Posted by Ronald * Starr on October 06, 2001 at 19:06:25:
I received this response via e-mail. Seeing no problem with privacy, I answer here.
Date: Sat, 6 Oct 2001 11:58:17 -0700 (PDT)
From: “Doug Pelton” | Block
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Subject: Condo : $40 for $60k appraised
Ron, thanks so much for offering your thorough
This condo is probably in one of the
oldest/nicest-kept associations in our area. I vistied
the assessors office and, yes, did look up prices for
units selling in that 50-unit complex; no 1 bd. sold
recently, but found a couple of 2 bedrooms in that
complex: 1080 sq ft/$61,5k…and $60k. In 1994, two 1
bd in that complex sold for 55k/803 sq ft and 45k/
668 sq ft----this was the peak of our market. Yes, she
did buy ‘high’ at peak.
A ‘lower end’ condo complex sold 1 bed. last year for
$39.5k / 620 sq ft and $51k / 690 sq ft !!
Seems the 1 bd have a higher cost-per-sq foot ratio,
I’m wondering if a lease-option would give me some
room to decide if it rentable. Maybe $1000 for two
months and, during that time, she vacates and we try
to rent it.
Am studying your letter as I’'m a ‘newbie’ (have one
free-clear rental with good positive!) and trying to
understand the scenario about the creative finance
otions----for example, I could, say, offfer her $40k
with her taking $5k in a second at a high interst?
Thanks again for your time, Ron
Well, I still don’t have much of a feel for the value, as you did not indicate the square feet in the unit. However, if a “lower end” condo sold for more than you can get this one, that sounds pretty good to me.
I am still unclear on how much she owes on the loans and the terms of the loans. Taking subject to the existing liens might make sense, but without knowing the amounts and the terms, I can’t say for sure.
I like that you would be buying so that the monthly rent is about 1%-1.1% of the purchase price. At that rate you probably will be ok, especially if you got a new fully-amortizing mortgage at about 7-8% interest rate. You might be ok with the existing financing. See previous paragraph about this.
I’m not real excited by a $1,000 option consideration for just two months. Typically, people get options for about 1-4% of the property value, and that is for longer term, say 6 mo.s, 1 yr, or even 2 yr. Being she is living in the property and is elderly, it might not be good for her to have her move out without a firm sale. IF you don’t buy, what does she do now?
Could you get some idea how hard it is to rent without her having to move out? Possibilities: you have an option or a contract with a slow close, to give you time to find a renter and her to get ready to move out. Meantime, you show it while she is there.
You look up the ownership records for the complex, find all rental properties and contact the owners to find out the rents they are getting and how hard it was to get a renter in.
Contact some real estate agents in the area to attempt to get two pieces of information: possible market value, possible rental amount and ease of renting.
Go to the library and read local newspapers for past few months looking at condo rental ads. Maybe even call some of the numbers and talk with the people about rental amounts and ease of getting rentals.
Yes, I think if you can get in for a comfortably small down payment and get 9-12% cashflow on the property, it might make a good investment. However, if I thought that the appreciation would be negative or zero, I would probably not go for it myself. I figure that with cash for a downpayment, it might be better to find some other deal with better returns projected.
Your last paragaph confuses me. I thought that you had been suggesting to her about $42K? And when you said that, it sounded like you could put down $2,500 and buy it. That suggests that she owes $39,5K? Now you are suggesting $45K and her carrying $5K. Now neither deal sounds bad, if you have positive cashflow. But they don’t sound like the same deal.
I think key here is to put little cash out. Thus, if it turns out to be a bad deal, you don’t have much to lose. You might be well able to sell it for more than you paid for it. If she will carry, that sounds good to me. I would suggest that if she does not seem to understand or like an option idea that you not push that. Introduce it and see how she reacts. Then back off if she is negative.
Now, you mention having a free and clear rental. That is ok if you are into your retirement years and are not planning to acquire more properties. However, if you are thinking of expanding your holdings, you might well want to refinance that rental property to provide cash for buying more properties. There are a couple of good ways to go: just standard low-interest long-term self-amortizing loan; a bank line of credit loan. The later you would pay down whenever you had some extra cash. You would then be able to borrow out more money whenever a good deal popped up. You would only pay interest on the amount of loan money you were actually using. The interest rate, however, is usually somewhat higher than for a standard long-term loan.
Good Investing*****************Ron Starr****************