Posted by JD on April 15, 2004 at 19:51:30:
My gut tells me you are, of course, fully correct. However, it does
bring up this question:
Does the offering of owner-financing or a lease-option enable the
seller to charge a premium for the property? If so, how much of a
premium would be customary?
Case-Study Analysis of a “First Deal” - Posted by JD
Posted by JD on April 15, 2004 at 19:05:42:
Hi…
The following are the “numbers” for my first deal that I’m
contemplating. Specifically, I am wondering about the following
questions:
(1) Given worse-case scenario numbers, is there enough profit in it to
make this deal worthwhile to a starter investor?
(2) Are there any major flaws or deficiencies in the analysis?
(3) Are the non-remunerative lessons learned from this deal
worthwhile, even if there is a smallish profit?
Here’s the data for your consideration…
THE PROPERTY…
The home is an 850 sq.ft. 2/1 bungalow in a reviving part of Tampa on
an average-sized lot for the neighborhood. This is the second to the
ugliest home on the street within about 3 blocks, the rest of which
have already been rehabed to some extent. There is a separate 1-car
garage on property.
Home requires a variety of general repairs and updating to get an
above average neighborhood price of $130 sq.ft., including flooring,
wall resurfacing, painting, BR and kitchen updating, landscape work,
etc.
THE OWNERS…
The owners are in pre-foreclosure and not interested in pursuit ofany
theoretical equity. They are willing to allow the mortgage to be
assumed for the rehab period and are open to a Land Trust type of
transfer.
THE NUMBERS…
Appraisal value $87,500 in minimal functioning condition 2-years ago.
Current Mortgage payoff value: $67,500
Known Liens and city water meter reattachment fees: $3,000
Probable rehab cash needed: $27,500
Probable end-user resell calculated at premium sq.ft. value of $130 x
850 sq.ft = $110,000
MLS/Realtor sales commission (discounted): $5,000
Estimated months to completion: 4
Mortgage pymnts per mo.: $500
Estimated profit: $5,000
THE ASSESSMENT:
Notwithstanding the cost per-sq.ft method of appraisal, I feel like a
well-qualified couple would actually pay closer to $120,000 to
$125,000 because the place would be a “cream puff” by the time I’m
done with it. One question would be whether an appraiser would agree
to appropriate a mortgage decision on that amount.
I suppose I could do owner-financing or lease-option at a premium
and then refinance the original mortgage to re-acquire my cash and
then hope that the would-be owners take care of my property.
Any insights, random thoughts, hard lines of advice on this, my first
deal, would be tremendously appreciated.
Re: Case-Study Analysis of a - Posted by Greg
Posted by Greg on April 16, 2004 at 13:04:07:
I would agree with what someone else said. 27,500 in rehab costs seems pretty steep. See if you can’t reduce that and bring your sell price down a little more in line with the market values. If you look at 67,000 + 3000 + 12000 = 82,000, your margins suddenly look a lot better if you sell around 100,000.
Way too thin. Don’t do. - Posted by Mike G
Posted by Mike G on April 16, 2004 at 12:23:35:
DON’T DO IT. Step back and think about it for a sec, what you’re contemplating is putting approx $30k into it for a $5k profit. A rule of thumb I live by is to never put more into a property than I expect to make in profit. Way too many things can go wrong. You have no cushion here. As a CRE investor, you should be trying to put together deals which have these numbers flip-flopped (spend $5k w/ $30k in potential upside). That said, I like your pragmatic approach to analyzing deals. Keep it up.
Re: Case-Study Analysis - Posted by Allen_IND
Posted by Allen_IND on April 16, 2004 at 07:11:27:
Just a few ideas, caution I’m a noob myself.
Get the bank to discount the mortgage/short sell.
I think overall you shouldn’t be shooting for the top of the market, which it seems you’re doing. Rather, consider how much it would cost to do basic (cheap) cosmetic rehab just to make it somewhat presentable, and then sell it at a little below market.
Re: Case-Study Analysis - Posted by Mako(HI)
Posted by Mako(HI) on April 15, 2004 at 22:37:03:
What is the current market value of the homes in that area? You mention (120-125K) is this true?
You also write “$130 x 850 sq.ft = $110,000” in your assessment. Realtors usually go by what has sold in and around the same neighborhood for the same type of property as a baseline from which to calculate FMV (fair market value).
I suggest calling one in your area to find out what the FMV is on your property. Tell them that you’re thinking of listing it and that the house will be fully rehabbed before listing.
==========================
>>a well-qualified couple would actually pay closer to $120,000 to $125,000 because the place would be a “cream puff” by the time I’m done with it.
Re: Case-Study Analysis of a "Fir - Posted by dave
Posted by dave on April 15, 2004 at 19:23:19:
way too thin of a margin. the appraiser is going to go by market sales in the area only. there won’t be any reasoning with market value.
a desperate seller very seldom means good deal
Re: Case-Study Analysis - Posted by JD
Posted by JD on April 16, 2004 at 05:20:10:
The current market value seems to depend a bit on one of several
techniques for appraisal. If they use price-per-sq.ft, the value would
be somewhere around $110,000. If traditional comps are scrutinized
without regard to the square footage but with more sensitivity to the
BR/BA/GAR size, the price could be inched up to $115,000. The $120
to $125,000 figure may be “pie in the sky” thinking, which I am
altogether too prone to doing. I was looking for a reality check in this
forum and it seems I am getting it. 
Thanks!