Am I crazy to make an offer?

[David Whartnaby]

Hi all, I live in Fargo, ND and the market has been hot here but has slowed down during the last quarter. Really tough to find deals still though. I visited a FSBO property and spoke with the owner... The home is a 2BR 1BA ranch built on a crawl space. It is in excellent condition with an updated bath, brand new furnace, newer windows, roof shows no wear or tear. Nice neighborhood... I do not see any major CAP Ex expenses coming in the near future other than possibly replacing the washer/dryer which are old. Owner paid $122,500 13 months ago and just paid for a new furnace on top of that. House is listed for $127,500 at the moment. She told me that she has little wiggle room since she has very little equity in the home. She accepted a new job about 1.5 hours away, already has housing lined up and plans to move. She told me that she will stay though if she doesn’t receive a decent offer. Her terms: 30yr, 3.5%, and she put about 5% down. Rent comps run in the $900-950 range. I am aware that this property long term may not cash flow well. However, starter homes have appreciated 8% over the last 4-5 years in this market. My dad is an appraiser and I am currently training under him. Our research indicates this type of property will not depreciate but only continue to appreciate at the moment (albeit more like 3-4% per year). Even during the great crash, these homes did not depreciate in this market but more flatlined for a little while. Since it is also December, historically speaking homes sell for about 10% less in the 4th quarter and 1st quarter in this market than during the spring time when more home buyers are out shopping. Vacancy rates are around 10%. If I can negotiate a CFD and pay her the equity she has in the property, am I crazy to take over the property? It would cost round about $10,000 all told up front by paying her equity piece and closing costs. I calculate that PITI would be around $700 per month for us. It won’t necessarily cash flow long term but i could sell the home in about 5 years and pocket the appreciation and debt that would be paid down by the tenant in addition to the short term tax breaks. The idea would be to sell before having to pay any major CAP Ex expenses and before the home “depreciates significantly” in the eyes of an owner occupant. How much would you allocate to CAP Ex on a property like this usually? Is this a crazy idea? How much risk would I really be assuming in this scenario? Thoughts?