Need advice on 2.5/1 in college town / student rental area

17 Replies

Hello friends,

Please see the investment summary at the bottom of this long post.

I just got off the phone with an owner who NEEDS to sell no later than December to avoid paying taxes. He has no income and has just inherited the house from a relative who recently passed away. So the owner is mourning right now so I need to be sensitive to that. I have an appointment to walk the house at 1:30 PST.

My real estate agent did a market analysis and says that the property is worth around $190,000 in market ready condition, which this property definitely is not. There are no mortgages or encumbrances on the house. He owns it free and clear.

The house was built in 1914. The plumbing is pretty much busted. The owner is getting water from the neighbor's hose. The water heater will need to be replaced.

The owner tells me that the house is otherwise structurally sound with no cracks in the foundation. Of course, I'll ask my contractor to go in and check all of that out.

The next door neighbor is an investor who owns a lot of property and has already offered the owner $65,000 and has told the owner that he will help him with a new place to rent, something which he desperately needs. Since this investor has other properties, it seems to be within his power to offer. Maybe you guys have some idea of how he is going to do this.

I asked the owner if money was no object, how much does he want for the property. He said $75,000. I also asked him what he would like and he would like to be able to get a place of his own with some room for his dog to run in.

I estimate that it will cost somewhere in the neighborhood of $30,000 to get this place market ready, if not a bit more. I'd like to add a second bath if I could.

I told him that I would give him both cash and term offers today after walking the house. 

So here's my question:

What terms can I offer him that will give him cash and some cash flow to pay rent or buy another place where he and his dog (Jedi) can have a good life. His dog is named "Jedi" and I told him I'd throw in free tickets to the star wars movie in November if we do the deal. He laughed. He liked that a lot.

Acquisition Options:

1. All cash - $75,000 and help him get a place. I'll need a cash buyer since I won't have the cash.

2. Lease option sandwich - Give him a cash flow for 3 years, enough for a new place, and cash in 3 years. I'll need a partner, private or hard money to invest in the repairs.

3. 100% Seller financing. I'll need a partner, private or hard money to invest in the repairs.

4. YOUR IDEA :)

5. YOUR IDEA 

6. ...

Deal Summary

  • $190,000 ARV
  • Free and Clear
  • $30,000+ Repair Costs
  • Owner wants at least $75,000.
  • Owner needs money (he has no job) for a new place
  • Owner wants room for his dog

Thank you all for your help!

Dave

How quickly do you think you can get it up and renting vs. a straight sell?  College towns are great for rentals, since college kids will pay apartment rent for a room as long as the commute is short.

Let me know how it goes.

@Justin Fernandez,

That's a good question. I'll need to get my contractor in there to make sure that the house is reparable. If it is, 2 months (on the outside) wouldn't be out of the question.

@Dave Hall I would be curious how you came up with your 30,000 plus reno budget. My guess is you will need to go pretty deep on this reno from the sound of things, all new plumbing, all new electrical, more than likely new just about everything. Of course IF (and its a big if) your ARV number is 190,000. Depending on what you plan to do with this property you have some room to play with. 190,000 *.7 = 133,000 - (Rehab, holding costs, and closing costs) = 75,000 (what your seller wants + tickets to see star wars) Which means you have around 58,000 to play with for all of your unknown costs if you are sticking to a standard flip formula.

Do you know what you want to do with the property? Flip, rent?

If you could do seller financing on a limited term, meaning small down payment (so he can get a new place to rent) with cash flow to him as payments while the rehab is going and then either sell or conventional refi to pay him off so he could get the lump sum payment and be happy (to cover his future rent payments wherever he might be) would be the best and least out of pocket expense for you and seems like it would solve the owners problem.

It seems like the other investor has the fast track because he has other properties. What I would do is get your agent to print out 5 strong places for the owner to live in, that will buy you some time. In the meantime I would be hunting for HML's that can get you the cash FAST. Look for one that can fund all of the rehab. Most likely you will need about 20%, which isn't much on a cheap property like this. Make some phone calls to family and friends and offer then 6-8%.

Always budget more for older homes as once the rehab starts there are ALWAYS surprises. PM me or call me if you need any help. Good Luck!

Originally posted by @Chris Vail :

@Dave Hall I would be curious how you came up with your 30,000 plus reno budget. My guess is you will need to go pretty deep on this reno from the sound of things, all new plumbing, all new electrical, more than likely new just about everything. Of course IF (and its a big if) your ARV number is 190,000. Depending on what you plan to do with this property you have some room to play with. 190,000 *.7 = 133,000 - (Rehab, holding costs, and closing costs) = 75,000 (what your seller wants + tickets to see star wars) Which means you have around 58,000 to play with for all of your unknown costs if you are sticking to a standard flip formula.

Do you know what you want to do with the property? Flip, rent?

If you could do seller financing on a limited term, meaning small down payment (so he can get a new place to rent) with cash flow to him as payments while the rehab is going and then either sell or conventional refi to pay him off so he could get the lump sum payment and be happy (to cover his future rent payments wherever he might be) would be the best and least out of pocket expense for you and seems like it would solve the owners problem.

 Hey Chris,

Thanks for the advice.

I could be way off on the reno estimates. I'm using $25/sf on 1300 sf.

I'd like to rent if I could but a flip will work as well. I want to make sure the owner has a place to stay or the deal won't work.

Your last strategy is a good one. I'll ask him how much cash he thinks he'll need to get into a new place. I've already started calling around to see if I can find him a place.

Originally posted by @Chase Maher :

It seems like the other investor has the fast track because he has other properties. What I would do is get your agent to print out 5 strong places for the owner to live in, that will buy you some time. In the meantime I would be hunting for HML's that can get you the cash FAST. Look for one that can fund all of the rehab. Most likely you will need about 20%, which isn't much on a cheap property like this. Make some phone calls to family and friends and offer then 6-8%.

Always budget more for older homes as once the rehab starts there are ALWAYS surprises. PM me or call me if you need any help. Good Luck!

 Hey Chase,

The other investor will likely get the deal if I can't somehow sweeten it for the owner. 

Thanks for the advice on lending. It would help to get that squared away.

If you were fixed up in price right how fast would it sell? In Another words how good is the location?

I consider 30,000 a minor rehab

I often do joint ventures with the seller on a minor rehab

Investorr offer .7 x190 = 133k

30 In repairs 133 - 30 = 103k net to seller from Webuyhouses guys

------------

JV with seller

19k costs to sell commissions closing costs wiggle room

30k rehab loan Priv lender

3k interest

------

52k costs

10k jv fee

62,000 total

-----

-62 k + 190k = 148k note to seller after the house is fixed listed and resold, no payments for moratorium on private loan for 4 months

You make $10,000 without doing Hard money

Seller nets more money....Like 40,000 more

@Brian Gibbons

Thanks Brian,

That's a great approach. I need to make sure my rehab estimate is correct, but even if I'm off quite a bit, it looks like I can still structure a joint venture like this and he'll still get more money. I love the idea of giving the seller more and not just shafting him with a low ball offer. 

@Dave Hall just an aside - in the city when we really needed to "help" someone get out of a place, instead of giving them cash flow to go rent a place, we would RENT THEM the place for whatever the agreed upon time was. Now people here will probably jump down my throat about liability, whatever, whatever, but we got people out that NO ONE could get out. Spend an hour looking at apartments, take him in YOUR CAR (it goes a long way) and go visit each apartment. When he finds the one he likes, call the landlord and negotiate. You pay 6-12 months UP FRONT (if you have the money) and sign a long term lease (2 years, 3 years, whatever your seller wants). Then the kicker, rent a moving truck and pay two guys $150 each to move his stuff. He will sell you the house and brag to everyone about how awesome you were. Successfully done this 50+ times (and was compensated very well for finally getting a tenant out).

@Dave Hall I will bet money that the rehab costs more than 30k based on the age of the house unless you act as the contractor. If he gets 75k cash why cant he just go out and find and or rent a house? If he is working, he can get his own loan plus cash. There is still a good spead so now it just depends if you want to flip it right away for the cash or rent it it out for future equity. I have recently found a couple hard money lenders that only need 10% into the deal so that is one way to fund the transaction. If you don't have the 10% ask the seller to carry back a 2nd for 6 months or a year. If it is really worth 190k, you should be able to sell it within 2 months after rehab.  This is CA. things are selling fast if priced right.

9162612381
Originally posted by @Travis Lloyd :

@Dave Hall just an aside - in the city when we really needed to "help" someone get out of a place, instead of giving them cash flow to go rent a place, we would RENT THEM the place for whatever the agreed upon time was. Now people here will probably jump down my throat about liability, whatever, whatever, but we got people out that NO ONE could get out. Spend an hour looking at apartments, take him in YOUR CAR (it goes a long way) and go visit each apartment. When he finds the one he likes, call the landlord and negotiate. You pay 6-12 months UP FRONT (if you have the money) and sign a long term lease (2 years, 3 years, whatever your seller wants). Then the kicker, rent a moving truck and pay two guys $150 each to move his stuff. He will sell you the house and brag to everyone about how awesome you were. Successfully done this 50+ times (and was compensated very well for finally getting a tenant out).

 Great idea Travis. I've already begun looking for a rental in the area that he wants to live in. If I get private money for the deal, maybe I can get enough to cover the rental. The guy in the house is actually the owner and not a tenant, but it can essentially work the same way. He inherited this property and really has no money except for what he can get out of this deal.

Originally posted by @Gordon Cuffe:

@Dave HallI will bet money that the rehab costs more than 30k based on the age of the house unless you act as the contractor. If he gets 75k cash why cant he just go out and find and or rent a house? If he is working, he can get his own loan plus cash. There is still a good spead so now it just depends if you want to flip it right away for the cash or rent it it out for future equity. I have recently found a couple hard money lenders that only need 10% into the deal so that is one way to fund the transaction. If you don't have the 10% ask the seller to carry back a 2nd for 6 months or a year. If it is really worth 190k, you should be able to sell it within 2 months after rehab.  This is CA. things are selling fast if priced right.

 Hey Gordon,

You are absolutely right. I went by there about an hour ago and was blown away by how disgusting the place was. Structurally the house looks sound, but there is a lot of work to be done and the owner is a hoarder. The place was a mess, piled high with urine soaked trash, cobwebs everywhere. The neighborhood is great and the houses on either side are nice. It's just his place. He just hasn't tried to do anything with it at all. 

My contractor will give me some better numbers in the next day or so, but I would guess closer to $60,000. That's why the original offer he got was so low - $65,000. I still think there is plenty of room to make money on this.

I gave the owner until Saturday at 2pm to think over my cash or terms offers. If he accepts, I'll put it under contract and check the house out more thoroughly. I just don't know if my contractor is going to be able to assess the property solely because he won't be able to access anything. I'ver personally never been in house that cluttered. I've seen them on tv but this was really ridiculous.

Originally posted by @Chris Vail :

@Dave Hall

 here is a bad looking home that turned out fantastic, this thread is a great read if you have the time. Cat-Litter-House

 Hey Chris,

I read the whole post. Learned a lot. Thanks!

The house I'm looking at is quite a bit smaller but looks about the same - cobwebs, piles and piles of junk. I couldn't see the whole house because most of it was blocked off by walls of garbage. I should have taken pictures but I just met the owner and I didn't want to spook him. I'll see if I can get pictures tomorrow.

Hello everyone,

Thanks for all of your advice on this deal. I'm waiting to hear back from the owner on my offers. Both Brian and Chase suggested a joint venture and that's the direction I'm planning to go in.

So to do this, do I need to create an LLC for the property and deed the house to the LLC or do I just need a JV Agreement or both? Does anyone have a good JV Agreement I could use for this?

What documents do you think I'll need to safely do the deal. I read in the Cat-Litter-House thread provided by Chris Vail about a "Release of Possession" for all of the stuff on and in the property. The owner has quite a bit including art, stuffed animals with cash inside them (he said his mother would stash cash in the stuffed animals and he wants to find these for himself, of course), bikes, large construction ladders, and other junk. I don't care about the stuffed animals, but I don't want to take a long time to sort through the junk just so he can find these things. I'm positive he doesn't want to deal with all of this stuff. He just wants the cash. How would you handle this?

Obviously I don't want to invest a dime in this property until I control it, so I would like to know what documents I should use to establish that control?

Here are the numbers as I see them now:


ARV - $190,000

Hard Money Loan for repairs only -  $60,000 ($50K Loan + points, interest, etc.)

2nd Mortgage to owner @ 20% of Hard Money Loan - $10,000 (skin in the game)

Housing the owner for 6 months - $6,000

Sale, Closing Costs, Holding Costs, Wiggle - $20,000

JV Fee - $10,000

$190000 - $60,000 - $10,000 (JV fee) - $6,000 - $20,000 = $94,000 (which includes his money for the second mortgage)

So instead of a $65,000 cash offer from the investor, the owner waits 4 to 6 months and gets $29,000 more. So even if the ARV is off by $20,000, which I doubt, he should still get at least $74,000.

My biggest concern is spending money on the cleanup just so I can inspect the house and find out that the deal is not doable because of some severe problem. Thoughts? Should I move forward or is this deal too risky for my first one? 

Why don't you get a partner to help you with your first deal?

Bump up your profit to 20,000 and split it.

Have your partner contribute to maybe getting one of those storage pods are couple of storage pods out in the front to fill with all their possessions while you do the rehab.

Do the inspection and give them perhaps less money if the repairs are X and more money if the repairs are Y

Figure out the cost of leasing the storage pods and the labor to get all their crap in them but you can do the rehab

Have your partner contribute that money

Thanks Brian,

I just got off the phone and it looks like someone made him a better offer. I appreciate you and everyone else here taking the time.

Dave