Another bad deal.... but help me learn how it could be a good one

Real Estate Deal Analysis & Advice
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Another bad deal.... but help me learn how it could be a good one

Brandon Heath
San Diego, CA · Member since 2014 · 78 posts · 10 votes

Alright, I really thought I found a good deal but after running some numbers turns out it's not even close! Like way off (i'm still very new so if you laugh just try not to choke). Here we go...

So I found this deal on the zillow and was curious because its being sold by the owner and they state right up front that they do not want to be contacted by any agents. They are selling a duplex in a pretty good area. 

$429,000

Both units are 2 beds 1 bath. 

They currently get $1300 each side

One of the units needs a little "work".

Would like to use an FHA loan putting 3.5% down

I would live in one unit as owner occupant 

I called the owners to see why they are selling. Turns out they are an older retired couple who live on the other side of the county and are selling off their units that are not close.

So I ran it through the rental calculator and mentally cursed a few times. In order for this deal to work I would need them to sell it for like $350k 

I know I should be looking for off market deals and not Zillow. I also know that I live in a little place called San Diego and its not so cheap. 

Is the only option to either put 20% down or put in a super low offer and pray? 

And before 14 people come in and say "you really should try to invest out of state" I would be living in one unit. So either I continue throwing large amounts rent money down the drain or I try to make a smart move and invest where I live. 

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
11y

"So I ran it through the rental calculator and mentally cursed a few times. In order for this deal to work I would need them to sell it for like $350k"

OK...so offer 350k.  That's how it works.  You analyze the property to see what your maximum offer should be.  Then that's what you offer.  If they say "no", you are no worse off than you would be if you just passed on it.

...but, they may say "yes".

Remember, every question you never ask has the same answer...."NO".

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  • Joshua Woolls
    Investor · Grosse Pointe Park, MI · Member since 2015 · 164 posts · 64 votes
    11y
    Originally posted by @Troy Sheets:
    Originally posted by @Kevin Harrison:
    Originally posted by @Joe Villeneuve:

    @Brandon Heath  I just ran the numbers based on a buy of 350k.  Don't do it.

    Pleeeeeeeeeeeeeeeease, don't do it.  It's a terrible deal that no rationalization can fix.

    Here are those numbers:

    $350,000                  Buy
        7,500                   Closing & Rehab
    $357,500 TOTAL Cost (81.25% ARV)
    $440,000                  ARV

      $12,250                 DP (3.5%)
    $337,750                 Loan
       $1,711.33            Mnthly Pmt (4.5%, 30 yrs)

       $2,600                 Mthly Rent (2 x 1300)
     ($2,735.41)           Monthly Expenses

    Results (not good)
    ($135.41)                Cash Flow/Mo (that's a NEGATIVE Cash Flow

    Why would you pay out $2,735.41 every month to lose money?  I could buy 5 SFH in my area with that much/month and have a positive CF of over $4,000/month.

    Joe I know you're a really smart guy and in most cases you would be right. but don't forget that this guy is in San Diego and for him it would probably be cheaper than what he is paying in rent and would build him some equity.

    This is no model for future investing, granted, but it might actually be a better situation than he is in now and allow him to save some money. Just remember that his situation is not the same as a seasoned investor who is buying purely for profit, and this might be one of the better deals going in his target market.

    He has to live somewhere, so why not live somewhere that someone else is paying half (or more) of the mortgage for him? I have no idea if this is a "good" deal for the area at any price but I would contend that it'd still be a better deal than renting. 

    I am probably the biggest fan of home ownership out there, but sometimes a deal just does not make sense. In my opinion, this is one of those times. If for some reason the OP could convince the sellers to sell at 350k (a number that still doesn't make much sense from an investment standpoint) he should buy the house and immediately resell it at market value and pocket the cash. The only way this investment makes sense long term is with appreciation and that is a dangerous way to invest in buy and hold. 

    When buying SFH and small multi's there are two markets at play. There is the investor market and the Homeowner market. When the investor and homeowner market get out of wack it can create an especially good investment market, or an especially bad investment(buy and hold) market. With rents and homeprices where they are in San Diego right now, it looks to me to be an especially bad investor(buy and hold) market.

    1Reply
  • Joe Calderon
    Miami, FL · Member since 2015 · 92 posts · 24 votes
    11y

    Wait, you never listed the problem lmao? What prevented them from selling for 350k?

    0Reply
  • Renea Steward
    Massage Therapist · Chicago, IL · Member since 2015 · 613 posts · 84 votes
    11y

    @Barbara G. thanks for your last post in this forum. Your questions were questions that I appreciate@Brandon Heath for answering.

    @Brandon Heath considering what you are presently paying for rent(750) and your landlord preferring that you stay. 

    Consider staying where you are another year; purchasing a SFH that is cash flowing well; continuing to look for a duplex that will cash flow well would be a viable option.

    In a years time you should have put up money in savings. The money you saved in rent each month by not moving and the money from the SFH cash flow. You can use savings to place the down payment on the duplex that you located over the year.

                                  Enjoy as you prosper.....

    3Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    11y

    @Brandon Heath, you quoted @Joe Villeneuve: "5 SFH's and do over 4000k/month……… Really Joe? I think your trying to tell me to Invest out of state without actually saying it, lol".

    Joe must have been a bit too subtle (on this one very rare occasion), so I'll say it for him:- Invest out of state! Cheers...

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Brent Coombs:

    @Brandon Heath, you quoted @Joe Villeneuve: "5 SFH's and do over 4000k/month……… Really Joe? I think your trying to tell me to Invest out of state without actually saying it, lol".

    Joe must have been a bit too subtle (on this one very rare occasion), so I'll say it for him:- Invest out of state! Cheers...

    A man (or woman) goes to the Doctor and says, "Doc...it hurts when I raise my arm"...and the Doctor replies, "...so don't do it".

    1Reply
  • Brandon Heath
    OP
    San Diego, CA · Member since 2014 · 78 posts · 10 votes
    11y

    @Renea Steward

    I think staying put another 6-12 months is the smart thing to do. It actually is the master plan about 80% of the time (20% we get frustrated and want to just through caution to the wind). 

    The truth is that we are not in an emergency situation. I'm obviously still very green and need to learn a lot. Which is why I frequent Zillow and attempt to run numbers just to gain wisdom and understanding. I rarely post my wishful pursuits but thought this one was interesting enough to maybe get some expert/experienced opinions on.   

    You mentioned "purchasing a SFH that is cash flowing well". I was under the impression that SFH could be harder to cash flow, especially in tougher markets. This is also why I was surprised when@Joe Villeneuve mentioned is $4000 death punch! 

    I think it would be a mistake to be closed minded to different avenues. Are you of the mindset as well that I need to start outside my expensive market?

    0Reply
  • Brandon Heath
    OP
    San Diego, CA · Member since 2014 · 78 posts · 10 votes
    11y

    Originally posted by: The Notorious @Joe Villeneuve & his Evil side kick @Brent Coombs (the above is meant to be read with 0% seriousness and 90% humor and 10% 1920s radio reporter voice) 

    "A man (or woman) goes to the Doctor and says, "Doc...it hurts when I raise my arm"...and the Doctor replies, "...so don't do it".

    Hahaha, So in this case the man has to lift his arms to work and make a living. Does this mean the Dr. will be taking care of the mans bills.

    Or should I say, The man has to live somewhere! Are you saying its better to pay someone elses mortgage than to even try to locate a good deal (so I could pay my own)?  

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Brandon Heath:

    Originally posted by: The Notorious @Joe Villeneuve & his Evil side kick @Brent Coombs (the above is meant to be read with 0% seriousness and 90% humor and 10% 1920s radio reporter voice) 

    "A man (or woman) goes to the Doctor and says, "Doc...it hurts when I raise my arm"...and the Doctor replies, "...so don't do it".

    Hahaha, So in this case the man has to lift his arms to work and make a living. Does this mean the Dr. will be taking care of the mans bills.

    Or should I say, The man has to live somewhere! Are you saying its better to pay someone elses mortgage than to even try to locate a good deal (so I could pay my own)?  

     No.  If the deal doesn't work, as in NEGATIVE CASH FLOW, then it hurts...so don't do it.

    There's a follow up appointment to the above Doctor visit. too:

    Same patient goes back to the Doctor and the visit went something like this:

    Patient:  Doc.  I almost took your advice and didn't raise my arms ( I almost didn't do the negative cash flow deal).  It didn't hurt as much, but it still hurts (I still have bills to pay).

    Doctor:  So what did you do?

    P:  I decided to hold my right arm (the one injured) with my left arm, so my right arm wouldn't swing (I added more to my down payment...rationalizing my cash flow is better...it isn't...).

    D:  How did that work?

    P: It helped, but I think it just masked the pain, and transferred it to a different place   (...I just paid all the cumulative negative CF up front)...by back.

    D:...so then what?

    P:  ...so then, I had to adjust my legs to take more of my weight, which hurt my knees, so I decided to lean on the wall, but...

    D:  Sounds like all you're doing is transferring your pain to other areas, and not addressing the source of the pain.

    P:  OK.  I decided that it was OK since I was healing...kind of (...rationalizing things like depreciation deduction, equity build up, etc...),...but,...

    D:...but what?

    P:   ...but, I couldn't go anywhere, or do anything, and my "robbing from Peter to pay Paul" pain cures was making more pain in the end.

    D: So why are you here?

    P:  Doc...I decided to fix the source of the pain.  Fix my arm.

    Moral of the story:  Negative cash flow causes more pain when you rationalize that other parts of your financial system (your job, other investments, future returns you don't control, etc...) can compensate for it. As the Doctor said in the first place...Don't Do It.

    1Reply
  • Renea Steward
    Massage Therapist · Chicago, IL · Member since 2015 · 613 posts · 84 votes
    11y

    @Brandon Heath

    I was saying look into purchasing a single family home. At this moment in your life it is a more feasible investment.

    I wasn't addressing the location at all. Now that you ask if I was saying that you should look outside of your expensive area. I will adress it. I think you should look outside of your expensive area.

    If you want to purchase in your area. Do a few deals outside of your area that are cash flowing well. At that point you will have some real estate experience underneath you belt. You will be better qualified/ more informed to choose a decent deal in your area.

    This is business. It's isn't anything wrong with making a offer lower than the asking price.  I ask for discounts or present coupons/discounts anytime I make a purchase/ spend money. 

    You know what you are willing and capable to spend. The seller know what that are capable and willing to except. You aren't looking for a friend; you are trying to close a profitable deal for yourself while the seller is being released of property they desire to rid themselves of for various reasons. 

    You know your intentions when you make an offer. You know you aren't trying to offend. So take @Justin R. advice as to how to present the offer until you feel comfortable enough to just make the offer.

                             Enjoy as you prosper.....

    1Reply
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