First Deal, How Am I Doing?
As a new investor, I would like some advice on my first deal.
- I have been negotiating with the seller for almost 7 weeks.
- The seller needs to pay off his mortgage by July 1. (As per agreement in court, before facing foreclosure)
- I have a contract for 375,000 purchase price (signed today)
- As of today, the house is worth around 455,000.
- I have agreed to rent the house to the owner at 2,200 per month for one year ( 4 months free)
Here is my first concern: If he defaults at any time, how fast and how can I evict him? I know that it is a no no to rent to the troubled owner, but the situation is that he wants to rent for at least two years and at 2,200 per months it is less than half he was spending to keep the house.
- I will spend 20k between closing costs, seller's tax, penalties and the 4 months free rent I am offering.
That will still get me a profit of around 60,000.
- My intention is to keep the house for two years.
Is this a good deal?
I need some comments, please.
Thank you.
I guess you're not concerned about negative cash flow for the two years your intending to hold the property prior to selling it? Not counting yur acquisition costs, 375K at 7%, I see about $250 negative, not counting taxes and insurance, or maintenance. Over the term of ownership that you have indicated, this could total about 20K counting the 4 free months. When you end up evicting the seller, will the property lease for more than your payment amount? How difficult will it be to find a tenant that can afford this?
This property can be a positive experience. If it appreciates at 6% a year, you could net about 105K on the property when you sell... If you survive it.
Keep in mind, I don't know your financial situation. If you are able to handle the worst case scenario, Go for it!
Good luck,
Jeff [ Edited by jeff12002 on Date 06/16/2004 ]
Hey,
You can't count on appreciation in your calculations, so the deal has to stand on its own two feet today.
FMV- $455k
Purchase price-$375
Closing Costs - $20k
Negative Cash Flow ($200 per month)- $5K
RE Commission - $27K
So that is half of what you thought you would get. (I am presuming 10% down and 7% for the mortgage).
Then you have the headaches of runing a rental with negative cash flow for two years, so when something breaks how do you pay for it????
PLUS renting to the current owner is going to get you in to a world of hurt if you have to try and evict him.
"Profit" -$28k
Thank you guys for your response. Now it is my turn to make this deal more atractive, and the only chance I have is with my lender.
I was thinking to get an interest only loan with a 20% down. Fortunately, I did my calculations with this in mind, and I was confirmed today that my payments will be 1,000 + tax + insurance. That will give me a cash flow of 300 a month.
I hope everything goes well with this soon to be tenant.
I appreciate your comments
Regards,
jlsayan
Let me get this straight. You are going to put 20% (75k) down plus 20k in closing costs. A total of 95k into this deal.
And you won't get most of your money back until two years.
I would pass.
I am closing on a house as I type. I paid the seller 5k and will be getting a minimum of 65k back within a month.
Sounds like you have already made up your mind. Seems to me that you should start looking for better deals.
I can't imagine you being in business long if these are the types of deals you do..
good luck.
Tom
You are right Tom, the problem here is that I will have a lot of money stuck for two years. My problem was that it is the only deal I got in 4 month, the good thing is that I will make 110K profit.
The message here is to look for better leads, any sugestions?
What are you currently doing to generate leads?
Well Itbelknap, I enrolled in a preforeclosure list on internet. Also some other sites that ofer foreclosure listings but I have not look deeply into them, because purchase price is always to high.
Any sugestions on where to look for?
Thanks
I just have a problem with the tenant. If his credit score and equity building wasn't enough of a priority for him to maintain his mortgage payments, what makes you think he'll make all his rent payments on time when there's nothing in it for him. Sounds like a potential nightmare on alot of fronts. Thumbs down from me.
[addsig]
Greetings:
I noticed one of you said that you belonged to a pre-foreclosure list on the internet. Care to share the address? I live in MI and would like to start investing.
Thanks,
Sallie
E-mail: **Please See My Profile**
First off, I would Give a thumbs down on this deal.....If the owner could not make his payments on the loan, what makes you think he is going to give you a monthly rent check on time. I have seen this before, and I have had to evict the homeowner each and every time.
2 years is a long time in real estate, to make a 100k. Look at interest rates, are they going up? They will be Higher in 2 years, and that is a guarantee.......... :-o
jlsayan,
When you look @ the previous post that breaks down the #'s the question becomes, how can I make this deal work.? The #'s are the #'s so you can't ignore them. Perhaps you're better off re-vamping your strategy i.e. sell to a 1st time homebuyer/someone that wants to live in the house, take the difference/profit and move on to the next transaction within 90 days. You're using too much of your working capital on this deal.
As I have read, it looks that what I thought to be a decent first time deal, it is for the mayority a thumbs down.
The answer to if tenant-formerly owner will pay is: This guy was paying (up to default) around 4,800 a month to keep the property, (they share payments between owner and his brother, their mother lives with them but is retired) so I thougth that 2,200 is a good relief for them and they have not spent money for the last 5 months either.
Moreover, when I first talked to them, not moving was an important issue, So after I posted this topic, I have research in "tenant eviction process" . I hope everything goes well for me and specialy for my soon to be tenant.
Thanks for your comments, I will keep you posted on how am I doing.
jlsayan