Multifamily Preforeclosure - How To Structure A Deal?
Hi Everyone,
I am relatively new to real estate investing, but I do have 11 properties that I am currently doing sandwich lease options. I came across a 4 plex that I am interested in, but I am not sure how to go about putting together the best deal.
I am 27, have a mid FICO of 778 and have $30k in cash. My goal is to eventually be a full time investor. Now for my situation. I am currently renting an apartment. I have put in a few offers on duplexes, houses and 4 plexes, but just havent been able to get one to work. On one house, I was outbid by $1. On the duplex, which was bank owned, I offered $135k. The appraisal came in at $127k but the bank wouldnt budge off the $135k, so I gave up and signed a lease for the place I am currently living and later found out the bank sold the duplex 6 months later for $115k.
Back to the 4 plex. It is currently in foreclosure. The guy owes $103K. It is listed with a Realtor for $128k. It is probably worth $120k. It goes to the sheriffs auction in June. Can I do a subject to deal and not have pay realtor commission? I dont have a problem just buying it conventionally, but I dont want to put a lot of my cash into it, because I still want to buy a place to live(i would really like living in a 4 plex, but not this one, I need a garage). I have thought about doing a lease option, but if the sheriffs auction is scheduled, will just making up the back payments avoid that? I have an LLC that I would like to have own the property. Can I take it subject to and the refinance it right away and not have to sign for it personally since there is some equity there?
Is it a bad idea to live in a multiunit that you own? Should I quit being so picky and buy something so I am not wasting my money on rent? HELP!!!!
Ryan
What is the cost of repairs? To determine if you have a good deal, at a minimum you must know the After Repair Value (ARV) and the repair costs.
You can cheat on this a little, but Ron LeGrand teaches the MAO (maximum allowable offer) formula.
MAO = (ARV * .7) - repair costs
MAO = (190000 * .7) - repair costs, this already puts you at 133k or below. You will have a hard time flipping this to another investor at 144,900.
If you know that you want to flip, you can always put a Land Trust as the purchaser. Say the purchaser is the "123 Main St Residential Land Trust". When you find your investor, you sign over the land trust to him for the finders fee. You can also use an LLC, Corp, or some other entiry as a buyer.
Thank you for responding. I am estimating the cost of repairs will not exceed $10K. The ARV will be $190-210K. Can you better explain the land trust scenario? Is there any other way besides the land trust or LLC? There are 3 other offers that came through now, so the bank is wanting us to bring our best offer to the table...Thank you!
A trust, llc, corp, etc are all entities. An entity can purchase property. Say you set up an LLC, which you can do online in FL. You are the only member in the LLC. You tell the bank that TomKat LLC is the purchaser of the property. You sign the P&S since you are the managing member. But remember the purchaser is the entity. Once you find someone who you want to flip the property to, you simply sell them the LLC.
This selling of the entiry (whether it is a land trust, LLC, etc) only works for cash buyers. No traditional lender will lend to an entity.
Brenda
Monkfish, what was your repair costs on that house?
The higher the ARV, the more you can cheat on the 70%. But realize also that the higher the ARV, the more you better be on target with the ARV, repair costs, holding costs, etc. On a million dollar home, you can not afford to have over estimated the resell value and underestimated the repair estimate. The holding costs will kill you.
Also, the more experienced you are the more you can cheat on the 70%. The MAO formula is really good for beginners, moderate priced to lower priced homes, and for giving quick answers over the phone. When someone calls me on a house where I am unfamiliar with the neighborhood, I ask them on the phone what are the needed repairs and it is usually easy to find the ARV so I can quickly come up with a ball park number to see if they are motivated. The MAO is simple math that you can do without a calculator (while driving the car) and on a property that you are not very familiar.
I buy lower priced homes and I always use the MAO formula as my measuring stick as to if it is a good deal.