All Forum Posts by: Mark Reynolds

Well I have to disagree on the fix-up budget. If you notice in the first photo the roof is not a straight line but curves upward to the left. That's  a pretty good sign that the house has settled/that the foundation in inadequate or that the walls themselves have rotted at the bottom. All of these are things to be avoided in a house you intend to hold for a long time. 

Came across a similar thing a while back not long from where I live. Still I was willing to buy it because it came with a 3 acre lot and was in a great school district. I figured I could spend $10-15K rent it for $1,100 a month, tear it down in 5 years and build a big house on the lot.

Obviously in the current situation you don't have those advantages. I think a plan that has this house selling for $20,000 in the near future has difficulties. 

On the other hand if you can buy it for $6K and put $20k in it to rehab then rent for $400. That would give a 15% cap rate which is a pretty good return.

My thinking goes like this-- buy it for $6K. Tear it down for $1,500. Put a double-wide on it for not a lot more than the $20,000 rehab. Now you have a new house with 3 times the space. Figure you'd have $30,000 in the deal that way and that it would rent for $800 per month. That is a 30% cap rate or about twice as good a deal. Plus your on-going maintenance costs on the new prefab are going to be a lot less than they are on the existing house with foundation problems.

Where I come from (in Chicago, a very different market) 0.12 acres is considered a "standard" lot.

Where is it located? Looks like it is out in the country. How much land comes with the "house"? My guess is knock it down and start over.

Well, several things here. Looks like your initial intent is to occupy this yourself which means you have a different set of goals and motivations than if this were a straight investment deal. My first thought is to agree with Curtis-- concentrate on volume and that means that this one is already too complicated, move on.

That said, the fact is that you are looking to find a place to live and need the seller financing. That means you need to talk to the owner directly, get this on a personal basis.

So how far away is the address? Drive over there-- talk to him.

So why didn't they guy want to sell? Normally I might not care too much about this sort of question but you are attempting to get this guy to carry paper on a house he didn't want to sell at all. My guess is that he lived in the house until he went into the nursing home and hopes he's going to move back into it some day. But that may not be it. When you are trying to get the seller to do something unusual you must give him a reason to do it. That reason must be something HE wants more than cash now because you are not offering him cash now. So if he's not particularly interested in cash you have to find some other motivator. To do that you need to understand him and you cannot get that understanding through two levels of intermediaries-- the guy you are dealing with and the broker who deals with the old guy.

Skip trace him-- go have a conversation.

The opinion of appraisers or realtors is irrelevant. Bottom line-- except to the encroaching neighbor the property has no value. Trying to value it based on your perception of how much value it adds to his property is pointless (unless you have the ability to read his mind).

Lets turn this on its head. How much does it hurt the value of your land to give this parcel up? As you previously described, the loss of value on your parcel is minimal so why should he pay more than what it costs you?

If you want to talk about "what the land is worth" in the abstract the answer is "zero"

I have no idea why people have a hard time understanding this (you are not alone) THERE IS NO VALUE IN REAL ESTATE except as some user creates that value by being willing to pay for it. Given the state of affairs the opinion of experts (appraisers, assessors, accountants, lawyers, etc.) is useless-- there is only one expert, the one guy for whom it has any value at all. GO HAVE A CONVERSATION with that guy-- it is in his best interest to find a number you can both work with.

The problem is that Americans know nothing about how to negotiate. We've had fixed prices in the stores for so long that we think everything has a fixed price and negotiation is trying to get a bargain on/off of that price. Negotiation is about finding a place where both sides can be happy-- maybe even where both sides are better off than they started.

Is there anything you would like the neighbor to do differently? Plan shrubs around his AC equipment? Let you walk across his property to get to the mailbox? Cut down the tree that blocks you view of the bay? Stop thinking of price solely in terms of dollars.

As you describe it adverse possession does not enter into the picture. In CA Adverse Possession requires the possessor to pay the property taxes which they have not done.

The encroachment appears to be fairly recent which further impacts the encroacher's case since you could give them notice to remove the encroachment.

That said you've got a situation where something that costs you little or nothing is very valuable to one and only one other person. Lets take a worse case scenario-- you play hardball, the other guy finds an aggressive attorney who comes up with some argument why its an easement and you both end up in court. Easy to spend $15,000 to $25,000 on legal fees on each side and how the matter will come out is essentially a crap shoot.

So, compromise and work something out. I would start out at around $50,000 which is probably highway robbery but a guy with $2.5 million on the line may well pay it just to avoid the hassle.

Have lunch, let him buy the beer. Get him to mention a number first.

Mark

Jerry,

Since you're so local I'd recommend Paul Paarlberg at the First Midwest Branch over in Chicago Heights. Terrific guy, remembers when the banker's job was to be helpful, refers biz back and forth between his clients when appropriate. Tell him I sent you.

Brittney,

I invest in these kinds of properties occasionally but I wouldn't advise a beginner to work on this kind of deal out of the box. As many others here have pointed out there are lots of places for this to go wrong and unless you are prepared to deal with the difficulty regardless of where it comes from I think you should do something else first.

That said-- there are serious don't-wanters out there. I typically buy at less than the tax proration so they are effectively paying me to take the property.

@michaellauther. I am interested in your Dayton transaction. Would you be willing to pay me the demo costs to take the house off your hands? What part of Dayton is the property in? I grew up in Dayton and still have family there. Is a vacant lot in that part of town worth anything? I have, on occasion sold the vacant lot to the neighbor for additional yard. I am even working on a transaction where we may build a public park on the land and hold it waiting for the neighborhood to improve.

The problem here is that the 2% rule is simplistic. It makes assumptions about what operating expenses will be that are, more often than not, inaccurate.

You need to learn Capitalization rates if you are going to get a little more sophisticated. 2% ROI per month would work out to be a 24% cap rate if there were no expenses-- but some operating expenses are inevitable. The problem is, of course that those operating expenses can run up to 50% of the gross income which brings your cap rate down to 12% which is good, but not great. If the properties are truly without operating expenses (again, unlikely) a 24% cap rate is fantastic.

Cap rate= Annual NOI/purchase price. 10% is good, higher is better. If you are not finding properties in this range you are either not looking hard enough (don't do bad deals just because you cannot find good ones) or you are in an over-heated market where fix-and-flips might work but buy and rent probably will not. That said, in the most over-heated market there are good rental deals out there but you may need to reconfigure the property in some way.

That said I just bought a 2/1 condo with a 42% cap rate. Even after I split with my investor partner he will get 21% ROI (no debt) and I will make $4,200 per year. All in all not too bad. Beautiful apt. in good neighborhood. REO not long on market.

Lots of those deals out there in my area.

Oh, by the way, one last thing. Whenever the newbie says "there is absolutely no way to get a deal that . . . . " it is not true. While I am encouraging you to get a little more sophisticated in your analysis I would bet that there are 2%/month ROI deals out there in your market. They are not going to be easy to find. And when you do find one you may need to move quickly. But just because you looked at 50 and didn't find one doesn't mean they are not there. The good news is as you do this more they somehow become easier to find, mostly because you learn how to reject the duds more quickly.

Good luck in the blizzard, fellows. Looks to be a big one-- though most of it may pass north of you.

Nice to meet you David, and welcome to BP. I occasionally sell for a storefront installation company where the owner is Chinese who's English is not all that good. My wife is Chinese and translates and then I go be the "front".

Michael, that "wholesale" strategy might get you in trouble if you were in Illinois and buying from conventional sellers. Seems some folks consider this a breach of duty to your client (the seller). You might want to check with the state licensing agency.

Anyway, good luck with the investing as well.