How to approach this deal tomorrow

[Billy W.]

Hey Everyone,

Tomorrow I will be taking a look at a duplex that is for sale. They have been trying to sell it since September and had it listed at $128K. It is now listed at $100K.

The duplex is a bit run down and my guess is it would need about $10 - $15K in repairs to make it move in ready. Units are 2b 1ba which can rent for $750 and a 1b 1ba which can rent for $500 -$600.

Duplex is in an extremely desirable neighborhood with one of the best school districts in the city. Houses around it sell in the $250K - $600K range. The house right next door bought their land in 2000 for $225K and it is county appraised for $450K today on their website. The lots are the same size (potential to expand duplex or sell to developer later?).

How would you approach this meeting tomorrow? With the houses selling in the $250k - $600k range, what would you be looking at in terms of getting the price down to?

To meet the 2% rule, we would have to get about $55K, which Im not sure if that is doable. Any suggestions on this one?

Thanks

[Jon Holdman]

The 2% rule of thumb works better at $500 in rent than at $750. Nevertheless, paying $100K for $1250 in rent for a duplex is not going to cash flow as a rental. You may not need to be at $62,500 like the 2% rule would imply, but $100K is too high.

There are other ways to make money in real estate. Fix and flips and developing are two different ways. You have to know what you're doing, though. You say "Houses around it sell in the $250K - $600K range". That's such a large range that its meaningless. The fact this one has been on the market a couple of months (a short time), and hasn't sold for $100K tells you its worth less than $100K. So, comparing it to a $600K house is meaningless.

What you're implying is that the lot may have more value than the house. That's possible. What's the value of similar sized lots? What will it cost to demolish and remove the existing property? Is there any market for lots? What would it cost you to build a $250K house? Or, a $600K one? Is there something that makes this lot desirable or undesirable? Lots of unanswered questions.