So, my partner brought in a great lead... It's in Old City, in Philadelphia, which is a GREAT area... It's 3 bed rooms, 2 baths, 3 floors, $280K owed to the mrtg co., seller does not want anything just to get from under the mortgage... Comps are going from $385k-$405k... It was recently reno'd, could use an update in counter-tops, fresh coat of paint... Sounds like a dream right? Well, the seller has been having difficulty renting it which has increased his urgency to sell as he is carrying the costs.. But I am concerned that there is too little wiggle room bc of the high balance of the mrtg, the low, yet still existing costs to cosmetically update the home for a high-end/maximum return, giving the seller some funds, and then our fee, paying 300K+ seems a bit steep to present to our cash investors, but they would yield an $85k-$95k return if flipped; which may change their minds :)
What I want to know is, what are some of our other options to save/participate in this deal? Since the seller has a sizable mortgage, I doubt the mortgage company will consent to seller-financing... We thought about a seller Lease option... But the seller seems to be at his wits-end with the property... It seems to be ideal to advertise as a buy and hold because of the location and the values on these properties are only increasing.. Ideally, $1500-$2000 in rent can be collected if not immediately flipped, and it can generate cash-flow, while gaining additional equity... But does this appear to be an attractive deal... It seems like a gem, but I know a lot of investors are wanting cheaper properties to not have to shell out so much cash... Let me know your thoughts...
He wants to list with a realtor also... I told my partner that if he is contractually bound to the agent, we could be cut out automatically until the contract ends... But please chime in and let me know your thoughts!! Much appreciated!
You cannot wholesale it to a cash buyer for $300K even if the property is worth $385K. Why?
By the time the investor sells this for $385K, he will get the following:
Sales price - $385K
less RE Commission (6%) ($23,100)
less Closing cost to buy ($3,500)
less closing cost to sell ($4,000)
less acquisition ($300K)
less repairs (I am assuming based on what you said that this house probably needs $30K in updates)
less holding costs (taxes, insurance, utilities while property is vacant and for sale)
let's assume $300/mo on taxes, $100/mo on insurance and $100/mo on utilities EQUALS $500/mo and assume 6 months for the property to sell so holding cost equals $3,000)
equals PROFIT OF $21,400
Investment = Acquisition + repairs + closing cost to buy + holding cost
Investment = $336,500
Return on Investment = 6.4%
No one will want to make such a paltry return ($21K) given that they are risking over $300K.
But in my podcast - Biggerpockets.com/show65, I showed how you can get a deal even if you pay 93% of market value.
Wendell, are you selling something?
My first concern is that you believe you can get it leased quickly, while the guy who knows the area better than you has had difficulty getting it rented, if he is so motivated, he'd probably drop rents to escape some of the costs, and it's still not rented. Is that due to current condition?
Which also leads to your assessment of valuation and the comps, do the comps suffer the same or similar vacancy, are they similar in condition, are adjustments accurate?
I might buy a 100K place to net 15K, I won't get into a 300K property for 15K. Risk is to mortgages assumed, taken, carrying costs, cash in, as well as time constraints.
Just because a property is available, even at a perceived lower price doesn't make it a deal.
Hey, guess what, I've bought houses with no equity and profited, adding value is not always lipstick and carpet. Look to the valuation process, market and income approach and then see if the parameters used by the subject property can be changed, forced appreciation.
No, unless you have access to cash or know you can sell quickly, this isn't a prudent seller financed opportunity, IMO. :)
Wendell D. Guzman & Bill G., thank-you both so much for the insight.. Being able to peel the deal apart the way you both did comes with experience and "veteran-eyes"... We are still babies at this and are trying to grasp it all, while making smart/wise investor decisions, we are still learning... But looking at it from these stand points helps set a precedent on how we need to be viewing these deals... Thank you again and I will share this information with my partner!
Bill, when you seek to change parameters used by the subject property, i.e. forced appreciation, over a brief flip period of time, are you talking Not-Inside-Trading language?
Do you mean profile improvements like flooring, added bedroom, nice bathroom, new porch, restructuring of space flow, or splitting the unit into 2 functional rents with addition of a kitchen? Is it rehabbing property clusters in the neighborhood, marketing the region for nicer occupancy?
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