Do the numbers work?

Question

Hello BP,

So I have been putting the foot miles in recently in my attempt to find real estate opportunities before they hit the MLS (or become foreclosed).

I have tracked down the owner of a 1,100 sqft cottage in my area, she had inherited the property after her mother passed away. She said she wanted $170k for the house but that was just shy of the ARV of the house, and this house was not move in ready.

After a thorough walk-through I estimated my rehab bill to be about $60k. This was including a $25k estimate that she had received for a mold problem in the basement.

So my original offer was $90k for the house seeing comps being sold for $185k in the area.

She rejected my offer because she owed more on the house than what I had offered. Me being slightly naive, I ASSumed she owned the property free and clear because her mother owned it since the 70's. However, a recent refinance for a renovation in the back left them with a $149k mortgage to deal with.

The owner says that she wants out of the house at $149k (being that is what she owes). I do not see the numbers working if I were to purchase at that price.

My initial intentions were to buy and flip, would a buy and hold be a plausible option if I were to take over the mortgage?

Any advice is greatly appreciated!

-Justin

Gilbert Dominguez · Answer

If the numbers tell you there is not deal there there is not deal to be made that makes sense. Remember the numbers don't lie. You just cannot turn every frog into a prince , period. Leave it and move on to a real deal that will be beneficial to you rather than trying to ears on this one down so it looks like a bunny. It is a donkey and cannot be anything other than what it is. Walk away.

Justin Insley · Answer

@Lance Wakefield @Christopher Brainard You both said exactly what I expected. Just wanted to spit the numbers out on here to double check before I move on.

Even if the numbers were more in my favor, the mold issue altogether was a turn off for a amateur like myself.

Thanks again guys and until next time.

-Justin

Lance Wakefield · Answer

Sounds like there is no deal at all here to me. The mold problem would have to be taken care of before tenants could move in or before it could be sold to a conventional buyer.  If you "subject to" the property you still have to come out of pocket 25k for the mold removal at a very minimum (assuming the rest of the house is livable). Putting that kind of money into the property you may as well put 25k down on a fully renovated property for 185k and have no problems to deal with.

With purchase at 149 and mold at 25 you're sitting at 174

If you sell for 185 less 8% for closing costs you are only left with about 170k AND you still haven't done the rehab or cleared a profit.

Bottom line turn and run the other way.

Christopher Brainard · Answer

149k + 60k = $209k + Holding Costs + Sale Costs = $220-230k

House is worth ~170 ARV according to your assessment.

Has mold, so you can't even rent it until remediation is complete.

The question is, do you want to pay her $50k to buy her house from her?

I believe you already have the correct answer - no way would I consider purchasing this problem.

-Christopher