*** Official Real Estate Forum *** (2 Viewers)

[Rattle and Hum]

First, that's a VERY good credit score. Max is 850 and you're close. North of 720 is A+.

Thoughts:

Without knowing your market (I know you are trying to educate us some), but are there homes out there that are offering either a Lease/Option or some owner financing?

Some people cannot afford a home or have iffy credit. L/O and owner financing can help them out.

Some are victims of the FICO score system, but some are bums. Credit reports are cheap and REALLY cheap compared to what not having one can cost you.

If you sell a home Lease/Option, you get a Non-Refundable Option Consideration, or "NROC", that is usually 3-5% of the cost of the home. You also get a contract to sell it in a year or so at top dollar (for you I'd guess 140K).

You can write the lease such that you always have the right to inspect and should once a quarter if not more often. Defects found / not respecting the property can void the Lease and they lose the option to buy.

So you could get $6000 for someone to move in and "rent" your house for a year, get tax deductions from your "rental property" (which it would be considered), and you would sell and rent for top dollar.

Other option is the seller financing. You can offer to finance someone (who can't get their own mortgage) via a "wraparound mortgage" (you write a new mortgage that pays down your existing mortgage - you pocket the cash difference). You can also just owner finance the balance between what you owe and create a new second mortgage, or also offer to hold the 2nd mortgage for someone bringing in a new first mortgage.

Interest could be quite favorable for you. 10% interest on a 2nd mortgage isn't out of line, and if the 2nd is smaller than the first, the rate doesn't affect the buyer as hard. (Ex: First of $80K at 7%, Second of $40K at 10% works to be around 8%).

Any of these - get some $$ down - preferably 10%.

Here's something I just noticed.

You have a 15-year note.

You can refinance your property, pull out $$, and have a 30-year interest only loan. Even if you just pull $100K out at 5% that's $500 before tax and insurance. You could rent for a breakeven at that point.

Bottom line - you have options.

Jeff, thanks for your time and expertise. Our current home is listed for $128K. We actually listed it last summer as a L/O with 5K option terms and a selling price of $135K. We only had a few showings... price obviously too high.Interesting sidebar: The agent I listed it with sold a similar home last summer that was around the corner from us on a L/O. That tenant/buyer ended up circumventing the gas meter somehow (he is a heating / cooling guy) and the agent that sold the property just took it back with a huge gas bill that he was liable for.

Anyways,

1. Would a "wrap-around" trigger the due-on-sale clause of our current mortgage? I was hoping to avoid this if it sold L/O by not recording the L/O.

2. Hold a 2nd: Any ideas what type of lender I should be looking for that would allow us to hold a 2nd on the property? I assume most typical banks aren't interested in this or is this assuption off track?

Thanks again.

 

[jeff_eaglz]

I asked about selling my house this way several pages ago, and was surprised at the reaction. Like it was a dishonest way to sell a house...still not sure the difference between Land Contract and lease option, but from the way you just described it, Lease Option was what I was describing and Mike thought it was a terrible idea. Perhaps we can talk about the pitfalls of L/O again.

Pitfalls:1. "Tenant" is likely of weak credit (otherwise they'd be a buyer, not a leaser).

2. It isn't a sale - you are a glorified landlord.

3. One time tax event when they exercise the option (capital gains issue - possibly).

This can be negated if it was your house and you lived there 2 of the past 5 years.

4. Since it isn't a sale you need to keep an eye on the property.

5. Need another way to get your $$ out of the place if you need it TODAY.

Perks:

1. The down payment is non-refundable, and is forfeited 70% of the time.

2. Max sale price.

3. Tax benefits while being a landlord.

4. Have a chance to "sell" it again if they don't option it.

5. Tenants feel like homeowners so you should have less worries (and you can write the lease that basically says "you're the owner, you fix it").

That's a good start of each side.

 

[BassNBrew]

I asked about selling my house this way several pages ago, and was surprised at the reaction. Like it was a dishonest way to sell a house...still not sure the difference between Land Contract and lease option, but from the way you just described it, Lease Option was what I was describing and Mike thought it was a terrible idea. Perhaps we can talk about the pitfalls of L/O again.

Personal opinion here...Although they are two different types of contracts, you're usually dealing with the same principals.Seller

a) Owner trying to move a piece of property for more then the fair market value (otherwise it would sell on the open market).

b) Investor optimizing profit by taking advantage of a buyer's inability to secure funding because the general finance community finds them to be an unacceptable risk.

Buyer

a) Someone stuck with another home they must sell first or in a new job and can't secure financing.

b) Someone with a financial history of being irresponsible or taking excessive risks.

Why would a buyer enter into an agreement where they pay more then the market rate for a property and at terms less favorable than what most of the rest of the population has access too? They don't have any other choice. History tells us most of these types of contracts are not successfully completed. Any "equity" earned by purchasing a house prematurely is usually lost in the unfavorable terms of the rest of the contract. Most of these people would be better served by living within their means, getting their credit in order, and they chosing from a large population of homes on the market.

Owners and investors have two readily available means to make a fair profit. Sell at a market rate for an immeidate profit. Lease on a longer term for income and longer term appreciation. Sure, a lease purchase can be drawn up to fit within those criteria, but in a vast majority of the cases they are written with the terms strongly favoring the owner and even set up for abuse.

With that said, it's a matter of personal ethics as there's nothing wrong with a operating in a predatory manner as long as it's legal. Personally I like to deal in win-win situations for both parties in a contract. Lending standards are already very liberal and you really don't even need to have a downpayment to purchase anymore.

I realize there are occasional exceptions to these rules, but why would you want to chase after an exception when there's a larger readily available market out there? I may be overly sour on lease purchases, but I speak with people (both buyers and sellers) regularly that have been taken advantage of and it makes me sick.

 

[jeff_eaglz]

First, that's a VERY good credit score. Max is 850 and you're close. North of 720 is A+.

Thoughts:

Without knowing your market (I know you are trying to educate us some), but are there homes out there that are offering either a Lease/Option or some owner financing?

Some people cannot afford a home or have iffy credit. L/O and owner financing can help them out.

Some are victims of the FICO score system, but some are bums. Credit reports are cheap and REALLY cheap compared to what not having one can cost you.

If you sell a home Lease/Option, you get a Non-Refundable Option Consideration, or "NROC", that is usually 3-5% of the cost of the home. You also get a contract to sell it in a year or so at top dollar (for you I'd guess 140K).

You can write the lease such that you always have the right to inspect and should once a quarter if not more often. Defects found / not respecting the property can void the Lease and they lose the option to buy.

So you could get $6000 for someone to move in and "rent" your house for a year, get tax deductions from your "rental property" (which it would be considered), and you would sell and rent for top dollar.

Other option is the seller financing. You can offer to finance someone (who can't get their own mortgage) via a "wraparound mortgage" (you write a new mortgage that pays down your existing mortgage - you pocket the cash difference). You can also just owner finance the balance between what you owe and create a new second mortgage, or also offer to hold the 2nd mortgage for someone bringing in a new first mortgage.

Interest could be quite favorable for you. 10% interest on a 2nd mortgage isn't out of line, and if the 2nd is smaller than the first, the rate doesn't affect the buyer as hard. (Ex: First of $80K at 7%, Second of $40K at 10% works to be around 8%).

Any of these - get some $$ down - preferably 10%.

Here's something I just noticed.

You have a 15-year note.

You can refinance your property, pull out $$, and have a 30-year interest only loan. Even if you just pull $100K out at 5% that's $500 before tax and insurance. You could rent for a breakeven at that point.

Bottom line - you have options.

Jeff, thanks for your time and expertise. Our current home is listed for $128K. We actually listed it last summer as a L/O with 5K option terms and a selling price of $135K. We only had a few showings... price obviously too high.Interesting sidebar: The agent I listed it with sold a similar home last summer that was around the corner from us on a L/O. That tenant/buyer ended up circumventing the gas meter somehow (he is a heating / cooling guy) and the agent that sold the property just took it back with a huge gas bill that he was liable for.

Anyways,

1. Would a "wrap-around" trigger the due-on-sale clause of our current mortgage? I was hoping to avoid this if it sold L/O by not recording the L/O.

2. Hold a 2nd: Any ideas what type of lender I should be looking for that would allow us to hold a 2nd on the property? I assume most typical banks aren't interested in this or is this assuption off track?

Thanks again.

1. As long as you are making payments, I wouldn't worry about the "Due on Sale". That's rarely called, if ever. Like I said earlier, why would the lender want the house? They want the payments.That said - I'd steer you towards refinancing towards an investor loan and renting / leasing the place yourself. That should alleviate any fears of the DoS clause - you're getting an investor product anyway.

If you have a good relationship with a local bank, may be time to hit them up for a loan. Tell them what you're doing - and not a teller. Talk to a VP.

Don't fear banks - they need YOU to make $$. They need loans.

2. Good question. Not every lender will allow it. If you are going to do the "Seller 2nd", you can go find a lender for the buyer that comes to you (they will) and offer the buyer the name of a lender that will do the deal. That gives you the added benefit of knowing if they have good credit. Both loans (your refi and this new loan) may be able to be done by the local bank or an investor friendly broker.

Look for someone that would allow "CUMULATIVE Loan to Value (CLTV)" of 80-100%. CLTV is the Total Loan to Value of all the loans on the property.

Example:

1st Mortgage: $70K

2nd Mortgage: $20K

House Value: $100K

CLTV is 90%.

Remember to try and get a down payment of 10%. You are accommodating the new buyer already by taking the note. They should meet you part way.

Are you already set to buy the new place? If you're using a normal (I use that term loosely) mortgage company, they may need to see a lease / rental agreement to offset the cost of keeping house #1.

 

[Rattle and Hum]

Interesting scenario. If I base your depreciation on $120K at 27 years, you're talking a $370/ month tax advantage to add into your numbers. If that's the case, maybe you should consider renting your next home as home as ownership appears to be a huge liability in your market, especially if you're not going to stay there for 5+ years. 5% is cheap money that I'd be hard pressed to let go of. You should also base your calculations on a 30 year mortgage and your $300 negative cash flow goes away. Obviously you can't refi, but this $300 negative cash flow is in reality a $300 forced savings plan. Relative to the 1% rule, I calcualte you at just above 0.7% which is common in many markets. You can tread water here and if the new house is important to you and you shouldn't damage your financial position. Also that extra $300 a month on the new house may be cheap money if interest rates continue to rise.

BnB... thanks for the quick response and the numbers put together. Looks like I gain $370 a month from the depreciation and I found our property tax site that shows we will pay about $90 a month more from losing the homestead. I honestly think it may be worth it to simply rent existing home out providing I can land 95% financing on the home we want to purchase. I guess I have a call to make on Monday.Quick follow up on something I don't understand:

Let's assume we sell the home five years from now for $130,000.

Since we have depreciated the property five years to a tune of $22,220, how is that figure applied to capital gains ($120,000 / 27 years = $4444 year X 5 years).

We paid $112,000 for the property three years ago and have $5k into improvements.

1. 112,000 + $5K= $117,000 Base.

2. Sold for $130,000 in five years.

3. $22,220 written off as depreciation

4. 28% Tax bracket

What would our tax liability be assuming tax laws remain constant?

I realize that you are not giving legal tax advise.

I think our true goal is to ultimately sell the home but also not to give it away. Any less than $125K and I am really not so inclined to "move up" in house. If we go ahead and rent than hopefully the renters will end up being the buyer. My understanding is that this is not uncommon in these situations.

Thanks for your time.

 

[jeff_eaglz]

With all due respect to proninja and his like (mortgage brokers) - few brokers are valuable to me any more, if ever. The reasons are that they don't control the deal like a bank can (they have the $$ and the underwriting, so banks close the loop with themselves, especially portfolio lenders). Brokers are at the mercy of the person with the $$ - another lender with underwriting criteria.

I'll take control of a deal over a good rate / percentage point any day. I want deals that close, not the best rate.

 

[jeff_eaglz]

Interesting scenario. If I base your depreciation on $120K at 27 years, you're talking a $370/ month tax advantage to add into your numbers. If that's the case, maybe you should consider renting your next home as home as ownership appears to be a huge liability in your market, especially if you're not going to stay there for 5+ years. 5% is cheap money that I'd be hard pressed to let go of. You should also base your calculations on a 30 year mortgage and your $300 negative cash flow goes away. Obviously you can't refi, but this $300 negative cash flow is in reality a $300 forced savings plan. Relative to the 1% rule, I calcualte you at just above 0.7% which is common in many markets. You can tread water here and if the new house is important to you and you shouldn't damage your financial position. Also that extra $300 a month on the new house may be cheap money if interest rates continue to rise.

BnB... thanks for the quick response and the numbers put together. Looks like I gain $370 a month from the depreciation and I found our property tax site that shows we will pay about $90 a month more from losing the homestead. I honestly think it may be worth it to simply rent existing home out providing I can land 95% financing on the home we want to purchase. I guess I have a call to make on Monday.Quick follow up on something I don't understand:

Let's assume we sell the home five years from now for $130,000.

Since we have depreciated the property five years to a tune of $22,220, how is that figure applied to capital gains ($120,000 / 27 years = $4444 year X 5 years).

We paid $112,000 for the property three years ago and have $5k into improvements.

1. 112,000 + $5K= $117,000 Base.

2. Sold for $130,000 in five years.

3. $22,220 written off as depreciation

4. 28% Tax bracket

What would our tax liability be assuming tax laws remain constant?

I realize that you are not giving legal tax advise.

I think our true goal is to ultimately sell the home but also not to give it away. Any less than $125K and I am really not so inclined to "move up" in house. If we go ahead and rent than hopefully the renters will end up being the buyer. My understanding is that this is not uncommon in these situations.

Thanks for your time.

Your tax liability will be the sales price less the tax basis and any/all capital expenses.But I'm not an accountant - but I keep mine busy .

 

[jeff_eaglz]

I asked about selling my house this way several pages ago, and was surprised at the reaction. Like it was a dishonest way to sell a house...still not sure the difference between Land Contract and lease option, but from the way you just described it, Lease Option was what I was describing and Mike thought it was a terrible idea. Perhaps we can talk about the pitfalls of L/O again.

Personal opinion here...Although they are two different types of contracts, you're usually dealing with the same principals.Seller

a) Owner trying to move a piece of property for more then the fair market value (otherwise it would sell on the open market).

That's a myopic point of view - although I don't discount your experience.

A L/O written for 10% appreciation year-over-year in Maryland would wind up being a steal for a buyer the past 3 years.

Ethical sellers allow for a buyer to request (at their expense) an appraisal for value affirmation of the property. If it isn't as high, renegotiation clauses are triggered (price now the appraised value as long as > original price, for example). I wouldn't agree to an appraisal unless I knew I was getting at worst 5% appreciation.

b) Investor optimizing profit by taking advantage of a buyer's inability to secure funding because the general finance community finds them to be an unacceptable risk.

Again, true most of the time, but some people have begun to reestablish their finances and aren't above the 720 line for FICO score (or are in the 600s but don't want to pay double-digit interest for a mortgage). Leasing a place they want to buy allows them to test drive / establish themselves at that site and also allows them more time to fix their credit. If the only house in a neighborhood or school system you want to be in is on a L/O, wouldn't you take advantage of that?

Buyer

a) Someone stuck with another home they must sell first or in a new job and can't secure financing.

b) Someone with a financial history of being irresponsible or taking excessive risks.

Why would a buyer enter into an agreement where they pay more then the market rate for a property and at terms less favorable than what most of the rest of the population has access too?

Because it locks in a future value and a location that they want to move into today.

They don't have any other choice. History tells us most of these types of contracts are not successfully completed. Any "equity" earned by purchasing a house prematurely is usually lost in the unfavorable terms of the rest of the contract. Most of these people would be better served by living within their means, getting their credit in order, and they chosing from a large population of homes on the market.

Owners and investors have two readily available means to make a fair profit. Sell at a market rate for an immeidate profit. Lease on a longer term for income and longer term appreciation. Sure, a lease purchase can be drawn up to fit within those criteria, but in a vast majority of the cases they are written with the terms strongly favoring the owner and even set up for abuse.

With that said, it's a matter of personal ethics as there's nothing wrong with a operating in a predatory manner as long as it's legal. Personally I like to deal in win-win situations for both parties in a contract. Lending standards are already very liberal and you really don't even need to have a downpayment to purchase anymore.

I realize there are occasional exceptions to these rules, but why would you want to chase after an exception when there's a larger readily available market out there? I may be overly sour on lease purchases, but I speak with people (both buyers and sellers) regularly that have been taken advantage of and it makes me sick.

Properly structured L/O deals can be win-win. I don't do anything that wouldn't allow me to sleep at night.....

I'm not picking a fight here, as I rarely do L/O Deals, but they have their place and ethics can still be held and make you $$.

 

[Rattle and Hum]

1. As long as you are making payments, I wouldn't worry about the "Due on Sale". That's rarely called, if ever. Like I said earlier, why would the lender want the house? They want the payments.

That said - I'd steer you towards refinancing towards an investor loan and renting / leasing the place yourself. That should alleviate any fears of the DoS clause - you're getting an investor product anyway.

If you have a good relationship with a local bank, may be time to hit them up for a loan. Tell them what you're doing - and not a teller. Talk to a VP.

Don't fear banks - they need YOU to make $$. They need loans.

2. Good question. Not every lender will allow it. If you are going to do the "Seller 2nd", you can go find a lender for the buyer that comes to you (they will) and offer the buyer the name of a lender that will do the deal. That gives you the added benefit of knowing if they have good credit. Both loans (your refi and this new loan) may be able to be done by the local bank or an investor friendly broker.

Look for someone that would allow "CUMULATIVE Loan to Value (CLTV)" of 80-100%. CLTV is the Total Loan to Value of all the loans on the property.

Example:

1st Mortgage: $70K

2nd Mortgage: $20K

House Value: $100K

CLTV is 90%.

Remember to try and get a down payment of 10%. You are accommodating the new buyer already by taking the note. They should meet you part way.

Are you already set to buy the new place? If you're using a normal (I use that term loosely) mortgage company, they may need to see a lease / rental agreement to offset the cost of keeping house #1.

I see what you are getting at. Thanks a ton.If we re-financed from a 5%- 15 year to a 6.5%- 70% LTV-30 year investment property loan would we be able to re-coup some of the finance charges via tax deductions?

I really need to get educated on the tax implications of doing what we are talking about.

Yes, we are set to buy the house. The offer has been accepted but contingent on us selling our home. The only reason we did this offer is because the listing agent is the same on the home we are buying and selling. She will let us out of the listing if the home we want sells to someone else before our current home sells. She is also giving us 1% back since we listed with her should both homes in question sell.

The thing about our market is that its very difficult to find a home such as the one we are buying under $180K. We would not even sell our current home if it wasn't for this one coming up at $173K. The fact that it hasn't sold out from under us yet (4+ weeks) attests to the slow market in this area. Like I mentioned, an exact identical home sold last summer for $176K in this development. (The only difference is it had a third stall in garage but ours has finished family room and full bath in the basement.) Our current residence is a first-time home buyers type of home in this market. Thanks again

 

[BassNBrew]

Interesting scenario.  If I base your depreciation on $120K at 27 years, you're talking a $370/ month tax advantage to add into your numbers.  If that's the case, maybe you should consider renting your next home as home as ownership appears to be a huge liability in your market, especially if you're not going to stay there for 5+ years.  5% is cheap money that I'd be hard pressed to let go of.  You should also base your calculations on a 30 year mortgage and your $300 negative cash flow goes away.  Obviously you can't refi, but this $300 negative cash flow is in reality a $300 forced savings plan.  Relative to the 1% rule, I calcualte you at just above 0.7% which is common in many markets.  You can tread water here and if the new house is important to you and you shouldn't damage your financial position.  Also that extra $300 a month on the new house may be cheap money if interest rates continue to rise.

BnB... thanks for the quick response and the numbers put together. Looks like I gain $370 a month from the depreciation and I found our property tax site that shows we will pay about $90 a month more from losing the homestead. I honestly think it may be worth it to simply rent existing home out providing I can land 95% financing on the home we want to purchase. I guess I have a call to make on Monday.Quick follow up on something I don't understand:

Let's assume we sell the home five years from now for $130,000.

Since we have depreciated the property five years to a tune of $22,220, how is that figure applied to capital gains ($120,000 / 27 years = $4444 year X 5 years).

We paid $112,000 for the property three years ago and have $5k into improvements.

1. 112,000 + $5K= $117,000 Base.

2. Sold for $130,000 in five years.

3. $22,220 written off as depreciation

4. 28% Tax bracket

What would our tax liability be assuming tax laws remain constant?

I realize that you are not giving legal tax advise.

I think our true goal is to ultimately sell the home but also not to give it away. Any less than $125K and I am really not so inclined to "move up" in house. If we go ahead and rent than hopefully the renters will end up being the buyer. My understanding is that this is not uncommon in these situations.

Thanks for your time.

What Jeff said above except check into this with a professional. There is a capital gains exculsion if you've lived in the home 2 of the last 5 years. Not sure how that applies to depreciation, but I would want to use a lower capital value for the initial depreciation figure if I was going to be selling the home soon and could exclude the appreciation over that. For example, why not cap the home at $110 instead of $120 so you could write off $20000 rather then just $1000 if you sell in the next three years. I'm not saying cheat, but I'd use the lowest defensible market value in that scenario. Since your home hasn't sold at $130, it may not be worth $120. These tax consquences are way above my head and I urge you to get professional advice as the savings will far outweigh the costs. I'm just throwing out thoughts so you can formulate questions before speaking with someone.Just curious...what kind of state increases tax basis for leasing a home? I've never heard of that. How would the local accessor know that it's being leased?

 

[Rattle and Hum]

Just curious...what kind of state increases tax basis for leasing a home? I've never heard of that. How would the local accessor know that it's being leased?

We have what's called a "Homestead exeption which you are supposed to only apply to one home. In my area:

Estimated Property Tax For Primary Residence or Qualified Farm (Homestead): $1813 / 30.21 millage rate

Estimated Property Tax For Second Home, Rental or Business (Non-Homestead):

$2893 / 48.21 millage rate

 

[jeff_eaglz]

Just curious...what kind of state increases tax basis for leasing a home? I've never heard of that. How would the local accessor know that it's being leased?

We have what's called a "Homestead exeption which you are supposed to only apply to one home. In my area:

Estimated Property Tax For Primary Residence or Qualified Farm (Homestead): $1813 / 30.21 millage rate

Estimated Property Tax For Second Home, Rental or Business (Non-Homestead):

$2893 / 48.21 millage rate

OK you got me.Millage rate???

 

[jeff_eaglz]

Before anyone else...

Your Millage May Vary....

 

[Mike Anderson]

My Available Properties

Mike...great website!

While you are right here, Any more Comments?????Always trying to make it better, would love some feedback.

 

[Mike Anderson]

Rents are $250 per month and each is rented.  I think $275-$300 is a fair price. 

I am in a lower Market as well.Now, please understand that my Wife built this website, it is not from a Professional. That said, it looks pretty good now, where it used to be terrible.

Here is a list of my Available properties, you can see that I deal with Lower rents than much of the country. I do hold out for excellent candidates, and expect my units to stay in great shape.

A 900 sq ft one bedroom here would be $375-$425.

My Available Properties

I went and looked at this property on Thursday. All I can say is that the next time I feel like life isn't going my way, I'll visit this place and count my blessings. 2 of the 3 units were in bad condition and one unit was packed with 6 people...3 being kids. Laundry piled 3 ft deep in the closets, food laying everywhere, and a 6 month old lab leaving fragence thruout.Really too much liability for my tastes. Potential great return, but who knows about the roof, electrical system, heating system, etc. No feasible way to remodel short of spending big bucks and this neighborhood will never appreciate. 2 bedroom waterfront condos can be rented as low as $750. With two people sharing, that's $375 a month for a modern place in a nice area on the lake. That's the reason for the low market cap on 1 bdrm rents. I don't think I'm ready to jump into the market of high risk tenants at this time.

Mike...great website!

I'll admit to being shocked at what a one Bedroom goes for in that market.I'll still contend that a Tip Top shape 900 sq ft one bedroom should go for $375.00

anything less than that in Any market seems like it will only attract trash.

 

[Mike Anderson]

Rents are $250 per month and each is rented.  I think $275-$300 is a fair price. 

I am in a lower Market as well.Now, please understand that my Wife built this website, it is not from a Professional. That said, it looks pretty good now, where it used to be terrible.

Here is a list of my Available properties, you can see that I deal with Lower rents than much of the country. I do hold out for excellent candidates, and expect my units to stay in great shape.

A 900 sq ft one bedroom here would be $375-$425.

My Available Properties

I went and looked at this property on Thursday. All I can say is that the next time I feel like life isn't going my way, I'll visit this place and count my blessings. 2 of the 3 units were in bad condition and one unit was packed with 6 people...3 being kids. Laundry piled 3 ft deep in the closets, food laying everywhere, and a 6 month old lab leaving fragrance throughout.Really too much liability for my tastes. Potential great return, but who knows about the roof, electrical system, heating system, etc. No feasible way to remodel short of spending big bucks and this neighborhood will never appreciate. 2 bedroom waterfront condos can be rented as low as $750. With two people sharing, that's $375 a month for a modern place in a nice area on the lake. That's the reason for the low market cap on 1 bdrm rents. I don't think I'm ready to jump into the market of high risk tenants at this time.

Mike...great website!

Bass, Given what you said, as long as the property will pass basic inspection: roof, etc, this is exactly the type of place I want to STEAL with money at close.The seller is in trouble. You know it, I know it, everyone in the market knows it.

This guy is in over his head. Would an offer of $50K be worth his while? It just might be. $60K with $10K in allowances. You won't know unless you come to the table. If this is something you want, an off the record conversation is most likely in order.

Figure out what it takes to rehab, fix/clear the "Stacking" problem, Holding costs until you find good College GIRLS, the whole nine yards.

This kind of worthless property owner is exactly the guy I would hit for 10K in my pocket at closing and just STEAL the place from him. He has lost control, and needs out in the worst way.

Check the local records, and if he owns it outright, it is prime for a takeover. If he owes the $82K, run screaming.

 

[Mike Anderson]

One for Mike or anyone else looking to comment....

Looking at a 2700 sf home that has been made into three 900 sf one bedrooms.  Built in 1900, listed for $82000.  Rents are $250 per month and each is rented.  I think $275-$300 is a fair price.  On the surface the home looks in good condition and well maintained, going inside tomorrow.  Neighborhood is borderline.  Similar houses in the immediate three blocks that have been averagely maintained.  Two blocks from a community college.  Town is basically a low rent district, old mill town, that is the county seat about an hour away from Charlotte.  Basically meets the %0.01 bogey which I only see in maybe 1 in 100 deals, if that (can't stress this enough).  Multi family is few and far between here.  Biggest advantage, 2 of 3 filled will pay the bills.  Also like that the tenants can keep an eye on each other.  I'm concerned about about a house of this age and the fact that it's a 1/2 hour from me.  Appreciation will be minimal, although if I could get the rents up to $300 over time I could sell it for $100,000.

10% 7500 down

10% 7500 2nd at $65 / month

80% 60000 1st at $300 / month

Taxes and insurance $90 / month

Water and sewer $90 / month

$545 per month expense or basically $200 profit.  $2400 per year or $1800 at %75.  Looks like a 25% return initially going to 10% at year 30 when it's paid assuming no rent increases.  A $25 per month rent increase would cover $900 a year in repairs.

Am I seeing this to say that you only carry the Water/Sewer bill? If that's all you carry, it's tight. Doable, but tight.Only you would know, but where did the $300 a month come from. I am in a bad market, and that would be very low here.

In my Market, just off the top of my head I would want to buy it right around $70-75K. How much room do you have? If the thing has been on the market for awhile, hit them low with everything you can. Seller paid closing costs, repair allowance, Unfair tax split in your favor, call for repairs, anything you can think of. Then be prepared to give all that up for a low $70k final price where you wave everything and buy as is. You have the resources with your profession to get the work done.

Worst case scenario is that they scoff. From there, someone else buys it, or they come back to you "Standing Offer"

As for the age, I will say that 1900 is a newer house when you look at my stable. Most of my properties are 1800's. Older Multies are my bread and butter.

Good negotiation techniques here. Remember - whoever wants the property LEAST will get the deal. Price is just a PORTION of the deal - terms, payments, interest, seller financing can be way more important. Determine what matters to you.

For me, seller financing is big. Interest isn't. Points are (but that's on a lender, and I'm really really tired of mortgages - hence I'm working commercial lines of credit now). I'm in a rehab property well under a year so I don't care about interest - just what my costs are for those 12 months (preferably 5-6).

Seriously, if you don't really want the property, most likely, you will get it.Repair allowance is the big hit for me. Go over the property with a fine tooth comb. Hire an inspector. I am to the point that I am more harsh than any property inspector will be. I can walk a property and find thousands and thousands worth of things to repair based on Code, energy efficiency, security, whatever.

I am personally a nightmare to a seller. But I know Code backwards and forwards, and I can see a problem a mile away. It comes with experience.

I hit up the amount that the seller has to escrow for a repair allowance. The poor seller ******* will do anything to make that go away. I generally get huge concessions to avoid escrow and just be done with the deal at closing.

If needed the seller is going to see a monstrous list of legitimate items that need attention, or I can just buy it "as is" for a silly reduced price.

Nothing makes me more furious than an inspector coming in and dinging my property for the potential buyer, but I will tell you that it ABSOLUTELY will put money in your pocket. ABSOLUTELY.

If you are buying, find an Inspector you can trust that understands what you want. Then make sure the inspection goes the way you want it to.

That might seem underhanded, but really, A professional with a reputation to protect isn't going to ding anything that isn't a real issue. You just want him to be EXTRA Picky. Really really picky. It's his job, and you pay him (Unless you write it into the contract that the seller pays for him - this never works out, but anything is doable), make him go ape #### if you are the buyer. Every single item saves you money, and many of the items aren't things that are habitual or you care about.

The more he finds, the stronger your position. If you are not a Real Estate Professional, get as Picky Inspector who will go Ape #### for you, and then be prepared to drop every condition he might find for some silly ridiculous price.

Really, serious advice here.

 

[Mike Anderson]

One for Mike or anyone else looking to comment....

Looking at a 2700 sf home that has been made into three 900 sf one bedrooms.  Built in 1900, listed for $82000.  Rents are $250 per month and each is rented.  I think $275-$300 is a fair price.  On the surface the home looks in good condition and well maintained, going inside tomorrow.  Neighborhood is borderline.  Similar houses in the immediate three blocks that have been averagely maintained.  Two blocks from a community college.  Town is basically a low rent district, old mill town, that is the county seat about an hour away from Charlotte.  Basically meets the %0.01 bogey which I only see in maybe 1 in 100 deals, if that (can't stress this enough).  Multi family is few and far between here.  Biggest advantage, 2 of 3 filled will pay the bills.  Also like that the tenants can keep an eye on each other.  I'm concerned about about a house of this age and the fact that it's a 1/2 hour from me.  Appreciation will be minimal, although if I could get the rents up to $300 over time I could sell it for $100,000.

10% 7500 down

10% 7500 2nd at $65 / month

80% 60000 1st at $300 / month

Taxes and insurance $90 / month

Water and sewer $90 / month

$545 per month expense or basically $200 profit.  $2400 per year or $1800 at %75.  Looks like a 25% return initially going to 10% at year 30 when it's paid assuming no rent increases.  A $25 per month rent increase would cover $900 a year in repairs.

Am I seeing this to say that you only carry the Water/Sewer bill? If that's all you carry, it's tight. Doable, but tight.Only you would know, but where did the $300 a month come from. I am in a bad market, and that would be very low here.

In my Market, just off the top of my head I would want to buy it right around $70-75K. How much room do you have? If the thing has been on the market for awhile, hit them low with everything you can. Seller paid closing costs, repair allowance, Unfair tax split in your favor, call for repairs, anything you can think of. Then be prepared to give all that up for a low $70k final price where you wave everything and buy as is. You have the resources with your profession to get the work done.

Worst case scenario is that they scoff. From there, someone else buys it, or they come back to you "Standing Offer"

As for the age, I will say that 1900 is a newer house when you look at my stable. Most of my properties are 1800's. Older Multies are my bread and butter.

Good negotiation techniques here. Remember - whoever wants the property LEAST will get the deal. Price is just a PORTION of the deal - terms, payments, interest, seller financing can be way more important. Determine what matters to you.

For me, seller financing is big. Interest isn't. Points are (but that's on a lender, and I'm really really tired of mortgages - hence I'm working commercial lines of credit now). I'm in a rehab property well under a year so I don't care about interest - just what my costs are for those 12 months (preferably 5-6).

Seriously, if you don't really want the property, most likely, you will get it.Repair allowance is the big hit for me. Go over the property with a fine tooth comb. Hire an inspector. I am to the point that I am more harsh than any property inspector will be. I can walk a property and find thousands and thousands worth of things to repair based on Code, energy efficiency, security, whatever.

I am personally a nightmare to a seller. But I know Code backwards and forwards, and I can see a problem a mile away. It comes with experience.

I hit up the amount that the seller has to escrow for a repair allowance. The poor seller ******* will do anything to make that go away. I generally get huge concessions to avoid escrow and just be done with the deal at closing.

If needed the seller is going to see a monstrous list of legitimate items that need attention, or I can just buy it "as is" for a silly reduced price.

Nothing makes me more furious than an inspector coming in and dinging my property for the potential buyer, but I will tell you that it ABSOLUTELY will put money in your pocket. ABSOLUTELY.

If you are buying, find an Inspector you can trust that understands what you want. Then make sure the inspection goes the way you want it to.

That might seem underhanded, but really, A professional with a reputation to protect isn't going to ding anything that isn't a real issue. You just want him to be EXTRA Picky. Really really picky. It's his job, and you pay him (Unless you write it into the contract that the seller pays for him - this never works out, but anything is doable), make him go ape #### if you are the buyer. Every single item saves you money, and many of the items aren't things that are habitual or you care about.

The more he finds, the stronger your position. If you are not a Real Estate Professional, get a Picky Inspector who will go Ape #### for you, and then be prepared to drop every condition he might find for some silly ridiculous price.

Really, serious advice here.

One thing I forgot. You are piling on the seller here. Anything you can add is worthwhile.Another HUGE deal is to ask for warranties. You want a guarantee on the furnace for a year, the stove, fridge, whatever.

He won't give it to you, which tells you two things:

#1) A repair of a furnace at any point is likely just shy of $400.00 If he won't warranty it, you really need to have someone look at the furnace. Nothing is worse than calling your Furnace company out and having them condemn the furnace over a cracked heat exchanger. There is really nothing you can do here, and you are in for a $3-4K furnace replacement. (PLEASE Don't get a Janitrol, they are garbage, seriously, buy a good furnace, no Janitrols. I know they are cheap, just don't do it.) I spent $400.00 JUST TODAY repairing a piece of #### Janitrol blower motor, and tomorrow at 9:00 am I have a repair guy coming to look at another Janitrol that gave up the ghost.

If I can say this outside of Real Estate: Janitrol Furnaces are worthless, I spend more money and time than you would believe fixing them.

I have seen every kind of Furnace malfunction. If your Furnace ever goes out, seriously, I can most likely tell you exactly how to fix it for pennies on the dollar. File that away, and PM me if you are ever in need.

#2) He is absolutely done, doesn't want to see this property again, and you are offering a price that is too high. At which point, he hasn't accepted or you wouldn't still being doing inspections. If the Furnace, hot water heater, stove, fridge, etc all check out and he won't warranty anything, freaking low ball him big time.

Unless he is a FBG named Mike Anderson, in which case, just talk to him, and you will surely get a fair price.

 

[Mike Anderson]

OK, I'm nowhere near as sophisticated about this stuff as you guys are, and I'm currently looking to buy a primary residence.  Wouldn't mind getting something I can renovate for a few months while I continue to live where I am, especially if it's going to give me significant capital appreciation. 

So I guess the questions are, what should one look for in a property that's going to be one's primary residence (aside from the obvious - what I like in a home).  It's likely that I'll hold onto this place for some time, but at the same time I want the potential for short term capital appreciation (currently single, who knows what I'm going to want in a home when I have a family/kids?). 

How does one find a good real estate agent?  Or is one even necessary?  How do I make it clear to the agent that I'm a "serious buyer" that he can work with?  How do I get the sweet deals before they get snapped up by a voracious market.  I know the cardinal rule in real estate is know your local market, but how does one LEARN the local market?

A Buyers agent is FREE TO YOU. You would be foolish not to use one.

How true is this? How "free" are they really? I mean, isn't the cost of the house going to be inflated to take into consideration the sellers Real Estate agent, as well as the buyers "buyers agent" if they use both?

Simple answer is no. In most markets, seller signs a contract to list and market a property. The seller is paying the listing agent only, but the contract language will talk about marketing in MLS and co-broking with other agents. When a property is entered into MLS, a buyer's agent commission is generally entered. If the listing agent captures both sides, they're entitled to 100% of the commission. Sometimes in tight negotiations and slow markets, this may be adjusted down to make a deal work. The reality is that in most major markets, another agent will usually bring the buyer to the table. I guess technically you could research your own properties and work directly with each listing agent on every property you want to see and hope for a tight negotiation where you might get the agent to eat $500 to $1000. Of course in this instance you will miss out on some of the population of houses and will be negotiating thru an agent working in the best interests of the seller and who legally shouldn't be giving you any advice during the process.This also applies with any sizeable builder with a sales staff. You may think you're getting a discount, but in reality your working with a sales agent in the builder's pocket collecting full commission and maybe even a bonus.

Now, here's something that I do as an investor. If I see a listed property that could be a deal, I call the listing agent. They ask if I'm an agent or if I need one, and tell them I like to deal with as few parties as possible and that if they are willing to work with / for me as well then I'm happy to see them get the whole commission.Pause for to take effect.

Commissions around here of $10K+ are average to low.... Maryland is expensive (but not so much as other places - all relative). So if I can get the broker to come to my side (even though the seller is paying for him/her) then I have an instant ally who tries to get ME the deal over others.

Works more often than not. Realtors are supposed to work for the seller first, but at times they can give you more info than they should. I encourage them .

I've also gone the other extreme and told a broker (with the seller in the room) that if it wasn't for their commission this deal would be done. They love that.....

Savvy realtors should learn to take notes for their commissions sometimes. It does make more deals happen. 90% of realtors don't understand what investors do.

OK, the reality is that I have done this. Pitting the seller against his own Realtor is a solid move. Been there, done that, got the tee shirt. However, it can be poor advice, and blow up in your face for a FIRST time buyer.The original poster is asking from the position of a first time buyer.

Abashail, I IMPLORE you, please get a buyers agent. There are so many pitfalls on your first ever purchase.

If Jeff sees this, I am sure he will say the same. Surely Jeff didn't look at this correctly, and he didn't realize you are a first time buyer looking for your very own home.

Jeff, jump in here and correct/add to your thoughts considering a FIRST TIME BUYER is asking the question. If you are sure that you are absolutely correct for the first time buyer, lay down a pretty solid reasoning.

 

[Mike Anderson]

Totally depends on your Market and what you want to accomplish.  Jeff wants in Cheaply as possible to unload for a gain never seeing a tenant.  For me, Cash is King, and it's ALL about Flow.

Hey, I resemble that remark......I just happen to think that turning a quick 15% profit on a property inside of 6 months far outpaces renting.

More of a "get rich faster" than the "get rich slow" by landlording approach.

Neither are get rich quick schemes.....

Me, I want the long term quarter vs. the short term penny.Both ways are ABSOLUTELY money makers. I will happily flip when it's the right deal.

I comes down to how you need your investments to perform. If I am Cash poor, I flip a property without thinking about it. The money is there.

 

[Mike Anderson]

Go out and try it. Find someone who does it, partner with them getting more than 50% if you have to.

SERIOUSLY, Don't partner with anyone but your Wife. I can't even begin to get into how many troubles this will get you.Like I said before, my Mother does the Carlton Sheets deal. She is out of town, so the wife and I went over to feed the cats for a few days.There, sitting on the coffee table was the newest Sheets newsletter. It was talking about a guy that found an investor ready to give up, who gave this Sheets investor 1/3rd interest in all his properties just to run them/Manage them.Are you freaking serious?????? People are morons. Use that to your advantage, or be taken advantage of.Anyway, Partners are 99% of the time death knolls to your business.

 

[Mike Anderson]

Yes a seasoned investor has/had done well in those markets these past few years, but these "hot" markets have spurned more investors and competition.  Good deals are harder to find, and thus the margins aren't as big as you might think.  Doubling your money on a deal can be much harder in hot markets vs. warm, average or even cold.

Real estate is both local and cyclical.  You can make money in EVERY market, even yours.  That goes for everyone.

Real Estate investors make their money when they BUY, not when they sell.  That means we buy cheap and at prices that price in a profit already.  I NEVER assume appreciation to make me a profit.

However, many newer investors in the area do just that and so far they are getting away with it.  I won't pay that high a price for these deals, so the Noobs think they are smarter and grab them.  Once the climate changes they'll be begging for a way out of that deal.

Very good points. It's just tough when you're in your early/mid 20's without much in the way of income, assets, or experience to do what you're doing, and I'm trying to take advantage of this market to build some capital and knowledge of the local market so I can eventually do what you're doing. I'm not trying to argue with you, simply looking for clarification on what you're thinking and why.Before I start to buy/sell properties for a living, I'm going to try to have a war chest that'll be living expenses for a year and about twice that much for working capital.

Living in the Pacific North West, I wouldn't think the War Chest is as Necessary as you might think.In your shoes, I would be looking to Jeff, and follow his path. You have a moving market. Should it hold up, and I think it will, it's just a matter of buying under value, and "Flipping"

With just one to three flips under your belt, I would hazard a guess that you will have more than you need to roll forward.

Now, I am imagining your market, but the Pacific North West is hot, and primed to Flip. Only you could know the exact details. Tons of People from CA are moving North to take advantage of your RE pricing. If there is any area in the Country that I think will continue and actually become more white hot, it is your Market along with NM and AZ. The Exodus from CA of people with a great amount of Capital to purchase (And not exactly knowing the going rate, so they spend too much) is going to drive those three markets.

With that in mind, I think you are in one of the best areas of the country to be in. I would certainly consider the concept of buy for appreciation in your market.

Once again, you know the specifics of your market, and I could be off base here as I am lumping you into the greater Pacific North West.

Mike, You make it sound that "flippers" can only operate in appreciating markets.

That's not true.

Everyone can find a junker house and fix it up to look like one of the neighbors. If you can do it for 70-75% of the after repair value, you can "flip" for a profit.

(by the way, "flipping" has a bad connotation in Maryland due to scandals with bad mortgages years ago, so we prefer "buying wholesale, selling retail" or "rehabbing").

There are deals in EVERY market. Mike, you're a testament to that. I know you get deals below market all the time. Everyone can if they know how/where to look or who to ask or buy from.

Housing is a need across the country. Rundown houses are everywhere. Find one and fix it up, then sell. Repeat.

In a strong market, you may have fierce competition for deals (Maryland can get that way). I'm sure California, NYC and Seattle are like that as well. There is a place within an hour's drive that has deals of virtually anywhere in the US.

The "Trick" is to know what works best in your market. All techniques can work (renting, lease options, rehabs, etc.), but some may work better in some markets than others. Cleveland is a depressed market so there's little appreciation, but rentals seem to make sense there. York PA is similar. Maryland is a rehab and retail area. However if the market cools off and no one can afford to buy, lease options may start to be the cool thing to do.

Another example: "The Short Sale". This is when a homeowner has fallen behind on the mortgage and the mortgage company is pressing to foreclose. Sometimes you can negotiate with that company to buy the mortgage at a discount - "Shorting" the note - and getting a deal that might not have been there otherwise.

This works in areas like Mike's - flat values year over year. The mortgage from 2001 is about what the place is worth. Foreclosures cost finance companies 15-25% of the mortgage balance to do. So unless the property went up 30% in value since the note was written, they don't really want to foreclose.

In Maryland, we've gone up 20% year over year for at least 3 years. No way you can get a short sale (or it will be a bear to try).

Wow, I don't know where to start here.First, I strongly belive in a market like proninja's, the only prudent course is to Flip. Now, proninja is established in life, and can afford to carry a small monthy loss banking on a huge payoff down the road, but most are not as geared and savy as he is.

Secondly, I can find a deal fopr me if I look hard enough. On my Website you will see two properties at 209 Woodland. I bought that property for $29K, and all told it will bring in $1,275 a month. I can live with that.

The 22% rule works just fine.

 

[BassNBrew]

Rents are $250 per month and each is rented.  I think $275-$300 is a fair price. 

I am in a lower Market as well.Now, please understand that my Wife built this website, it is not from a Professional. That said, it looks pretty good now, where it used to be terrible.

Here is a list of my Available properties, you can see that I deal with Lower rents than much of the country. I do hold out for excellent candidates, and expect my units to stay in great shape.

A 900 sq ft one bedroom here would be $375-$425.

My Available Properties

I went and looked at this property on Thursday. All I can say is that the next time I feel like life isn't going my way, I'll visit this place and count my blessings. 2 of the 3 units were in bad condition and one unit was packed with 6 people...3 being kids. Laundry piled 3 ft deep in the closets, food laying everywhere, and a 6 month old lab leaving fragrance throughout.Really too much liability for my tastes. Potential great return, but who knows about the roof, electrical system, heating system, etc. No feasible way to remodel short of spending big bucks and this neighborhood will never appreciate. 2 bedroom waterfront condos can be rented as low as $750. With two people sharing, that's $375 a month for a modern place in a nice area on the lake. That's the reason for the low market cap on 1 bdrm rents. I don't think I'm ready to jump into the market of high risk tenants at this time.

Mike...great website!

Bass, Given what you said, as long as the property will pass basic inspection: roof, etc, this is exactly the type of place I want to STEAL with money at close.The seller is in trouble. You know it, I know it, everyone in the market knows it.

This guy is in over his head. Would an offer of $50K be worth his while? It just might be. $60K with $10K in allowances. You won't know unless you come to the table. If this is something you want, an off the record conversation is most likely in order.

Figure out what it takes to rehab, fix/clear the "Stacking" problem, Holding costs until you find good College GIRLS, the whole nine yards.

This kind of worthless property owner is exactly the guy I would hit for 10K in my pocket at closing and just STEAL the place from him. He has lost control, and needs out in the worst way.

Check the local records, and if he owns it outright, it is prime for a takeover. If he owes the $82K, run screaming.

He bought it in 1989 for 62,000. That gives you a pretty good idea of the crappy appreciation around here. My concern is that repairs could run upwards of $30,000, especially if I go to toss a tenant and they call county inspectors. One other issue that I need to get over...being brokers, my partner and I are hesitant to lowball and get that reputation in the market.

 

[Mike Anderson]

Yes a seasoned investor has/had done well in those markets these past few years, but these "hot" markets have spurned more investors and competition.  Good deals are harder to find, and thus the margins aren't as big as you might think.  Doubling your money on a deal can be much harder in hot markets vs. warm, average or even cold.

Real estate is both local and cyclical.  You can make money in EVERY market, even yours.  That goes for everyone.

Real Estate investors make their money when they BUY, not when they sell.  That means we buy cheap and at prices that price in a profit already.  I NEVER assume appreciation to make me a profit.

However, many newer investors in the area do just that and so far they are getting away with it.  I won't pay that high a price for these deals, so the Noobs think they are smarter and grab them.  Once the climate changes they'll be begging for a way out of that deal.

Very good points. It's just tough when you're in your early/mid 20's without much in the way of income, assets, or experience to do what you're doing, and I'm trying to take advantage of this market to build some capital and knowledge of the local market so I can eventually do what you're doing. I'm not trying to argue with you, simply looking for clarification on what you're thinking and why.Before I start to buy/sell properties for a living, I'm going to try to have a war chest that'll be living expenses for a year and about twice that much for working capital.

Living in the Pacific North West, I wouldn't think the War Chest is as Necessary as you might think.In your shoes, I would be looking to Jeff, and follow his path. You have a moving market. Should it hold up, and I think it will, it's just a matter of buying under value, and "Flipping"

With just one to three flips under your belt, I would hazard a guess that you will have more than you need to roll forward.

Now, I am imagining your market, but the Pacific North West is hot, and primed to Flip. Only you could know the exact details. Tons of People from CA are moving North to take advantage of your RE pricing. If there is any area in the Country that I think will continue and actually become more white hot, it is your Market along with NM and AZ. The Exodus from CA of people with a great amount of Capital to purchase (And not exactly knowing the going rate, so they spend too much) is going to drive those three markets.

With that in mind, I think you are in one of the best areas of the country to be in. I would certainly consider the concept of buy for appreciation in your market.

Once again, you know the specifics of your market, and I could be off base here as I am lumping you into the greater Pacific North West.

Mike, You make it sound that "flippers" can only operate in appreciating markets.

That's not true.

Everyone can find a junker house and fix it up to look like one of the neighbors. If you can do it for 70-75% of the after repair value, you can "flip" for a profit.

(by the way, "flipping" has a bad connotation in Maryland due to scandals with bad mortgages years ago, so we prefer "buying wholesale, selling retail" or "rehabbing").

There are deals in EVERY market. Mike, you're a testament to that. I know you get deals below market all the time. Everyone can if they know how/where to look or who to ask or buy from.

Housing is a need across the country. Rundown houses are everywhere. Find one and fix it up, then sell. Repeat.

In a strong market, you may have fierce competition for deals (Maryland can get that way). I'm sure California, NYC and Seattle are like that as well. There is a place within an hour's drive that has deals of virtually anywhere in the US.

The "Trick" is to know what works best in your market. All techniques can work (renting, lease options, rehabs, etc.), but some may work better in some markets than others. Cleveland is a depressed market so there's little appreciation, but rentals seem to make sense there. York PA is similar. Maryland is a rehab and retail area. However if the market cools off and no one can afford to buy, lease options may start to be the cool thing to do.

Another example: "The Short Sale". This is when a homeowner has fallen behind on the mortgage and the mortgage company is pressing to foreclose. Sometimes you can negotiate with that company to buy the mortgage at a discount - "Shorting" the note - and getting a deal that might not have been there otherwise.

This works in areas like Mike's - flat values year over year. The mortgage from 2001 is about what the place is worth. Foreclosures cost finance companies 15-25% of the mortgage balance to do. So unless the property went up 30% in value since the note was written, they don't really want to foreclose.

In Maryland, we've gone up 20% year over year for at least 3 years. No way you can get a short sale (or it will be a bear to try).

I really shouldn't go into this, but clearly a Hot market is more Primed to "Flip" than a Cold Market.

 

[BassNBrew]

Mike...I read the rest of your posts and they make very good sense. We'll revisit this next week after we see how our current offer on another property goes. Thanks for the advice.

 

[Mike Anderson]

Rents are $250 per month and each is rented.  I think $275-$300 is a fair price. 

I am in a lower Market as well.Now, please understand that my Wife built this website, it is not from a Professional. That said, it looks pretty good now, where it used to be terrible.

Here is a list of my Available properties, you can see that I deal with Lower rents than much of the country. I do hold out for excellent candidates, and expect my units to stay in great shape.

A 900 sq ft one bedroom here would be $375-$425.

My Available Properties

I went and looked at this property on Thursday. All I can say is that the next time I feel like life isn't going my way, I'll visit this place and count my blessings. 2 of the 3 units were in bad condition and one unit was packed with 6 people...3 being kids. Laundry piled 3 ft deep in the closets, food laying everywhere, and a 6 month old lab leaving fragrance throughout.Really too much liability for my tastes. Potential great return, but who knows about the roof, electrical system, heating system, etc. No feasible way to remodel short of spending big bucks and this neighborhood will never appreciate. 2 bedroom waterfront condos can be rented as low as $750. With two people sharing, that's $375 a month for a modern place in a nice area on the lake. That's the reason for the low market cap on 1 bdrm rents. I don't think I'm ready to jump into the market of high risk tenants at this time.

Mike...great website!

Bass, Given what you said, as long as the property will pass basic inspection: roof, etc, this is exactly the type of place I want to STEAL with money at close.The seller is in trouble. You know it, I know it, everyone in the market knows it.

This guy is in over his head. Would an offer of $50K be worth his while? It just might be. $60K with $10K in allowances. You won't know unless you come to the table. If this is something you want, an off the record conversation is most likely in order.

Figure out what it takes to rehab, fix/clear the "Stacking" problem, Holding costs until you find good College GIRLS, the whole nine yards.

This kind of worthless property owner is exactly the guy I would hit for 10K in my pocket at closing and just STEAL the place from him. He has lost control, and needs out in the worst way.

Check the local records, and if he owns it outright, it is prime for a takeover. If he owes the $82K, run screaming.

He bought it in 1989 for 62,000. That gives you a pretty good idea of the crappy appreciation around here. My concern is that repairs could run upwards of $30,000, especially if I go to toss a tenant and they call county inspectors. One other issue that I need to get over...being brokers, my partner and I are hesitant to lowball and get that reputation in the market.

Lawrence Taylor would have bought lower and sold higher than Joey Porter.

Dammit, don't make me kick your ### in :e: Seriously, keep playing around. :finger on the button:

 

[jeff_eaglz]

OK, I'm nowhere near as sophisticated about this stuff as you guys are, and I'm currently looking to buy a primary residence. Wouldn't mind getting something I can renovate for a few months while I continue to live where I am, especially if it's going to give me significant capital appreciation.

So I guess the questions are, what should one look for in a property that's going to be one's primary residence (aside from the obvious - what I like in a home). It's likely that I'll hold onto this place for some time, but at the same time I want the potential for short term capital appreciation (currently single, who knows what I'm going to want in a home when I have a family/kids?).

How does one find a good real estate agent? Or is one even necessary? How do I make it clear to the agent that I'm a "serious buyer" that he can work with? How do I get the sweet deals before they get snapped up by a voracious market. I know the cardinal rule in real estate is know your local market, but how does one LEARN the local market?

A Buyers agent is FREE TO YOU. You would be foolish not to use one.

How true is this? How "free" are they really? I mean, isn't the cost of the house going to be inflated to take into consideration the sellers Real Estate agent, as well as the buyers "buyers agent" if they use both?

Simple answer is no. In most markets, seller signs a contract to list and market a property. The seller is paying the listing agent only, but the contract language will talk about marketing in MLS and co-broking with other agents. When a property is entered into MLS, a buyer's agent commission is generally entered. If the listing agent captures both sides, they're entitled to 100% of the commission. Sometimes in tight negotiations and slow markets, this may be adjusted down to make a deal work. The reality is that in most major markets, another agent will usually bring the buyer to the table. I guess technically you could research your own properties and work directly with each listing agent on every property you want to see and hope for a tight negotiation where you might get the agent to eat $500 to $1000. Of course in this instance you will miss out on some of the population of houses and will be negotiating thru an agent working in the best interests of the seller and who legally shouldn't be giving you any advice during the process.This also applies with any sizeable builder with a sales staff. You may think you're getting a discount, but in reality your working with a sales agent in the builder's pocket collecting full commission and maybe even a bonus.

Now, here's something that I do as an investor. If I see a listed property that could be a deal, I call the listing agent. They ask if I'm an agent or if I need one, and tell them I like to deal with as few parties as possible and that if they are willing to work with / for me as well then I'm happy to see them get the whole commission.Pause for to take effect.

Commissions around here of $10K+ are average to low.... Maryland is expensive (but not so much as other places - all relative). So if I can get the broker to come to my side (even though the seller is paying for him/her) then I have an instant ally who tries to get ME the deal over others.

Works more often than not. Realtors are supposed to work for the seller first, but at times they can give you more info than they should. I encourage them .

I've also gone the other extreme and told a broker (with the seller in the room) that if it wasn't for their commission this deal would be done. They love that.....

Savvy realtors should learn to take notes for their commissions sometimes. It does make more deals happen. 90% of realtors don't understand what investors do.

OK, the reality is that I have done this. Pitting the seller against his own Realtor is a solid move. Been there, done that, got the tee shirt. However, it can be poor advice, and blow up in your face for a FIRST time buyer.The original poster is asking from the position of a first time buyer.

Abashail, I IMPLORE you, please get a buyers agent. There are so many pitfalls on your first ever purchase.

If Jeff sees this, I am sure he will say the same. Surely Jeff didn't look at this correctly, and he didn't realize you are a first time buyer looking for your very own home.

Jeff, jump in here and correct/add to your thoughts considering a FIRST TIME BUYER is asking the question. If you are sure that you are absolutely correct for the first time buyer, lay down a pretty solid reasoning.

Mike is correct here. I slipped in to "investor mode" when giving this advice. New buyers should get a buyers agent INDEPENDENT of the seller's agent. That may even require that they are not from the same realtor group or agency.

I've seen deals between two agents that are not only both from Remax but the same office of Remax. Surely that isn't as good at two people who have never met before and are unlikely to meet again.

Good correction Mike.

 

[jeff_eaglz]

Yes a seasoned investor has/had done well in those markets these past few years, but these "hot" markets have spurned more investors and competition. Good deals are harder to find, and thus the margins aren't as big as you might think. Doubling your money on a deal can be much harder in hot markets vs. warm, average or even cold.

Real estate is both local and cyclical. You can make money in EVERY market, even yours. That goes for everyone.

Real Estate investors make their money when they BUY, not when they sell. That means we buy cheap and at prices that price in a profit already. I NEVER assume appreciation to make me a profit.

However, many newer investors in the area do just that and so far they are getting away with it. I won't pay that high a price for these deals, so the Noobs think they are smarter and grab them. Once the climate changes they'll be begging for a way out of that deal.

Very good points. It's just tough when you're in your early/mid 20's without much in the way of income, assets, or experience to do what you're doing, and I'm trying to take advantage of this market to build some capital and knowledge of the local market so I can eventually do what you're doing. I'm not trying to argue with you, simply looking for clarification on what you're thinking and why.Before I start to buy/sell properties for a living, I'm going to try to have a war chest that'll be living expenses for a year and about twice that much for working capital.

Living in the Pacific North West, I wouldn't think the War Chest is as Necessary as you might think.In your shoes, I would be looking to Jeff, and follow his path. You have a moving market. Should it hold up, and I think it will, it's just a matter of buying under value, and "Flipping"

With just one to three flips under your belt, I would hazard a guess that you will have more than you need to roll forward.

Now, I am imagining your market, but the Pacific North West is hot, and primed to Flip. Only you could know the exact details. Tons of People from CA are moving North to take advantage of your RE pricing. If there is any area in the Country that I think will continue and actually become more white hot, it is your Market along with NM and AZ. The Exodus from CA of people with a great amount of Capital to purchase (And not exactly knowing the going rate, so they spend too much) is going to drive those three markets.

With that in mind, I think you are in one of the best areas of the country to be in. I would certainly consider the concept of buy for appreciation in your market.

Once again, you know the specifics of your market, and I could be off base here as I am lumping you into the greater Pacific North West.

Mike, You make it sound that "flippers" can only operate in appreciating markets.

That's not true.

Everyone can find a junker house and fix it up to look like one of the neighbors. If you can do it for 70-75% of the after repair value, you can "flip" for a profit.

(by the way, "flipping" has a bad connotation in Maryland due to scandals with bad mortgages years ago, so we prefer "buying wholesale, selling retail" or "rehabbing").

There are deals in EVERY market. Mike, you're a testament to that. I know you get deals below market all the time. Everyone can if they know how/where to look or who to ask or buy from.

Housing is a need across the country. Rundown houses are everywhere. Find one and fix it up, then sell. Repeat.

In a strong market, you may have fierce competition for deals (Maryland can get that way). I'm sure California, NYC and Seattle are like that as well. There is a place within an hour's drive that has deals of virtually anywhere in the US.

The "Trick" is to know what works best in your market. All techniques can work (renting, lease options, rehabs, etc.), but some may work better in some markets than others. Cleveland is a depressed market so there's little appreciation, but rentals seem to make sense there. York PA is similar. Maryland is a rehab and retail area. However if the market cools off and no one can afford to buy, lease options may start to be the cool thing to do.

Another example: "The Short Sale". This is when a homeowner has fallen behind on the mortgage and the mortgage company is pressing to foreclose. Sometimes you can negotiate with that company to buy the mortgage at a discount - "Shorting" the note - and getting a deal that might not have been there otherwise.

This works in areas like Mike's - flat values year over year. The mortgage from 2001 is about what the place is worth. Foreclosures cost finance companies 15-25% of the mortgage balance to do. So unless the property went up 30% in value since the note was written, they don't really want to foreclose.

In Maryland, we've gone up 20% year over year for at least 3 years. No way you can get a short sale (or it will be a bear to try).

Wow, I don't know where to start here.First, I strongly belive in a market like proninja's, the only prudent course is to Flip. Now, proninja is established in life, and can afford to carry a small monthy loss banking on a huge payoff down the road, but most are not as geared and savy as he is.

Secondly, I can find a deal fopr me if I look hard enough. On my Website you will see two properties at 209 Woodland. I bought that property for $29K, and all told it will bring in $1,275 a month. I can live with that.

The 22% rule works just fine.

Not sure what's holding your comments back Mike.My points were:

1. Deals are everywhere.

2. Flipping is easier in some markets than others, especially in bad rent markets.

3. The opposite of 2 is also true. Rental markets may make for bad flip markets.

4. You can do both (2 and 3) but one may be more successful.

Bottom line:

Know your market.

 

[jeff_eaglz]

He bought it in 1989 for 62,000. That gives you a pretty good idea of the crappy appreciation around here. My concern is that repairs could run upwards of $30,000, especially if I go to toss a tenant and they call county inspectors. One other issue that I need to get over...being brokers, my partner and I are hesitant to lowball and get that reputation in the market.

Don't get blinded by the math. What you perceive is unfair may be a blessing to him.Losing $20K may still be a deal to him.

Lowball offer....

 

[Rattle and Hum]

Just curious...what kind of state increases tax basis for leasing a home?  I've never heard of that.  How would the local accessor know that it's being leased?

We have what's called a "Homestead exeption which you are supposed to only apply to one home. In my area:

Estimated Property Tax For Primary Residence or Qualified Farm (Homestead): $1813 / 30.21 millage rate

Estimated Property Tax For Second Home, Rental or Business (Non-Homestead):

$2893 / 48.21 millage rate

OK you got me.Millage rate???

Round these part a "millage" is what number each 1,000 of assessed value you pay in taxes. Assessed value about half of the townships perceived value. Our current home is assessed at 59,800. 59.8 X 30.21 millage= $1806.56If we turned this home into a rental we would pay 59.8 X 48.21= $2883.

You are exactly right when you say your millage may vary.

 

[Rattle and Hum]

Jeff and BnB... I really appreciated you going over my situation last night (buying new home and keep current home as a rental. We are under the 1% rule coming in at about .7% but we are in a slow market and would like to take the opportunity to move up in house.)

I am still lost on the tax consequences and don't want to keep pressing the issue here. I'm afraid the matter is in the same category as the "tuck" rule for me so I have woefully ignored it up to this point.

Is there a link that you could share that any caveman (yes, they still exist) could understand?

Things I need to learn:

1. Depreciation

2. Depreciation recapture if/when we sell

3. Will 100% of taxes and interest paid be able to be written off against income generated by the rents. (Believe it or not, we are not eligible to itemize- about $3,000 away from it).

Thanks a ton. PJ

 

[BassNBrew]

Jeff and BnB... I really appreciated you going over my situation last night (buying new home and keep current home as a rental. We are under the 1% rule coming in at about .7% but we are in a slow market and would like to take the opportunity to move up in house.)

I am still lost on the tax consequences and don't want to keep pressing the issue here. I'm afraid the matter is in the same category as the "tuck" rule for me so I have woefully ignored it up to this point.

Is there a link that you could share that any caveman (yes, they still exist) could understand?

Things I need to learn:

1. Depreciation

2. Depreciation recapture if/when we sell

3. Will 100% of taxes and interest paid be able to be written off against income generated by the rents. (Believe it or not, we are not eligible to itemize- about $3,000 away from it).

Thanks a ton. PJ

PJ - I really urge you to speak to a tax professional. It could be a 15-30 minute consultation from a tax accountant or a HR Block guy and should cost next to nothing. This is too big of a decision to rely solely on internet board folks who all have said that we aren't accountants and that you should consult one. I and others have our opinions as to what's correct, but in reality we could be filing erroneous tax returns based on a misunderstanding of the tax law, we could be misusing tax software, or the answer could be different because we're incorporated/LLC/sole proprietor. I guess another option if you're a do it yourself guy is to buy HR Tax Cut Federal edition for $10 at Wal-mart and run the scenario thru the software as if you've already done this and see what the numbers say. I also forgot to add that the gov't may view this differently depending on whether they deem this a reason venture based on propit potential.

 

[BassNBrew]

Quick question for Jeff or anyone else looking in. I have a friend that just sold an investment lot for a huge profit. She had held this lot for 2.5 years. Obviously there will be Federal capital gains, but do individual states dip their hands into the kitty too? Would that be income or a state capital gains? Is it due in the state where the property is sold or where you reside? This was strictly an investment as she has a full time job.

She's talking to a real estate attorney tomorrow, I was just curious if anyone had experience with this.

 

[jeff_eaglz]

Quick question for Jeff or anyone else looking in. I have a friend that just sold an investment lot for a huge profit. She had held this lot for 2.5 years. Obviously there will be Federal capital gains, but do individual states dip their hands into the kitty too? Would that be income or a state capital gains? Is it due in the state where the property is sold or where you reside? This was strictly an investment as she has a full time job.

She's talking to a real estate attorney tomorrow, I was just curious if anyone had experience with this.

Living in Maryland, I see out of state owners (VA, DC, WV, etc.) all the time.(The People's Republic of) Maryland dips their hand in at the closing table to be certain of their payday.

Yes, the state gets $$ - but I believe that is the transfer taxes.

As far as I know, when you make a profit (all our goal), everyone wants a piece - city, state, federal. The way they get it is that your gains are treated like you sold an investment - just like a stock. Capital gains rules apply for all of those levels.

Only way to avoid it is to "defer" them by a 1031 exchange - which really only puts them off. Eventually taxes will be paid. The 1031 basically allows you to treat it like a standard IRA - growing tax deferred.

 

[radballs.]

This thread is incredible. Jeff, Mike and BNB, I have some questions that I'll hit you with shortly. Thanks for all the info.

 

[jeff_eaglz]

This thread is incredible. Jeff, Mike and BNB, I have some questions that I'll hit you with shortly. Thanks for all the info.

"Radballs" - thanks.I thought it might strike a nerve. Glad it did.

BnB and Mike have made it way better than I'd even hoped.

And we will continue .....

 

[rolyaTy]

Hey everyone, thanks for the advice. I'm totally new dealing with this so I really do appreciate y'all taking time to help.

I have one more question though:

I'm not sure I will be in the same city a year from now. My job is pretty much a stepping stone to bigger and better things, and doesn't offer much for me as far as advancement goes, and neither does my area, so I will likely be moving out of the city/state in a year or two. However, I still would love to buy a house, especially considering I can get some good deals being a first time homeowner.

The option i'm looking at is this. I'm single, but I have two friends who can move in with me to the new house if I get one. I will charge them rent to help me pay the bill. Likely the mortgage will be about 900 dollars all things considered and they will probably pay around 550 or so, greatly offsetting that cost.

My plan is to live there with them as roomates until I move, having them essentially paying down my mortgage, at the same time I split the utility costs with them, and when I move off I will keep the house and rent it either to them or to another family. The area I'm looking in is right next to an air force base, the property value is great and the market is always good for selling, so I'm not worried too much about demand for renting.

The question I have is whether or not this seems like a good idea. I figure this might be a good way to start a rental type business, where I get a house here or there, and if I can get the house at a low rate, and have other people pay down the mortgage during the first year or so, I'm getting a fairly good deal. Are there special considerations that apply when you turn a house you've lived in, into a rental property? Are there additional property taxes you have to pay? Should I mention these plans to the bank when I'm applying for a loan? Is it even a good idea in principle? Thanks in advance for thoughts on this.

 

[jeff_eaglz]

Hey everyone, thanks for the advice. I'm totally new dealing with this so I really do appreciate y'all taking time to help.

I have one more question though:

I'm not sure I will be in the same city a year from now. My job is pretty much a stepping stone to bigger and better things, and doesn't offer much for me as far as advancement goes, and neither does my area, so I will likely be moving out of the city/state in a year or two. However, I still would love to buy a house, especially considering I can get some good deals being a first time homeowner.

The option i'm looking at is this. I'm single, but I have two friends who can move in with me to the new house if I get one. I will charge them rent to help me pay the bill. Likely the mortgage will be about 900 dollars all things considered and they will probably pay around 550 or so, greatly offsetting that cost.

My plan is to live there with them as roomates until I move, having them essentially paying down my mortgage, at the same time I split the utility costs with them, and when I move off I will keep the house and rent it either to them or to another family. The area I'm looking in is right next to an air force base, the property value is great and the market is always good for selling, so I'm not worried too much about demand for renting.

The question I have is whether or not this seems like a good idea. I figure this might be a good way to start a rental type business, where I get a house here or there, and if I can get the house at a low rate, and have other people pay down the mortgage during the first year or so, I'm getting a fairly good deal. Are there special considerations that apply when you turn a house you've lived in, into a rental property? Are there additional property taxes you have to pay? Should I mention these plans to the bank when I'm applying for a loan? Is it even a good idea in principle? Thanks in advance for thoughts on this.

Good questions here.If this wasn't your plan, I'd say don't be a buyer of a house - rent or lease.

But, looks like you have a creative solution. I love those .

Is 550 the best you can get? I'd pitch it to your friends such that they cover $300 each. That way you can replace yourself at the house in a year or so if need be with another $300 renter (preferably $325, with $25 a year increase written in the lease) to cover your costs.

If your friends flinch - you say that you are putting your neck out to be the only one on the mortgage and in a year if you move, you'll need to get a property manager so that pays for part of it.

I doubt that they will be that unnerved by paying $300 rather than $250, unless it is that big of a deal.

I'm going to stop answering tax questions until we get an accountant on the thread. Real estate is great for tax savings, but I pay someone to figure all that out for me.

As for mentioning it to the bank - there's no need to do that now and it might put them off if you are already thinking that way. Some are skittish and might "flag" your loan (if they don't sell it) for check-up in a year or two to see if it is now non-owner-occupied (NOO). This can trigger a due on sale clause or at least a rate call (bank wants to charge you more).

If you just "changed your mind" in the future and decided to rent it..... that's another story.

If you start to show a pattern though you may have a problem.

 

[roadkill1292]

The question I have is whether or not this seems like a good idea.  I figure this might be a good way to start a rental type business, where I get a house here or there, and if I can get the house at a low rate, and have other people pay down the mortgage during the first year or so, I'm getting a fairly good deal.  Are there special considerations that apply when you turn a house you've lived in, into a rental property?  Are there additional property taxes you have to pay?  Should I mention these plans to the bank when I'm applying for a loan?  Is it even a good idea in principle?  Thanks in advance for thoughts on this.

If the numbers work and you are confident that you can continue to find solid tenants, then this is a good idea. To the best of my knowledge, single family rental properties are not taxed differently than owner-occupied. And, since those costs are deductible (along with depreciation) you might even find yourself in the wonderful situation of having a positive cash flow while showing a tax loss for the property.No, I wouldn't mention it to the bank. If you're really going to live there at first, that's all they need to know. Who knows, your plans could change anyway.

I need to take a couple of hours and go back through this thread. This has probably already been said.

 

[BassNBrew]

Hey everyone, thanks for the advice. I'm totally new dealing with this so I really do appreciate y'all taking time to help.

I have one more question though:

I'm not sure I will be in the same city a year from now. My job is pretty much a stepping stone to bigger and better things, and doesn't offer much for me as far as advancement goes, and neither does my area, so I will likely be moving out of the city/state in a year or two. However, I still would love to buy a house, especially considering I can get some good deals being a first time homeowner.

The option i'm looking at is this. I'm single, but I have two friends who can move in with me to the new house if I get one. I will charge them rent to help me pay the bill. Likely the mortgage will be about 900 dollars all things considered and they will probably pay around 550 or so, greatly offsetting that cost.

My plan is to live there with them as roomates until I move, having them essentially paying down my mortgage, at the same time I split the utility costs with them, and when I move off I will keep the house and rent it either to them or to another family. The area I'm looking in is right next to an air force base, the property value is great and the market is always good for selling, so I'm not worried too much about demand for renting.

The question I have is whether or not this seems like a good idea. I figure this might be a good way to start a rental type business, where I get a house here or there, and if I can get the house at a low rate, and have other people pay down the mortgage during the first year or so, I'm getting a fairly good deal. Are there special considerations that apply when you turn a house you've lived in, into a rental property? Are there additional property taxes you have to pay? Should I mention these plans to the bank when I'm applying for a loan? Is it even a good idea in principle? Thanks in advance for thoughts on this.

1) Don't even think about buying a house unless you're a 100% sure that you want to go into the rental business.2) Any chance of that Air Force base closing?

3) If you decide that you want to become a landlord, buy a house on this basis. In other words you are not buying the one with the tricked out garage and rec rm with a pool table that you like. Get on the phone, call a couple of local property managers, and ask them where do renters want to be located, want type of house is the market demanding, and want features are tenants looking for. If it were me, I'd be looking for durable floors and a fenced yard is one of the best investments I see.

4) Treat this like a business from the get go with your friends. That means a lease and security deposit. Deal with this now, not when your dealing with the stress of relocating. Human nature says it will be harder to get this done after you've lived with them for a year. I can see it now..."aw man, you've lived with us a year, surely you can trust us."

5) Based on what I've read in this thread, tax liability varies in different locations.

Good luck!

 

[Ten Yard Fight]

I did this with my first house. Had 2 roommate renters in a 3 bedroom house. My mortgage was 900, rents were 575, I was paying down the principle about 100 monthly, and I think I figured about 175 monthly in tax savings. Plus the appreciation. After 5 years I got married and they moved.

 

[rolyaTy]

Thanks for the suggestions/advice. Seems like it's a good idea as I can't think of anything that would discourage me from doing it at this point. The air force base is a very stable one and it's unlikely it'd be shutdown anytime soon, so I feel that the location is probably pretty good. THe house is 3/2 with 2 car garage and a nice sized fenced in backyard. Quite a few new houses are being built in the subdivision as well so I think there will be continued growth there, and it's in a good school district.

Anyways, thanks for the input, it's well appreciated.

 

[rolyaTy]

I did this with my first house. Had 2 roommate renters in a 3 bedroom house. My mortgage was 900, rents were 575, I was paying down the principle about 100 monthly, and I think I figured about 175 monthly in tax savings. Plus the appreciation. After 5 years I got married and they moved.

How'd that work out for you? Did you have a written contract with them? Any problems arise that might be good to mention?

 

[ravnzfan]

neither was/am I

I posted earlier I didn't want my kids dumping $6-8K+ each in rent yearly, so using the back page of the local paper I started going to real estate auctions, to get a feel for what property was going for that way vs market.....40-60% appeared to be reasonable range of expectation

I took my daughter to several, and we settled on a small 2bd/1b 2 story colonial on 1/3a...was old, needed paint and new windows, but otherwise was in good repair

paid $60K(only 1 other bidder!)...my wife and I held the paper, as my daughter just changed jobs...when she qualified a year later, my daughter had a rediculously low mortage of ~$365/month, when small 2 bdrm apt in area went for ~$700/mo

she repaid us, and we purchased a similar property for my son the same way

sold her property recently for $126K, while putting less than $5K into it, holding it for ~4 yrs...after putting 20% down on her new house and paying closing costs, she had a check for ~$26K left over...and I had a VERY happy 26 yr old little girl!

find the "real estate auction"  section of your local paper, and attend a few to get a feel for how they work

terms, address and sale date are listed---once you go to a few, you'll know if this "is for you or not", as there is an element of risk if you have absolutely no "feel" for this (you do seem to have some aptitude, as you express a desire to do some rehab work yourself)

Yes that is a good story, but auctions vary widely across the country. Maryland auctions may not play out like that in other states (and they don't). You can still try, but I would NOT recommend it for someone new.They can also be very intimidating to novice investors. And you WILL NOT be getting ANY inspections for a property at an auction. Of all the ways to buy real estate, this is the RISKIEST that is available out there. Committing to a property all at once and often you haven't seen the inside. OK for an investor, not so good for someone looking for a place to live.

They are also NOT good indications of market value. I've seen properties overbid. I've seen properties underbid. Rarely are they bid to a market value level. It also gets confusing to novices as there is often a "buyers premium" that may or may not be announced. For example, a house may be auctioned at $300K and everyone thinks that it was a deal. The house really sold for $330K (10% Buyers' Premium, or "BP"). Deal doesn't look as good now.

Now you could face sticker shock if you start shopping that neighborhood looking for houses at $300K.

Many auctions of this type are geared towards investors as buyers or that there is some issue with the property (or both).

Very cool story.  Let me take the opportunity to ask the experts a question about these "sheriff's sale acutions".  I attended several in a row last year, just out of curiosity.  Just like I think someone else mentioned, it seems like it might be easy to overpay.  It seemed 90% of the properties did not get bid on.  8% were bid on by an investor, but counterbid by an attorney representing the bank.  2% were won by investors, but only after a pretty good amount of bidding between the investors. 

Each state has different laws about auctions. Some have foreclosure auctions and sheriff's sale auctions, some just the sheriff's sales. Foreclosures have at least one bidder, which is the bank. First bid will be for the amount of the foreclosing mortgage - usually the first mortgage - and the bank will bid the balance of that loan.IMPORTANT - If the bidder is a 2nd or 3rd mortgage - the property will be sold "Subject To Other Liens and Encumbrances" - which means that you can't forget the other mortgages. I've heard people bidding $100K for a 2nd mortgage on a $200K house, forgetting that their is a $150K first mortgage. Whoops.

Auctions are good ways to buy, but really for experienced investors. Don't dive in quickly. Now THAT'S a Shark Pool. There's also often collusion at the auctions...

1.)  Am I right in my understanding that you don't get to inspect these houses before buying them?  Is this a bit risky?

That's usually the case with state and county auctions. If the auction is at the property you will likely be able to walk through (but for only a few minutes).

2.)  They state you have to PAY before you leave.  How do most investors handle this?  Obviously some people have 6 figures liquid to throw down, but I'm guessing most of the investors I saw don't.  Do they have a relationship with a lender that allows them to take a "blank" cashier's check to the auction?

In Maryland you have to put down the $$ that is required to bid, which is usually about 10% of what the property may go for, or what is owed. At a foreclosure auction of a $200K mortgage, $20K down in cash / cashiers' check is usually required.The balance is due 10 day AFTER the auction is ratified / certified by a judge. That can take a 1-2 months. There's your time to get the rest of the $$ or find another buyer.

But - this is Maryland law. Other states vary, a lot.

Jeff raises very valid points....more about my situation:--at the time of the purchase for my daughter, our 1st investment property

the deal was our child (22 at the time) would give us a small monthly "rent" until she qualified for a mortage, which she did ~ a year later--she had just changed jobs prior to purchase of property...we aren't "in the real estate business"

--purchased at auction for $60K...not a huge amount of money "at risk", as I had a real estate friend pull trailing 12's, which indicated most recent selling price in neighborhood (at the time $125-150K, for similar "finished" properties)....I would be alot more cautious if the properties I was looking at were 160K or 260K!

--only faced 1 other bidder(beside the bank), who decided not to counter our bid(which was what the outstanding mortage was)...note this was May'01, and these days you could go to 100 auctions and not be the only one there!

--had help...took a builder friend to the property, which was open 1hr prior to the sale---he looked at plumbing, wire and roof as best he could at the time...nothing appeared in disrepair....he would also attend an open house when we purchased my son's house ~ 2yrs later

--deposit...$5K cash/certified funds required at both...as JE stated, balanced due 10 days after ratification of sale, which was ~ 45 days after the auction---I had a key the day we bought the property---had it been the case, we could have done a major repair and listed/sold the property w/in the alloted time (THIS would have been jumping in the SHARK POOL!), had we not had the funds secured (we borrowed against stock we owned to pay for the property)

--2nd purchase....July'03...after my daughter repaid us (keep in mind her mortage was ~$370 for the property, when similar property rentals were in the $600-700/mo range), we did the same thing for my son

$62K sale, on a 2 bdrm/1b cottage type (A-frame roof has attic 7 1/2 high in center, but slopes to floor)...the trailing 12's has us in a $150-170K neighborhood for 3bdrm homes, we're looking to expand this one in the future to 3bd/2b

this auction had ~6 or 7 of us "qualify for bidding purposes" by confirming the required deposit w/auction co--several were "bottom feeders", looking for something for 20-25 cents/dollar--a couple contractors were bidding, looking to "raise the roof" and make it a full 2 story, 4bd/2b property..in the end, my wife really wanted the house--we were w/in $2-3K of our limit on the property

we spent ~$25K on repairs (including gutting drywall, new kitchen/bath and a new roof-pointed out to me ahead of time by my builder buddy)

my son was in school at the time of all this...we did most of the work ourseleves...he moved in a year after the purchase, and finished school this past year--once he repays the 90K to us, we'll look far a similar type situation, where we can get something in the 100K range, invest alittle "sweat equity" and a couple dollars, and make a few bucks

as I stated in my closing paragraph of the original post--there is an element of risk

however, if you do your homework and get a good handle of "retail" in the neighborhood, get a decent estimate of what you'd like to do to improve the property---you should be well prepared to have a set "top $$" number

we had to walk on several occasions before we bought either house, but in the end it has worked out for all of us

 

[jeff_eaglz]

neither was/am I

I posted earlier I didn't want my kids dumping $6-8K+ each in rent yearly, so using the back page of the local paper I started going to real estate auctions, to get a feel for what property was going for that way vs market.....40-60% appeared to be reasonable range of expectation

I took my daughter to several, and we settled on a small 2bd/1b 2 story colonial on 1/3a...was old, needed paint and new windows, but otherwise was in good repair

paid $60K(only 1 other bidder!)...my wife and I held the paper, as my daughter just changed jobs...when she qualified a year later, my daughter had a rediculously low mortage of ~$365/month, when small 2 bdrm apt in area went for ~$700/mo

she repaid us, and we purchased a similar property for my son the same way

sold her property recently for $126K, while putting less than $5K into it, holding it for ~4 yrs...after putting 20% down on her new house and paying closing costs, she had a check for ~$26K left over...and I had a VERY happy 26 yr old little girl!

find the "real estate auction" section of your local paper, and attend a few to get a feel for how they work

terms, address and sale date are listed---once you go to a few, you'll know if this "is for you or not", as there is an element of risk if you have absolutely no "feel" for this (you do seem to have some aptitude, as you express a desire to do some rehab work yourself)

Yes that is a good story, but auctions vary widely across the country. Maryland auctions may not play out like that in other states (and they don't). You can still try, but I would NOT recommend it for someone new.They can also be very intimidating to novice investors. And you WILL NOT be getting ANY inspections for a property at an auction. Of all the ways to buy real estate, this is the RISKIEST that is available out there. Committing to a property all at once and often you haven't seen the inside. OK for an investor, not so good for someone looking for a place to live.

They are also NOT good indications of market value. I've seen properties overbid. I've seen properties underbid. Rarely are they bid to a market value level. It also gets confusing to novices as there is often a "buyers premium" that may or may not be announced. For example, a house may be auctioned at $300K and everyone thinks that it was a deal. The house really sold for $330K (10% Buyers' Premium, or "BP"). Deal doesn't look as good now.

Now you could face sticker shock if you start shopping that neighborhood looking for houses at $300K.

Many auctions of this type are geared towards investors as buyers or that there is some issue with the property (or both).

Very cool story. Let me take the opportunity to ask the experts a question about these "sheriff's sale acutions". I attended several in a row last year, just out of curiosity. Just like I think someone else mentioned, it seems like it might be easy to overpay. It seemed 90% of the properties did not get bid on. 8% were bid on by an investor, but counterbid by an attorney representing the bank. 2% were won by investors, but only after a pretty good amount of bidding between the investors.

Each state has different laws about auctions. Some have foreclosure auctions and sheriff's sale auctions, some just the sheriff's sales. Foreclosures have at least one bidder, which is the bank. First bid will be for the amount of the foreclosing mortgage - usually the first mortgage - and the bank will bid the balance of that loan.IMPORTANT - If the bidder is a 2nd or 3rd mortgage - the property will be sold "Subject To Other Liens and Encumbrances" - which means that you can't forget the other mortgages. I've heard people bidding $100K for a 2nd mortgage on a $200K house, forgetting that their is a $150K first mortgage. Whoops.

Auctions are good ways to buy, but really for experienced investors. Don't dive in quickly. Now THAT'S a Shark Pool. There's also often collusion at the auctions...

1.) Am I right in my understanding that you don't get to inspect these houses before buying them? Is this a bit risky?

That's usually the case with state and county auctions. If the auction is at the property you will likely be able to walk through (but for only a few minutes).

2.) They state you have to PAY before you leave. How do most investors handle this? Obviously some people have 6 figures liquid to throw down, but I'm guessing most of the investors I saw don't. Do they have a relationship with a lender that allows them to take a "blank" cashier's check to the auction?

In Maryland you have to put down the $$ that is required to bid, which is usually about 10% of what the property may go for, or what is owed. At a foreclosure auction of a $200K mortgage, $20K down in cash / cashiers' check is usually required.The balance is due 10 day AFTER the auction is ratified / certified by a judge. That can take a 1-2 months. There's your time to get the rest of the $$ or find another buyer.

But - this is Maryland law. Other states vary, a lot.

Jeff raises very valid points....more about my situation:--at the time of the purchase for my daughter, our 1st investment property

the deal was our child (22 at the time) would give us a small monthly "rent" until she qualified for a mortage, which she did ~ a year later--she had just changed jobs prior to purchase of property...we aren't "in the real estate business"

--purchased at auction for $60K...not a huge amount of money "at risk", as I had a real estate friend pull trailing 12's, which indicated most recent selling price in neighborhood (at the time $125-150K, for similar "finished" properties)....I would be alot more cautious if the properties I was looking at were 160K or 260K!

--only faced 1 other bidder(beside the bank), who decided not to counter our bid(which was what the outstanding mortage was)...note this was May'01, and these days you could go to 100 auctions and not be the only one there!

--had help...took a builder friend to the property, which was open 1hr prior to the sale---he looked at plumbing, wire and roof as best he could at the time...nothing appeared in disrepair....he would also attend an open house when we purchased my son's house ~ 2yrs later

--deposit...$5K cash/certified funds required at both...as JE stated, balanced due 10 days after ratification of sale, which was ~ 45 days after the auction---I had a key the day we bought the property---had it been the case, we could have done a major repair and listed/sold the property w/in the alloted time (THIS would have been jumping in the SHARK POOL!), had we not had the funds secured (we borrowed against stock we owned to pay for the property)

--2nd purchase....July'03...after my daughter repaid us (keep in mind her mortage was ~$370 for the property, when similar property rentals were in the $600-700/mo range), we did the same thing for my son

$62K sale, on a 2 bdrm/1b cottage type (A-frame roof has attic 7 1/2 high in center, but slopes to floor)...the trailing 12's has us in a $150-170K neighborhood for 3bdrm homes, we're looking to expand this one in the future to 3bd/2b

this auction had ~6 or 7 of us "qualify for bidding purposes" by confirming the required deposit w/auction co--several were "bottom feeders", looking for something for 20-25 cents/dollar--a couple contractors were bidding, looking to "raise the roof" and make it a full 2 story, 4bd/2b property..in the end, my wife really wanted the house--we were w/in $2-3K of our limit on the property

we spent ~$25K on repairs (including gutting drywall, new kitchen/bath and a new roof-pointed out to me ahead of time by my builder buddy)

my son was in school at the time of all this...we did most of the work ourseleves...he moved in a year after the purchase, and finished school this past year--once he repays the 90K to us, we'll look far a similar type situation, where we can get something in the 100K range, invest alittle "sweat equity" and a couple dollars, and make a few bucks

as I stated in my closing paragraph of the original post--there is an element of risk

however, if you do your homework and get a good handle of "retail" in the neighborhood, get a decent estimate of what you'd like to do to improve the property---you should be well prepared to have a set "top $$" number

we had to walk on several occasions before we bought either house, but in the end it has worked out for all of us

Good stories.

One comment - please define for everyone "Trailing 12s".

 

[Ten Yard Fight]

Thanks for the suggestions/advice. Seems like it's a good idea as I can't think of anything that would discourage me from doing it at this point. The air force base is a very stable one and it's unlikely it'd be shutdown anytime soon, so I feel that the location is probably pretty good. THe house is 3/2 with 2 car garage and a nice sized fenced in backyard. Quite a few new houses are being built in the subdivision as well so I think there will be continued growth there, and it's in a good school district.

Anyways, thanks for the input, it's well appreciated.

Oh sure! Cons:

1. Appreciation was very minimal. They were building new houses in my neighborhood for the first 3 years, and I'm pretty sure that stifles existing home sales in said neighborhood.

2. Both I and one roommate smoked when we moved in together. We both smoked inside. I quit smoking 3 years in, and chose to endure him smoking for the next 2 years. Obviously I didn't have to do this, but during those 2 years, the smoke didn't bother me that much and didn't cause me to fail in my quitting efforts.

3. Same roommate became my business partner later and I had a hard time ignoring the fact that he was lazy.

Pros:

1. $34,500 collected in rent over 5 years.

2. People to hang out with

3. Didn't have to furnish the rooms

4. Minimal repair needed after they moved out. I chose to paint and lay carpet only.

*****

Both were friends and I did not require security deposits or contracts, though I would certainly see the desire for one. In this instance, it did not matter. I am very happy with how it turned out.

 

[radballs.]

Jeff,

First I just wanted to thank you again for starting this thread. I’ve learned a lot reading it over this weekend. I’m out in California and unfortunately for real estate investing there isn’t anything close to matching up with the 1% rule. I don’t think Mike’s system would work out here since rentals probably come out to about .35% of the value of the property. Not something that either of you would recommend I think. There are still opportunities to flip some fixer uppers, but the base amount of your investment is obviously much higher than in other parts of the country. In any case, here are a few residential questions that I have.

Residential Project:

My question isn’t really about investing per se, but I’m interested in using the equity in my home to build my dream home. My current home has an approximate value of $400 K and my mortgage balance is only $125 K. My dad has two plots of land adjacent to his primary property. Each plot is a little over one acre and each is zoned for splitting into two buildable lots. On one of the lots, there resides a log cabin which he currently uses as a rental. My dad is willing to deed a portion of this land to me so that I can build my house. He realizes that the land will be mine someday anyway so he figures he would like me to be able to enjoy while I’m still young. He is leaning toward building two manufactured homes (1,500-1,800 square feet each) on the other plot to be used as rentals. He can get much closer to the 1% rule by going the manufactured home route. I want to build my home where the log cabin is. It is in very rough shape and it would most likely have to be completely demolished. All of the land is completely owned outright.

Can my dad just deed the land to me for nothing without any kind of tax implication for either of us?

Is this the best way to go or should he build the home under his name and then just sell me the home at his cost?

Will his manufactured homes appreciate as much as a stick built home would?

Approximately what kind of savings might both of us enjoy if we build all three homes as stick built versus him going the manufactured route? In other words, are there legitimate economies of scale if all three used a lot of the same materials? If so, what percentage would you figure? Homes built out here given the materials I would most likely use, range from $150 to $180 per square foot.

Can the value of the land be used as the down payment to get the construction loan approved?

At this point, I’ve only spoken with one GC about the project but I don’t have any home plans yet. He said that he would work with us on the home plans when we were ready to get going. So, should I secure the loan first? Or what would be a general check list for such a project?

Thanks for any help and I’m sure I’ll think of other questions in the meantime.

 

[jeff_eaglz]

Radballs,

I'll help where I can.

1. Check with county / city zoning, but I believe you'll have to subdivide the lots before you build.

2. Get a local architect familiar with Planning and Zoning ordinances in the area. Tell him that you want 4 houses on 2 lots (4 after subdivision). Odds are that he should steer you towards a common driveway where all 4 owners would come in and branch off (think of a mirrored "F" pattern):

H----------+----------H | | | | H----------+----------H | | | | |A cul de sac at the end is an option.

That way all the utilities and such can come in on a common line and serve all 4 homes. Saves cost there and on the driveway(s).

You'll need easements from all 4 owners for common ground (where applicable).

2. Check with a tax advisor about deeding the land. Deeding the land over (rather than the house plus land) will likely be better tax-wise, but check with an accountant.

3. Timing who sells what to whom / when can be tricky. I would try and build 4 homes at once (or at least plan the "mini-community" to be all the same). That makes for (A) easy comparable homes and (B) ensures that you won't have the best or worst house on the block.

Building the first one and selling it to you or any other buyer would set the price standard for the block. Barring changes between when the first one is sold and when #2, #3 or #4 are ready, the value will be set.

4. Having a plan and taking that to a bank may be sufficient for the $$. Owning the land free and clear helps your Dad be the "constructor" of 4 new homes, but adding a sales agreement between you and he for the future home (and giving him a deposit) would add validity.

I would work with the architect and a local lender to try and put this together. Rather than selling it to renters, find 2-3 friends / family that you want to live near and have them buy the homes "pre-construction". A builder only needs to sell 50-70% of a project to fund it, so that may help as well.

5. Regarding stick built vs. manufactured. I would go manufactured, but would visit the plant where they make the homes and/or see examples of their work. I believe you would do well at $100 a sq.ft. or much less.

$150-180/ft is high.

Hope that gets you started.

 

[radballs.]

Thanks for the feedback Jeff. I also have some comercial questions for you that I'll mention a bit later.

 

[Warehouse Nasty]

How much (if any) of an impact does having railroad tracks near your house (say about 0.25 mile away) affect the value of a property?