My first deal -- is this the one?

Question

Hi everyone!  My husband and I are newbies and have had a couple seemingly good deals pass us by in the last few weeks because we haven't been willing to pull the trigger.  I could really use some help analyzing this one, because if it looks good we're ready to jump.  Here are the particulars:
                                    
                                    Bank-owned SFH
                                    1,605 finished sf on main level plus 980 finished sf basement
                                    4 bed (1 non-conforming); 3 bath
                                    Built 1983
                                    Oversized 2 car attached garage
                                    Needs cosmetics (clean carpet; interior paint; new light fixtures)
                                    All kitchen appliances are included
                                    No HOA
                                    Just re-listed yesterday (guessing the financing failed)
                                    Total listing time approx 100 days
                                    Easy, non-highway commute to 3 major employment centers
                                    Easy commute to airport
                                    Asking price $99,900
                                    Cyberhomes estimate $154,625
                                    Rent comps average $1,100
                                    Only 1 sold comp in last 3 mos.: 1 block east, same finished sf and year built, sold 9/17/08 for $132,000
                                    
                                    Pending inspection and any new info re: repairs (roof, furnace, etc.), we're thinking of an initial offer of $72,500 with 20% down.  We're assuming $1,000 in potential repairs.  It would be a cash deal (i.e., full $72,500 payable in cash at closing).  All funds would come from loans from our 401(k) accounts (6% fixed for 58 months).  
                                    
                                    We'd like to rent it for $1,000 a month, and would use a property management company (the one I'm leaning toward charges $350 one-time set-up that covers unlimited advertising; 10% of collected rent monthly; plus $12 a month to handle evictions).  Taxes are $1,636 annually.
                                    
                                    Any insight/guidance/words of wisdom would be much appreciated!
                                    
                                    Marjorie

Edited to add: One of the things that appeals to us is that, due to the financing via 401(k) loans, we'd own the property free and clear in 5 years...so it would be 100% cash flow after that.  Thoughts?

Jason Reed · Answer

Newbie,

Don't worry about missing a deal or two there will be more coming...  If you are looking at renting a property you may want to condiser buying a duplex.  I am not sure what Denver's market is for duplexes, but I will give you a scenario of what is going on in Minneapolis.  My clients and I have been buying duplexes for similar prices to single family homes (same neighborhoods). There were and are so many investors that were foreclosed upon that there are incredible opportunities out there. If you can pay about the same for a duplex as a home your income will be almost double (of a single family home) and your costs are about the same.  Two other pieces of advice don't look at just one property and try to do all the planning on it-go out and look at 20 properties.  You will get a better Idea of the market conditions and you will find one or two properties that will shine above everything else and you won't have to ask for advice you'll know that its a great deal!  If nothing else you will learn about the market.  Also make several offers. My most successful client makes 40 offers a month and buys 8 per month.  If he doesn't want a property he uses the inspection as his way out.

Finally, look at using a line of credit on your home instead of your 401k.  If you are downsized, or layed off you will have a huge tax bill if you can't pay back the loan!
Jason Reed

Will Barnard · Answer

Actually, using 401k funds via the borrowing provisions, is a seldom used but wonderful strategy so long as the funds are used to purchase cash producing assets. Wouldn't you want to guarantee your 401k borrowed funds a set rate of return, no downside in the stock market, thus increasing and benefiting your 401k, and at the same time, having your 401k benefit you (outside of a retirement account) legally with the purchase of an investment!
Combining your efforts to get a property at a good discount, with conventional financing and 401k borrowed funds, you can get into deals with no money down (none out of pocket anyways).

As far as if this is a good deal or not depends on your strategy and the area it is in. If your strategy is ONLY cash flow, you probably are not there with this deal. If your startegy is to get a great property at a great discount, rehab it and sell within the next year or two, you could make a nice chunk of money with this deal. You have favorable financing, what appears to be a nice reserve account (home equity line, etc) so you may be on to something here.

Tom C · Answer

Caitlyn,

I think she is planning on taking a loan, therefore repaying herself with interest. This is how I got my start too for a DP on my first HUD.

Account Closed · Answer

Ahh, I see now.  She did say "loans."

Account Closed · Answer

Marjorie wrote:  One of the things that appeals to us is that, due to the financing via 401(k) loans, we'd own the property free and clear in 5 years...so it would be 100% cash flow after that. Thoughts?

You're willing to take the money out of your 401(k), pay the early withdrawal penalty thereon, to pay cash for the property?

Owen Dashner · Answer

If you are considering rehabbing the property and you are estimating $20,000 in repairs alone, then your offer needs to be a lot lower than $72K.  You have to factor in all of the "quiet costs" as well.  Realtor commission, closing costs (acquisition & selling), utilities, dumpster rental, taxes, insurance, and interest payments are some of the things that will eat away at your profit.

Get some really good retail comps (not Zillow or any online estimate) by physically walking through similar properties in the area, and have your realtor pull recent sales.  Look at how long the comps sat on the market and price per square foot, and factor that into your calcuations.  You will want to price your completed rehab property slightly less than the current comps to ensure that it sells quickly.  After you arrive at your eventual sale price, subtract your rehab costs, carrying & quiet costs, and desired profit.  The number left over should be your maximum offer.

With all that being said, if the property needs extensive repairs, I would probably not recommend starting out with it as your first investment.  On my first rehab REO property, I made the classic mistake of underestimating costs, and trying to make a good deal out of something that simply wasn't.

Also, If you are looking primarily at REO's, you definitely don't want to fall in love with any particular property or you will get frustrated and disappointed.  Keep several going at once and make some lowball offers with an inspection contingency.  REO deals typically take a LONG time to come together, so just do your due diligence and try not to get too excited when evaluating any one property.

Just my $.02...

Good luck!

Marjorie Wallwey · Answer

Thanks for your input, everyone.  We finally got in to see the property, and it needs a LOT of work...I wouldn't be surprised if we're talking $20,000 before all is said and done.  We're rethinking it, obviously ;-)

Does anyone have any thoughts in regard to attempting to rehab and retail it?

Jim Doine · Answer

Marjorie, did you make an offer? Was it accepted?  Jim

Tom C · Answer

John is correct.

74000 for 30 yrs @ 7.5% you monthly payment is $504.00

Rents $1000

Expenses $500

Cash flow neg $4.00 bucks per month.

If you can get an extra $150 bucks a month in rent and you have A LOT of equity, it might be worth a shot.

Jim Doine · Answer

Marjorie, If you read my earlier post I apologize. I've edited it. I miscalculated the payment using thirty year fixed financing.Not making excuses, just to tired. Jon and Tom are both correct.thank you for correcting me Tom.  Jim