Newbie Considers Her First Fixer-upper
Posted: 10:48 on 07-18-2004
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I'm hoping that an experienced investor will tell me what issues/aspects of this deal that I'm overlooking.
First, the property I'm interested in:
There are two houses on 1.3 acres of land. One house has been split into three rental units (two units have 2 bedrooms, one unit has 1 bedroom). The house was built nearly 100 years ago but looks to be in good shape. However, the appliances are OLD and the units need carpet, paint and some minor cosmetic work.
Both of the two bedroom units are rented out for $500 per month. The one bedroom is vacant. I have only been able to see inside the one bedroom, because the folks renting the other units don't have phones and weren't at home when I've visited this property. One renter is a single Mom with two kids and four dogs. The other renter is a single man with a rottweiler and a pit bull. 
But according to the realtor, the condition of these units is very similar to the one bedroom that I have seen.
On to the second house...its a tiny house with one large bedroom. The man who lived there last owned the property. He is now serving time for trying to kill his wife. Its been said that he was mentally ill, and from the looks of the house, I could beleive it. He had three dogs in the house, and he was known to leave them for several days at a time. I have never seen so much dog poop in my life! There is garbage all over this house, too. In fact, the house has been condemned. Structurallly, the house looks good. Like the other units, it mostly just needs a good cleaning, painting, carpeting. I do worry that I'll never be able to get the smell of dog urine out of the house--
I'm sure it soaked into the sub-floor.
So all this property is owned by the bank now, and they are asking 140K, which they will not get. According to the realtor, they are holding out for 100K. The realtor has told me that they've turned down offers as high as 88K.
I'd like to buy this property (Am I crazy?)
I have no cash, but I do have good credit. My spouse and I have a decent combined income. Our only asset is our home, which we bought about 4 years ago. We have about 20K in equity.
We could do the work they need ourselves, but we don't have much cash to buy the supplies and appliances. We certainly don't have down payment money.
The bank is supposedly very easy to work with as far as lending goes. Here is our game plan: We tell the bank that we'd like to buy the property, but we need them to finance us 100% and lend us money for the rehabbing. Its a win-win situation; they will sell their property (which has been on the market for almost a year) and they will earn money on the mortgage. Of course we realize that they probably wouldn't give us a huge price break on the property if they give us all the money we want.
Experienced investors, I need your thoughts. What have I overlooked? Will the bank laugh in our faces and kick us out? Are there any options to creatively finance in this situation?
We would first fix up the condemned house and the vacant unit. We would give the two current renters the option to move when the vacant units become available, but they will probably leave because we will not allow all of those animals. It might come down to eviction for them.
We do expect that we will need to find 4 new tenants. We expect to collect about $1800 total each month, which would easily cover the mortgage, insurance, taxes, etc.
One last thought...the houses are kind of close together, so there is plenty of land available to build a few more units at some point.
If you've done your homework and are convinced that these units would be good rentals, here is what you do...
Get a Home Equity Line of Credit on your personal home now for the $20k. Put $10k (%10) down and use the remaining $10k for repairs, closing fees, etc... Another option to avoid PMI is called a piggy back loan. You would put down %10, at closing you'd get another home equity line against the new property for the %10 you just put down. You take that money and add it to your down payment which makes it %20 total down payment so you won't pay PMI. Obviously this is a paper money trick because you still owe 90% on the loan, but the bank doesn't care because one loan is 80% and the other is an equity loan. Don't ask me how the bank justifies it... I didn't believe it until I asked my bank on my last purchase about it (half expecting them to laugh at me) and they said, "Sure, would you like to set that up now for the closing?"
Just make sure you do ALL of your homework first. Find out if there is good demand for rentals in that area and what the average prices are. DO NOT trust the realtor alone. Go talk to several realtors and pose as renters looking for a place. Ask them to show you similar properties and find out what they are going for and how many are available.
Good luck!
I'll assume this property is not in bloomington. Rents in this area are very dependant on location. If you credit score is at least 700, i know of 2 mortgage brokers that can get you 100% financing on this property and maybe even get you a HELOC that you can use to rebad the units.
if you'd like the referrals, let me know; but you should be able to talk to a few friends who have used mortgage brokers then just ask them to tell you if they can get you 100% LTPP for investment props.
You should also check the zoning before getting too excited - adding another unit could cause you quite a bit of grief with zoning.