As I said in my previous blog entry, I got a call from a lady wanting to sell her house. My guesstimations were pretty much on spot (actually, a little higher, except I didn't factor in PMI in the loan). After talking with the lady, I found out both her and her sister bought the place, and her sister moved out last month to her own place. The lady said she can't continue staying there, since the payments are too high for just her. I told her I was an investor, and couldn't buy houses at retail price. She said that she didn't want any money for the property - she just wants to get rid of it. I figured the balance on her loan was around $113,500, and was surprised when she said it was currently $111,700. The deal will be very slim no matter what exit strategy I employ. I would almost have to take over her payments as a conventional loan would cost me $$$, especially, since the LTV is so high (~90%). I guessed she was paying about $1,386/mo (PITI), and she confirmed she is paying $1,400/mo.
So, what to do ... what to do ... I want this property badly for three main reasons:
1. It's a 15yr loan. This means the equity build-up and debt pay-down will occur a LOT faster than with a 30yr loan. It also means the payments will be higher, too, which is part of the problem I'm having on an exit strategy.
2. Based on the date of the loan, the fact it's only 15yrs, the monthly payments, taxes, insurance, and PMI, I figured the interest rate is <5% (actually, I figured 4.75%). With that kind of interest rate, it makes #1 above a lot more attractive.
3. It has about $15k-$20k of equity. Percentage-wise this isn't good ($112k/$128k = 88%), but the equity amount is still nice - especially given #1 and #2 above as it will only go down quicker.
The problem being a straight rental is this ... Rents in the area range from $950-$1200, with comps of $1,000 closer to this property. I could rent it out with a higher price tag, but it may sit longer, too - negating my efforts. At $1,000/mo, I'd have negative cashflow to the tune of $400/mo. Ouch! The good news is the property is located to a new university extension, so I could cater the property to students, since it has 4 bedrooms and 2 baths.
Another thing I could do is sell via owner-financing. I really need to see a lawyer about this first, though, as I still have some reservations about it - especially since it will have an underlying loan that could be called by the lender (this sense of fear is exacerbated knowing the original loan only had a 4.75% interest rate). If I did this, I could sell it for $135k or so. Even at that amount, I'd still have to ask for a high downpayment ($10k or so) and/or a very high interest rate (10% or so) on the new note.
The good news in all this is that (1) I still need to see if the lady is willing to let me take over the payments, and (2) she said she doesn't necessarily have to sell quickly (I specifically asked her if she needed to sell within a few days or could wait for 30-45 days, if need be, and she said she could wait). So I could realistically sign a contract for a 30-45 day close, which would give me more time to arive at a decision.
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3 comments:
Dang. After analyzing more than I shold on this property, I've decided I'll have to pass. The numbers just didn't work for me. I hate to walk away from the great int rate, decent equity, and 15yr term, but I can't afford negative cashflow for who knows how long - especially with two new mouths to feed soon. I'll call the lady back and get some more info, but I have a feeling I'll have to pass either way. I'll probably fish this one out for some other investor and (hopefully) take a birddog fee. I just hope my instincts are correct on this one.
Maybe try renting out the rooms separately to four+ students to cover the note. This choice may be a bit more manage intensive. Also, I am not sure if this is possible, but can you transfer the home into a trust, having you as trustee? That way you keep the loan were you want it. There must be a way to make this work.
Thanks Ed. Yeah, I've thought about the student thing, and I'm not sure of all the legalitites involved, IF I choose to have separate leases. Something I would need to check into. As far as the trust thing, I'm now at a pretty comfortable knowledge level when it comes to trusts. I'd like to create two companies: one would be the trustee and the other the holder (beneficiary) of my properties. Of course, since I will be the managing member of both, I'll essentially be both the trustte and beneficiary. I've heard some states don't allow a business entity to be one or the other, so I need to follow-up on that as well. It makes the "insurance trap" a lot easier to circumvent, too!
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