Should I pull the trigger on this deal.

Question

All,

I came across an opportunity that has the following numbers.  I am trying to figure out if I should pull the trigger.

Neighborhood: C+/C

Asking Price: $40,000

Monthly Rent: $800

Last year's taxes was $851

Annual NOI: $5,229 (10% reserve, 8.33% vacancy, 10% management fee, $800 insurance)

So, everything looks good at this point.  There is one concern i have.  The county's tax assessment is $32,000 for the property.  I understand that i am paying for the cash flow so i shouldn't look at the assessment value.  Somehow, I am having trouble reconcile the number in my head.  Should I give too much weight on the county assessed price?

The reason this came up is because the bank i am working with only lends on the the lower of purchase price or county assessment, like most banks.  So i can only borrow 75% of $32k.

This gets me an unlevered return of 13% and a leveraged return of 23%

Should I pull the trigger?

Byron Bohlsen · Answer

I haven't heard of a bank using a county assessment for a purchase loan. Are you thinking of an appraisal?

That said county assessments almost never match market value. The county assessment is off by 60k on a place i just bought and its not a super spendy home.

James Zhang · Answer

The bank does lend an appraised value.  But apparently they are willing to lend on the county's assessment which means the borrower doesn't need to get an appraisal

Jonathan Towell · Answer

You might ask a realtor friend to run a quick CMA (comp) on the property.

But, let's assume the tax appraisal is accurate. Every bank we've encountered is going to want 15-25% down on the sale price, regardless of the appraisal. There are strategies to get around this: seller finance, pledge another asset as equity, lease-to-own, etc. I have not read it but Brandon Turner's book looks like a good resource:

http://get.biggerpockets.com/nomoneydown/

I did read this one and it was pretty good:

http://smile.amazon.com/Nothing-Down-2000s-Dynamic...

That said we only do deals where the exit strategy is clear. On single family homes, our exit strategy is sale to owner occupants. If we buy a house for $40k that appraises at $40k, then we have no way to exit the deal without taking a loss. It doesn't matter the cash flow. If something happens, we need to be able to sell the property immediately, pay a realtor, pay closing fees, and not take a loss.

Should you buy the house? I'd recommend getting the CMA. If the sale price is over 10% less than the CMA, then you have an exit, which is the first strong signal that the deal is worth considering.