FIRST DEAL...WHAT YOU GUYS THINK?

Real Estate Deal Analysis & Advice
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FIRST DEAL...WHAT YOU GUYS THINK?

Lee V
Stockton · Member since 2009 · 73 posts · 3 votes

Alright guys....

I got a REO that the banks wants 67k. They will not go lower. It was originally listed at 79k. The home in itself probably needs about 7k of work to bring it to brand new, quick sale condition (it already has new baths and carpet). To used it as a rental, you'll probably just need new appliances and paint.

The problem with me accepting this offer is: pulling comps from the last 6 months, most homes were selling for 62k.

I counter at 62k with the comps but the bank rejects sticking to 67k (they said it had something to do with a reverse mortgage...blah blah blah).

Even at 67k, the house seems to be a pretty good cash flow.

Here are my numbers:

HML for $53,600 (found an HML who said they will be willing to lend at 80-90% of loan amount)
Payment is interest only for 1 year, loan due at 1 year.
I estimated the payment will be somewhere around $536


Rent will be at $1100
-$536 HML payment
-$150 tax and insurance (estimate)
-$200 per month to put in reserve incase of vacancy etc.
Positive cash flow: $214.

Am I missing something? My exit strategies are to refi at the end of the HML loan into a 30 fix mortgage or sell if the right opportunity comes.

The current AS-IS value should be around 75k. ARV values, including new kitchen, cosmetic work, and landscape, should be easily appraised at 90-100k.

What do you guys think? Should I be worry because of th recent sold comps in the areas are low? The market here in Stockton is pretty bad, but I believe now is the time to BUY AND HOLD.



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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    17y

    RUN FOR THE HILLS!!!!!!

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
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  • Nick J.
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    17y

    I agree with Curt. I didn't read the whole post, all I saw was they want 67k and you show comps at 62k.

    whenever you start 'playing' with the numbers to 'try' to make it work, you'll always end up losing

    sorry for not reading the rest of the post, I just want to tell you what I think about the first 2 paragraphs.

    Edit: Jon below me brought up a wonderful point!

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Why don't you, at least, buy one of those $62K houses?

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  • Lee V
    OP
    Stockton · Member since 2009 · 73 posts · 3 votes
    17y

    well those at 62k were the ones that were sold in the previous 3-4 months. Here is Stockton, banks are listing very low to get mulitple offers. For example, one house down the street that was bought for 64k, were listed at 52k. This house is actually listed the same price as homes that are not REO. I am not going to do the deal with them if they are not willing to go 62k or under, just looking for thoughs... thanks!

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  • Jim Doine
    Real Estate Investor · Myrtle creek , OR · Member since 2008 · 343 posts · 13 votes
    17y

    Lee, by your own comps you've established the FMV at $62,000. You can't pay FMV in todays market. You need to buy at a much deeper discount. Somewhere in the neighborhood of 70% FMV.. Jim

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  • Lee V
    OP
    Stockton · Member since 2009 · 73 posts · 3 votes
    17y

    hey Jim

    thanks for the reply, that is an excellent point. those are just some of the homes I pulled that were purchase around that price. Obvisously there were homes that are similar but purchased at 70,80 and even 100k. I was just looking for the cheapest home bought in that area to help me negoiate a price with the lender.

    How do you determine the FMV? Lets say if 5 investors all bought a house in that area for a deep discount, say 62k. Now is that going to be a FMV? I know an appraiser can pull any comps he wants to make the purchase seems like a good deal. And I think I am getting a good deal, if I get this property for 62k, but how do you guys determine the FMV?

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  • Jim Doine
    Real Estate Investor · Myrtle creek , OR · Member since 2008 · 343 posts · 13 votes
    17y

    Lee, food for thought. Stockton is arguably the worst declining market in the State.It will in all probability continue to go down before it bottoms. Even if you used 100K as FMV you shouldn't be paying more than 50-60K in this market less repairs. Your fairly new to the forums, spend a lot of time studying, there are several good recent threads on how to determine a good deal. Also study the landlording forum and make sure you understand the 50% rule. It is an excellent guideline to determine the maximum price you can pay for a buy and hold property based on the rent. Jim

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    Lee,

    Here is how I see this deal:

    Gross rents: $1,100
    Operating Expneses: $550
    NOI: $550

    HML Loan: $536

    Cash flow: $14 which is way too low!

    Once you refi, it would look a little better:

    NOI: $550
    Mortgage ($72K, 30 yr, 7% NOO): $480

    Cash flow: $70 (still low)

    That assumes that the repairs and points/fees associated with obtaining two loans are only $5K. I'm guessing that is too low.

    However, the cash flow isn't the really bad part of this deal. Why in the world would you consider paying MORE than market value for any property? You can ALWAYS buy properties for less than market value. If the market value is $62K, then you should be looking for a property for $30K to $40K!!! Do the hard work and you'll have a GREAT deal. Pay retail and you'll have a bad deal that will not be an acceptable rental and will be VERY difficult to sell.

    Good Luck,

    Mike

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    You need to get out and get to know this area. Drive by all the houses that are for sale. Get a listing of ALL recent solds. You need to look inside as many of those houses as you can.

    In many areas, the market has split into two parts. One is move-in-ready houses that can be sold to retail buyers. The other is REOs or similar. In some areas, retail sales are occuring, and can be used as a basis. Around here, a nice fixed up house in the $100-150K range will move pretty quickly, even in neighborhoods that have a lot of foreclosures. Even then, you need to know the market. Garages matter. Off street parking matters. One bath vs. two matters. Basement matters.

    OTOH, if there are no, or very few, retail sales, then its harder to make a case the retail value is relevant. If market value really is set just by the REOs and foreclosures, then you need to use that. Especially if there are nice REOs available (yes, it does happen.)

    If the bank won't come off their price, then just wait. They have a process for dropping the price. Wait until the drop occurs, then jump on it.

    But, get out and learn the neighborhood.

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  • Lee V
    OP
    Stockton · Member since 2009 · 73 posts · 3 votes
    17y

    what is included in the 50% rule, if not the HML payment? or mortgage payment?

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Expenses, vacancy, and capital items.

    Expenses are things like taxes, insurance, utilites (if you pay or during vacancies), legal expenses, CPA, maintenance, property management, tenant damage, etc.

    Capital items are big expenses like roofs or furnaces.

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  • Mark B
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    17y
    Originally posted by Jon Holdman:
    Expenses, vacancy, and capital items.

    Expenses are things like taxes, insurance, utilites (if you pay or during vacancies), legal expenses, CPA, maintenance, property management, tenant damage, etc.

    Capital items are big expenses like roofs or furnaces.


    Jon, do you always stick to the 50% rule? I've seen 40% used as well. And in my experience, which IS NOT MUH, the expenses are more like 30%. I'm new to this, so I'm not doubting the truth. I am just wondering if you have built a big buffer into the 50%? And in your experience, what are your investments actual expenses ranging?

    Thanks,
    Mark

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    I use 40% because I'm willing to do the management myself for free. Denver didn't experience nearly as much runup as other locations, and prices are now only about 13% above the 1/99 value adjusted for inflation. We're seeing population and job growth. So, I'm willing to have some speculation in my purchases.

    Our overall decline off the peak in March 2006 has been under 8%. I'm buying at a much, much larger discount.

    When your units are filled, and nothing is going wrong, your expenses will indeed be much less than 50%. But over the long term, and for many units, you will have things happen. A lengthy vacancy, damage, a capital item replacement, etc. Last month my expenses were 13% for my one and only (so far) rental. But, no way would I assume that's the end of the story.

    The mini-storage, OTOH, is running more like 60%.

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  • Account Closed
    Denver, CO · Member since 2008 · 25 posts · 0 votes
    17y

    What part of Stockton is this in? From what I've read, there are horrible parts of Stockton and decent parts of Stockton. North and West of UOP is supposedly decent. In the city, South and East is supposedly really bad. I'm in the Bay area and starting to look at Stockton as potentially attractive. Especially since I'm still no where near affording Bay area real estate. I've been running numbers, and if I can get something in the nicer area for $80k that rents for $1200 ... preferably newer construction to keep capital costs down. Then it's starting to sound very attractive. Or a similar duplex for $100k that rents for $800/$800. I still feel it has a ways to go though, so I'm in no hurry.

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  • Lee V
    OP
    Stockton · Member since 2009 · 73 posts · 3 votes
    17y

    Hey JBrooks

    Im only searching for areas in north stockton. The deals out here are crazy right now, if something is in decent shape and price right, it last only a week at the most.

    Im looking for areas in North Stockton and areas around UOP. I live by UOP right now and have a property in North Stockton. UOP area homes that are in great shape have not drop in price much at all.

    EAst and South are really cheap, but very unattractive. Most of those properties are hanging around for a long time on the MLS. If you are from the bay area, you may want to look at Western Ranch.

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  • Account Closed
    Denver, CO · Member since 2008 · 25 posts · 0 votes
    17y

    Hey Lee V, so what is your strategy right now - wholesaling, flipping, renting? I'd like to build up some capital before hanging on to properties. Is the spread enough to do it in Stockton?

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  • Lee V
    OP
    Stockton · Member since 2009 · 73 posts · 3 votes
    17y

    ------UPDATE----------

    So after not willing to budge from my price of 62k, the seller called and we "verbally" agreed to 62k. She sent over their REO ademdum and so on... I signed all the paper work, sent it to her and continued on with my home inspection, hoping to closed in 14 days.

    Well we got a call from the seller and she was all upset. She for some reason didnt read the offer carefully and didnt see that i was using a Hard Money Loan. She told the asset manager that this was an ALL cash offer, now it seems like they want to back out of the deal.
    They wont sign their part of the purchase agreement, even thought they sent the contract over, stating that on Feb 4, a verbal agreement was made between me and the seller and I had 10 days to do my inspection. I signed everything, sent it over. They even had the pre-approval letter from my HML along with my original offer. Now my realtor can get a hold of them and we get no response??? (been 2 days)

    Do we have an agreement or not???? They dont have my earnest deposit but is there something I can do to them if they back out?

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    17y

    Lee - don't fall in love with the first deal you come across. It is a buyers market. A better deal will come by if you look hard.

    Let the bank chase you...

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  • Lee V
    OP
    Stockton · Member since 2009 · 73 posts · 3 votes
    17y

    welll the bank came out and told me that decided to not sell it for 62k, and they put it back on the market.

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  • Charles Whitaker
    Real Estate Investor · Amarillo, TX · Member since 2008 · 173 posts · 15 votes
    17y
    Originally posted by Lee V:
    welll the bank came out and told me that decided to not sell it for 62k, and they put it back on the market.


    Take this as a grace from the higher power; you really didn't want that deal.
    0Reply
  • Adam Black
    Ridgeland, MS · Member since 2009 · 106 posts · 0 votes
    17y
    Originally posted by Lee V:
    welll the bank came out and told me that decided to not sell it for 62k, and they put it back on the market.

    I agree, consider this your "get out of jail free" card and move on to the next deal. If you're having this much trouble making it happen, it proabbly isn't the right deal.
    I have customers that invest with me that are alos buying in Stockton and they are finding sme great deasl right now, there will be another one.

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  • Alex Aronson
    Real Estate Investor · Memphis, TN · Member since 2008 · 86 posts · 1 vote
    17y

    Since you are new, you have to learn that there are always other deals out there. Many people think a good deal only happens once in a life time, once in a decade, once in a year. Truth is, GREAT deals exist all the time. The good investor finds them.

    You are worth more. Keep looking and you find a better deal.

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