Questions on my first potential deal - Posted by Brandon Monnig

Posted by dewCO on December 15, 2000 at 09:20:21:

You didn’t post this to Brandon, you posted it to Piper.

Questions on my first potential deal - Posted by Brandon Monnig

Posted by Brandon Monnig on December 14, 2000 at 17:23:10:

Hello everyone. I’ve been aware of the CRE site for a couple of years now, and I visit every so often to see what’s going on. It looks like I have run into my first chance to put the info I have gathered into use! Here are the specifics:

My friend Frank is a mortgage broker in our town, and he also owns 2 duplexes. He rents 3 of the units, and lives in the 4th. Frank was made aware of a foreclosure on a local property. The property is very small, say 900 sq feet, older (say mid 1930’s)breadbox-house in an old area. The exterior of the house looks bad. It has some wood rotting around a window, and the shake-shingle-look exterior is flaking paint and some of them are rotting. The roof looks rough, but does not appear to be leaking. I guess the best way to describe the exterior is pretty rough, but it could look good with some paint/elbow grease. A couple of the neighbor houses are fixed up nicely, so it is really easy to see the potential of this house.

The house is about 700sq ft, and has 1 bedroom, a living room, a small kitchen and a small bath. It also has a basement that is not included in the footage (ceiling too low to qualify as “living area”) but is definitely useable. The house if really decent on the inside. There are no signs of roof leak (on walls or ceiling), the floors are solid, and it is generally (relatively speaking) a clean little place. The floors are hardwood, but they have been patched/cut in several places, so there is now non-attached carpet laid down. The bathroom looks kinda’ forgotten, but I think some new linoleum and cleaning would do wonders. There is no provision for heating in the home, no stove, and no fridge.
The company that repo’d this house is looking for $10k out of it. Unfortunately I do not have the ability to get the money to purchase the home at that price. Frank, however, has the ability to purchase the home for cash. Frank knows of my interest in rentals/props, and has offered to help me get the home. My cost on the home will be $18k, either through the mortgage co he works for, or he will owner finance to me. The assessor’s office has the prop valued at $18,684. Frank said $19,800 is probably a reasonable market value on the home (assessment + 6%), and we expect a $300/mo rent to be attainable relatively easy.

I know I’m probably forgetting a whole slew of info, so what other questions do I need to answer? What is the general consensus on this deal? I think the payments will run me ~$190/mo on a 15 year note, so I’ll have ~$110/mo in positive cash flow, which I’ll just put right back into a repair/replace fund.

Electric heating for the home will cost me ~$500 for parts/installation. I plan on picking up some nice used/salvaged carpet, replacing a few window panes, and stripping/repainting. There will need to be some work on the exterior (such as replacing rotten wood around a window). The foundation has 1 crack, which I should be able to repair myself. There does not appear to be any water damage/leakage through the crack.

Assuming a rental price of $300-$375/mo, how does this deal look on paper? This will be my first experience with property ownership/rental, and I hope to learn a lot without throwing away a lot of money. I realize the quality of tenants in the $300-$375/mo range won’t be great. I hope to get them qualified on a section 8 program that will allow them federally subsidized rent, and also give them incentive to keep the place maintained to my liking.

I don’t even know where to go from here, so my question is: Help! What am I missing? What are some potential pitfalls?

If the prop cost me 18k up front, and I plan to rent for $300-$375/mo, the payoff period isn’t too long. Frank’s dad has a couple rental properties, and his criteria for a good deal is “anything that will pay for itself in 7 years”. I’d love to hear any feedback/comments/suggestions that I can get. Thanks!

About the payments… - Posted by AnnNC

Posted by AnnNC on December 17, 2000 at 18:24:32:

Would your seller consider 30 yr mtg with balloon at some time?
That would lower your payments, give you more money upfront for expenses.Or if you can’t do all the work yourself. Just wondering. Or is this just unrealistic and not worth it to the seller.? (and why, if anyone wants to comment).
Stripping and painting, of course you’re looking into
lead paint issuse in older house.
Did you get a home inspection?
Just thoughts. Ann

Re: Questions on my first potential deal - Posted by JPiper

Posted by JPiper on December 14, 2000 at 20:48:44:


I have to compliment you. I think you?ve done a nice job so far of evaluating your deal. I like the fact that you have checked this house out in terms of it?s condition. And I also like the fact that you?ve identified some problems and figured out some solutions. Understand that most houses can be made operable?and your post reflects that idea.

Now here?s what bothers me. Your buddy Frank has an inherent conflict?and he seems to be a major source of information for you. Let?s face it?.Frank buys the property for $10K, he now sells to you for $190 per month for the next 15 years. Sounds like a sweet deal. One way to look at this is that he return his cash in about 4 years. The next 11 are all gravy. Sounds like Frank has listened to his Dad? ?anything that will pay for itself in 7 years? is a good deal. To accomplish this he?s not doing repairs, renting to tenants, managing the property, evicting, etc. He?s simply relying on what is perhaps your good credit to make a fine profit. Nothing wrong in this by the way?.but we?re discussing this from your point of view.

So when Frank tells you the tax assessed value?.be careful. He has a vested interest. In most areas tax assessed value is little bearing to market value. It?s meaningless. But further, in older areas it?s generally in my experience well above the market value. What YOU need to do here is to check the comps. Find out what has SOLD in the area in recent months that would be comparable to this property. Do not buy this property, or any other property, until you KNOW what this thing is worth. Find out what has sold, and drive by them. Look at them and their condition?how they compare to the subject property.

While you?re at it?check out some of the rentals. A range of $300-$375 is way too wide. You need to narrow that down. $300 is going to give you a much different result than $375.

Your payment is $190?you calculated it correctly. But WHERE is all of the other expenses to operate this property as a rental? Things like taxes, insurance, repairs, advertising, legal costs, vacancy, possible utilities, etc etc. Rest assured, that if your rent is $300 these costs will probably wipe out that cash flow. And by the way, just how old is that roof? When that goes get prepared for a large expenditure. You need the cashflow to handle this?and it isn?t going to happen at $300 per month.

Next issue. How hard is it going to be to rent a one bedroom house? I can?t answer this. Never owned one in my life. But it would have to be VERY cheap relative to market value to interest me.

Bottomline is that depending on what the rent is exactly, you could be out there painting, repairing, spending time, money and effort?.for NO cash flow at all.

Now, unless you think I?m just shooting this deal down?.I?m not. I?m simply saying check the fact out. Carefully consider the tenant base as to whether the aggravation in dealing with them is going to be worth whatever the cashflow is.

This deal would look a whole lot better if you were buying for $10K?.like Frank is. In fact, if the bank wants $10K?I?ll bet they?ll take less than that. Tell you what?..while you?re out there checking out the comps?keep your eyes OPEN. Unless I?m way off base about this area?I?ll lay odds there are some other houses for sale at comparable prices?.and if they need some fixup that your willing to do?.they may well owner finance you just to get the thing sold. Who else will they sell to?

If you?re willing to spend the time to fix some of these cheap houses they can become major cash cows. And they are exactly the type of houses that need to be sold owner finance. Banks don?t even want to loan $10K?or for that matter?.$20K. This area may be a great opportunity for you if you?re comfortable with it. BUT check it out first?.find out what things sell for?get to know the area like the back of your hand. THEN you?ll KNOW whether your friend Frank has offered you a deal.


Re: Questions on my first potential deal - Posted by Mike-BC

Posted by Mike-BC on December 14, 2000 at 21:35:33:

Hello Brandon;

JPiper has made note of all the expenses that need to be considered that you did not mention in your post. So I would like to approach this issue from a different point of view.

In any business, you need to be cognizant of the market niche you occupy and who your target market is. With a one bedroom house, your target market is narrowed drastically to those who need only one bedroom - singles, older empty-nesters, young couples starting out. What sorts of rents would these people pay in other types of rentals? What does a house offer over an apartment - yard, off street parking…? Is the house located close to anything…hospital, college, shopping, downtown? These will help to define the profile of your renters, which is important as it will give clues to transiency/stability of tenants, rents they are able to pay, and perhaps even to how well your property will be treated. You haven’t provided that information, but my guess is that you will have difficulty renting the house and that renters will be quite transient.

Also, given the numbers you have given, I think that 18k is too much to pay but then again the terms may change this. It seems to me that your friend is buying the property at wholesale and then flipping it to you for retail pricing. Now if he were to flip it to you for 12k…

Just my opinion, but then again, I just might be right.