All Forum Posts by: Shawn Q.

Unless this is commercial (and it sounds like you're talking about a SFR) it depends on which appraisal you're talking about. Whether it's rented or not won't impact the appraisal on a SFR because it's done on a comp sale basis, not an income basis. So, the appraisal will be the same whether you have your tenant or not.

If you're appraising for the initial purchase, and you're planning to do a full rehab, however, you'll want to factor in the tenant to your cash flow and timeline after that initial purchase stage. You may not be able to get the tenant out, and do a robust rehab, immediately - which could negatively impact your outlook. 

More details on the deal and your timeline would be very helpful in answering your question. 

So, this might be a bit radical - and would definitely take some conversations with your wife - but here's what I would do:

• You mentioned friends and family in the area - I would stay with them on a month-to-month rental basis. This will help you in a few ways - it'll help keep you motivated to find a property (so you can have your own space) and allow you to build your war chest (as cheap/free rent means you can sprint towards any savings goals). 
• As @Robert Ellis said, definitely get in front of a few lenders as soon as you get there. Get a pre-approval as fast as you can, so you know what price range you're looking in. This will help you narrow your areas of focus and help define what savings goal you should be working toward. 
• As others have said, the FHA on a 2-4 unit is the fastest way to build your portfolio. If you look at 10 properties a weekend and know your target price range, you'll eliminate some of the uncertainty you're currently experiencing. I own a few SFR rentals, and if I had to do it over again I would definitely house hack a 4 unit as quickly as possible. The higher number of units you have initially means your vacancy risk is lower overall, which can be huge in managing stress.

Good luck, and let us know how it goes!

You might want to do a little research before engaging an agent. I would check your house here: public records search. That should give you the name and address of the owner, and the purchase price when they bought it. Then spend a little time on realtor.com or similar looking at what similar homes are selling for in your area. That shouldn't take to long, but it will give you a baseline of information if you decide to talk to an agent. However, if you can figure out what the house should sell for I would try contacting the owner directly first. Look up creative financing here on bigger pockets and see what options they might have for selling. It sounds like you should get a discount for some serious deferred maintenance. 

However (and it's a big however) I wouldn't consider this as an investment property. You'd be doing your parents a favor, not investing - which is a big difference. Good luck!

Thanks all! Shame it won't work out. Coincidentally @Dmitriy Fomichenko I just got your book on amazon. At least when I finish it I'll have a better baseline understanding than now! 

And thanks for the pointer @George Blower - I'll take a look and see if that increases my options!

So I'm considering a possible move to Seattle, which is a crazy market. Coming from the Midwest with a relatively low-paying job I wouldn't have enough cash to invest using traditional methods. I'm wondering if someone with experience in self-directed IRA investing could comment on the possible path below (I acknowledge no one responding is providing legal advice, etc. and I should check with a lawyer - I'm just looking for whether going down this path might be possible before calling my lawyer and getting a bill).

I have roughly $100K in a rollover 401k from a previous employer and I was thinking I could put that in a self-directed IRA to put a sizeable down payment on something that I could personally live in. I would have a property manager as I know I'm not allowed to actively manage real estate in a self-directed IRA. My question is whether that would still clear the bar of those rules. My IRA would be buying, the property manager would be managing, and I'd be paying normal market rent. Though it would be essentially paying myself, I'm hoping that might be hands-off enough to qualify.

I'm thinking this would be beneficial as I wouldn't have to worry about the tenant not paying rent, I would be building equity over time in a market it would otherwise be very difficult for me to enter, and I'd be able to minimize fees by finding the lowest cost property management possible (as I wouldn't need to worry about tenant screening, etc). 

What do you think? 

Talk to your lawyer and go back to the contract and the addendum. From what you've presented, you have no obligation to cover the seller's costs, and he's required to bring the items up to code prior to sale. 

Taking his option to replace the heating units after close might be a possibility, but I would think that's the much harder option. You'd need an independent cost analysis on the replacement (I'd get three estimates), permission from the city to close as a variance to their permitting process (likely the sticking point) and a new addendum for this additional agreement. Hard to do in a short period before close. If you go down that path, however, I would definitely make sure your replacement cost is locked down - I'd be shocked if the $6K is actually sufficient for the work. 

You should also review the leases and financials prior to purchase as part of your due diligence. You may see one (or more) of the leases is month-to-month, or there's a problem tenant. If you haven't written your offer you can include a requirement to have the current owner term the lease and vacate the unit before closing. In any case you should be including language in your offer that allows you to review the financials and leases, much as you would add an inspection clause - you're just inspecting the financials in addition to the physical structure. May take a little finagling, but that might be an option as well. 

I'm in a similar boat to you, and I want to add an extra thought to paring down your holdings: don't forget about vacancy risk. The smaller you are, the more critical that calculation is. You currently have 5 units (3SFR's and 2 units in a duplex). If you lose one renter you're at 20% (40% counting your home) vacancy. Expenses add up fast at that vacancy level (I know - I lost a tenant this year and holding killed me for a while). If you sell as you're considering you'll drop to 3 units at an baseline 33% vacancy. Lose a tenant at those numbers and you're at 66% vacancy. Economic vacancy calculations are even worse (if you weight rents against expenses across the whole of the portfolio and calculate that way). 

Monthly income and equity paydown are great wealth drivers, but they need time to work. In my opinion you'd be increasing your risk incredibly for a negligible long term gain. By all means do a HEL or HELOC to pull out some equity if the numbers make sense, but try to keep as many different income streams as possible.

I would agree with some of the others here that it's not a buy at that price, and also that he knows exactly what it's worth. I wouldn't be afraid to put in an offer though. I think there's two ways you could go with it. 

First tactic: contact him and thank him for his time. Decline to buy at his current offer and wish him luck in an open-market sale. I would also consider playing the 'new-investor' card and tell him what you came up with for your analysis. Tell him you don't think the property with needed repairs and at current rents is worth more than X, but "I'm new and I might not be analyzing the property correctly" - cater to his ego a bit. If he offers to go over the numbers with you, then you have an opportunity to bring a little reality to the conversation, and possibly see where he's getting his numbers. 

Second tactic: present your offer based on a realistic valuation and ask for terms. Having been in the business as long as he has, he knows the shape of the property. Be honest but fair with him - just outline the calculations above (I would build in a higher repair contingency for asbestos and lead - and make sure to mention those to him) and tell him you can make the deal work but only if he carries the paper at an attractive rate. If you can match, or exceed, what he's been taking home per month on the property - and do it with fewer headaches - he may not care about the details too much. No idea what his estate plan is, or if he has any heirs, but if he's 80 and you can make 5-7 solid years of low-stress payments to him that might be just what he's looking for. 

I would also ask your title company. If this HVAC certification is usual and customary as part of the contract this is something they would be requiring as well. If they know it hasn't been done, they'll certainly want to get on the seller to provide it in order to proceed with a timely closing. They likely wouldn't be able to certify the closing, transfer the title, or insure the property without it (assuming that clause is the result of a local statute, which is what it sounds like), so it sounds like the seller doesn't have a choice. 

Second point - I would ask the HVAC inspector you used what regulations he has to follow. I had a property inspected once, and they red-tagged the furnace, which means it could only be replaced, not repaired. Any HVAC tech that repaired it would lose themselves and their shop their license to operate. That's a heck of a bargaining chip. It might be as simple as asking him to report his findings to you and/or the agents in this case his findings. He could also be required to report it to the city, based on local laws. 

In any case it sounds like you'll be getting your deposit back. It's just a matter of if you can get the need for repair on the record. If you can, the repair will be required before the property can be transferred in any case and you're in a better position to go forward. 

Final thought (I promise) - you might not want this property. If the prior owner is avoiding needed certifications, and they did a slapdash repair of a critical system like this, who knows what else you'll find when you're the owner. Buying from a slumlord (I know, I've done it) can be extremely hazardous to your bottom line as you'll have years or decades of shoddy workmanship to repair as you find it.