'm not an expert by any stretch and it is possible there are more cost effective ways to successfully solve these issues. But I've dealt with such things several times over the years and that's where my advice comes from.

@Donald Crockett - thanks for the feedback!

I can definitely see what you are saying.

This house wouldn't bring enough rent to justify a rental. Would have to flip it if anything.

No such thing as crazy! I offered a credit union $5700.00 for the release of $38000.00 home equity loan balance and they accepted it in less than 12 hours! The only thing crazy is not asking and I guarantee if you never ask they will never agree.

Check the taxes if they are late or have been late I would go in with an offer to the bank of 40-50 and tell them the condition of the house and expected repairs support that price.

James,

Am I missing something here?  Do you have intel that you have chance to get this at your theoretical 60k? Or 70k?

They are asking 109k and your ARV is, according to your realtor, 123k.

That isn't anywhere near the spread an investor needs to make a profit.  Unless you have behind the scenes info, the liklihood of a deal here isn't worth the time you're investing trying to figure it all out (unless you're just doing this for mental exercise that is).

I suggest you come up with some sort of threshold/prelim test to filter out these type of situations and focus your time on properties that are more profitable and more likely to be sold at the price you need.

Time is your most valuable asset.  Finding deals is hard work.  You don't need to make it harder by spending time/effort on situations like these. 

as @Robert G. said you dont have a good enough spread to make much on this deal 
run the numbers and make the offer according to the numbers 
you may have to fix the foundation to refinance house 
 @James Weikel
find out who the engineer did the inspection for and said that crack was not a problem
i dont know that there would be an engineer in the world that would tell you that crack was not a problem if they were telling the truth
please do not listen to a realtor to come up with a arv especially if it is the listing agent
call several different ones and get their opinion 
also if 60 is what the numbers tell you to offer then that is what you offer 
good luck

look forward to talking at next months meetup

If I had such a letter I would be sure it was wet stamped by the engineer. The stamp would have his license number on it and you can look up his license standing with the state. Trust but verify.

The house went under contract last night with a "first look" buyer.

I really appreciate everyone's input and advice on this. It was definitely a learning experience!

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