First Property, Is This A Good Deal?
I've found a duplex that is selling for $79000 in a county an hour from where I live.
The realtor has told me that current rents are (3 bedroom unit) $525 and (2 bedroom unit) $395 but should be higher. Both units are currently full and on month to month leases. It was suggested that at least one of the tenants should be removed because they haven't taken care of the unit.
Taxes are about $2000. I'm estimating $5000 for rehab costs. I'm sure it will need new carpetting and a clean coat of paint.
I'd like to reduce the amount of cash to as low as possible and finance as much as possible.
I won't be able to do the property management but my dad lives 10 minutes away and will help out, but I will pay him a percentage of gross rent, probably 5-10%
Can I have the tenant removed? I would think yes because they are on month to month.
How can I set up this deal so that I can get a positive cash flow?
I wouldn't pay more than $62-63k for this property. I bought a similar duplex with much higher gross for $59, though it started at $72k. Have tenants being removed as part of your contract before you close, and try to have signed leases BEFORE you even close. On the other hand, m-2-m tenants could be VERY long term, and shouldn't necessarily be kicked out.
Another suggestion - sign the contract for $80k, but have the seller credit you $15-20k at closing (make sure to have this in a written rider to the contract). Having this 18-25% credit and borrowing a 90-95% LTV will enable you to pull out about 5-10k for the repairs you need to do.
Cheers and good luck!
-Greg
Thanks for the response.
It seems to me that I will need to get the price down to 60K and raise rents to get a good deal out of this property.
Thanks for the suggestion about the 80K, that could prove very useful for rehab costs.
At the current rents this should be cash-flow positive. $79,000= $725 payment PITI. Now I am assuming a good credit score and 100% NOO financing.
If you can raise the rents it will be even better. You can get back money at closing if you structure the purchase/sale amount to be raised and credit back money for repairs. The appraisal will need to come in at least what the raised price is at. So in this case the closing costs may be $3K and the repair amount is $5k for a total of $$87K if you can get it to appraise at this amount you could get back money at closing. If you need help see my profile.
Good Luck,
Robert
Thanks Robert,
The cash flow analysis spreadsheet that I have been using factors in other expenses including maintenance, management fees, and vacancy. At the current price, the cash flow is very thin.
MarkMarkov,
I can't speak for all 50 states, but as far as TX is concerned your RE attorney is incorrect. It IS illegal to have the seller credit the buyer if it is NOT on the HUD1 statement. I think what the attorney meant to say is that it would be difficult to find a lender that would allow more than 6% seller concessions. This seems to be the upper limit, however, if the lender signs off on the HUD1 and the cash back is disclosed, you shouldn't have any issues.
Chris
[addsig]
MarkMarkov,
It all depends on how you will write it up. I had two Century21 realtors majorly confused to the point that they involved a senior partner, company attorney and the best RE attorney in town before they let me proceed. People are very unknowledgeable about this not-gray-at-all area. It gets gray if it's a part of a separate contract. It can qualify as predatory lending. Research the rules on that in your state, but most of these laws are FEDERAL, not state. Here's what IS legal and what IS NOT legal:
REQUIREMENT: Your seller and lender BOTH need to be ok with final arrangement!
Credit from Seller for more than 2-4% on Conventional or FHA loans TOWARDS SELLER CONCESSION (closing costs) IS NOT legal since it is dictated by the loan what the maximum concession may be. Non-conventional loans, such as HML do not always have this condition - talk to your mortgage broker or lender.
Agreement for credit from seller to credit, when it is later agreed to "forgive" the money, or when the credit is actually an undercover owner finance loan IS NOT legal. Everything you do needs to be disclosed to your bank. Would they still have loaned the money if they knew of such "side arrangement".
Asking for a credit, showing no money exchange hands, and paying fees from the low sale price IS NOT legal. That's fraud.
Here's what I did that solves all issues. Again, assuming that Seller and Lender are ok with this.
Price: $50,000
Financing Terms: $10k down, $40k/6%/30years (80% LTV)
Contengencies: Seller agrees to give a $10,000 allowance to Buyer at closing for repairs.
I wrote a $10k downpayment check, Seller wrote a $10k credit check. Photocopies of those checks went on file with lender. No money actually exchanged bank accounts, but only because amounts happened to be similar. Seller DID NOT PAY FOR CLOSING COSTS. That's a separate issue, and you need to verify with your lender what is acceptable there. When the bank finally financed the transaction, they financed $50k at 85% LTV. $2500 in cash went into my pocket, and covered closing costs, but I still had to pay for them when I closed. Now I have to pay interest on that amount, but it works for me.
NOTE: Seller had to pay a realtor fee from $50k. Realtor agreed to take 5% instead of 6%. (Seller overpaid by $100) But everybody got what they wanted, everyone was happy. WIN-WIN!
Quote:On 2004-11-09 14:11, njmurphy wrote:
Thanks Robert,
The cash flow analysis spreadsheet that I have been using factors in other expenses including maintenance, management fees, and vacancy. At the current price, the cash flow is very thin.
Raising rents usually translates to higher vacancy rate - did you account for that? Make sure your leases don't end on the same month, and compensate higher rents by being EXTRA nice to your tenants. So they never want to leave. Rental property needs to be making money when you buy it AS IT IS. Proposed changes may or may not work, but can you afford to experiment? Can you afford to make payments while it's vacant? Can you afford to evict if you move ANYONE in just so it doesn't sit vacant? I'd go any day for lower rent from a high quality long term tenant over high-rent month to month that will trash the place AFTER I have to evict him/her. Just negotiate a better price. If you can't - WALK AWAY! $100/mo thin cashflow "if everything work out" is not worth your time. Too many other opportunities are out there. Spend more time on marketing for a good motivated seller than on creative financing of marginal deals.
Thanks for all your input. I took a look at the property and basically it is overpriced for the condition and the seller is not willing to budge nearly enough on the price.
I'll just keep looking for a better opportunity.