Potential deal....or banana peel?

Question

Hi all! I'm having a little bit of head knowledge vs gut feeling conflict and I'd love to hear some different takes on my situation. I currently work a full time job with minimal time for deal hunting in our fairly tough local market. I've done a flip and had two buy and hold SFR's previously that I sold. Looking to slowly grow into buy and hold SFR's again.

the story -

3/2 SFH 1200 sq ft bungalow in a great high demand area. Rehabbed interior w/new roof and siding in the last 4 yrs

Purchase price approximately $100K

Currently tenanted at $850/mo. Leased until Jan/2019 supposedly non negotiable. Am getting a copy of the lease to review.

IF the lease is actually non-negotiable, I'll have to wait it out til it expires before I can adjust to market rents of about $1050-$1150.

Annual taxes $800

Assessed Value $52000. From what I see, I think I could put $3500 into it and boost the ARV to $80K.

I could pay 20-40% down and finance the rest

Is it worth buying this at approx $20-$25K below market value, being upside down on the equity and putting up with the remainder of the lease with minimal cash flow in order to just get back in the market in a good area? I like the area for appreciation/growth and all but...???   Am i walking into a deal or stepping on a banana peel? Let me know what you think!! Thanks!

Bob Okenwa · Answer

This sounds like gambling instead of investing. Always remember with gambling, the house usually always wins. I'm with @Thomas S. on this one.

Jeremy M. · Answer

@Andrew Johnson  @Wayne Brooks

Thanks for the insights and the questions. Helped me think through the process a bit better.

It's a buy I wanted to make work and I should probably just walk away.

Wayne Brooks · Answer

@Jeremy Miller ARV=After Repaired Value, which is the market Retail value, Not assessed value by the county, which has no bearing on market value.

Jeremy M. · Answer

According to my "definitions" ARV=actual assessed value after my rehab versus the currently inflated market value.

And it's quite possible that my logic is all wrong. This is just the differences that I had made.

Andrew Johnson · Answer

So how does "boost the ARV to $80K" figure into it? @Jeremy Miller

Jeremy M. · Answer

@Andrew Johnson Ok, I see what you mean. I'll try to clarify. By "market value" I'm referring to what the comps are selling for currently. My line of thought is that currently comps are selling for $120-130K. This one is listed for a little over $100K and I think I could buy it for around $100k mark. The primary reason for this selling less than the comps, is the existing lease and rents that are below market. According to my agent and to the best of my knowledge.

Andrew Johnson · Answer

@Jeremy Miller Assessed values mean nothing to me.  It's not an appraisal, they aren't always current, they can be reassessed (well, in most states anyway), so it's best to just toss that number out of the window.  What's more perplexing is that your ARV is $80K.  Subtract the $3.5K in renovations and you get a value of $76.5K.  Yet the sales price is $100K.  Yet (again) you say you could buy it for $20K-$25K below market value.  So the price is $100K but you think you can purchase it for $51.5K (which is $76.5K - $25K)?  Based on...the assessed value?  I must be misreading or missing something...

Thomas S. · Answer

It isn't sustainable and anyone doin it is only adding to the stupidity of the market. Stupid is as stupid does. I would never invest in your area.

Investing in SFHs is not practical by my standards as the prices are driven by financially illiterate home buyers.

Appreciation is not by bread and butter. It is too fickle to be reliable.

Jeremy M. · Answer

The only justification to me is the potential that would lie in -

Upping the ARV and the rents

Gaining on cash flow and depreciation in a really good market

Buying and having a tenant pay down a mortgage vs sitting on my cash.

In this particular market the comps are selling at 60-100% above assessed values. How is this sustainable?

Thomas S. · Answer

Existing lease is a deal breaker for me. I would pass.

Plenty more deals out there.

Paying 100K for a property appraised at 52K makes zero scenes. Am I missing something.

Potential deal....or banana peel?

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