Expert: John Hendricks - 2/7/2008

Question
My name is Chris and I recently posted on here a few weeks ago looking for some help with some properties. After looking at the homes and finding the one that fits my goal, I have come across some more questions:

Here is the current Information: 3 bed; 2 bath; Duplex asking 23K; appraised at 43K; 1400sq. ft. Roof is 7 years old (still looks new); Duplex currently is rented-Upstairs (single bath & single room @ 375/month utilities payed by tenant who is occasionally late during the winter due to seasonal work but always catches up, who has been there 10 years. Downstairs-family that has been there 1.5 years, pays 400/month & never been late. Current lease is month to month. House has been on market for 6 months. Not under foreclosure. Ugly looking home in newer neighborhood (only 2 homes on block are in need of repair and one is in the process). Needs all new siding, flooring (carpet, vynal...etc) walls need paint and patching. Basement is dry and strong in terms of support beams & such. Furnace is from the 50's/60's) There is asbestos a single heat pipe and im not sure if I should get an inspection before or after I buy it, or use the inspection contigent on the offer.  I have comps of last 6 months sales in Antigo, WI. Taxes are 1.1K. I have no income or assets (besides my car which isnt payed off) I am a college student, and would manage the property myself.

My goal here is to bring monthly cash flow into my pocket and to let the equity build up in the home. I need help drawing up a deal so that I do not low ball the offer. I listed things that the house needs above. I would like to offer seller financing; if that falls through my grandma would co-sign; she has good credit as she is in the real estate business and I have a rating of 712. Any ideas? Thanks for your time and help!
Chris Jesse  

Answer
Dear Chris;

Sorry for getting back to you so late… I just returned from vacation, and just now catching up now. Hope this is not to late for you.

The offered sales price of $23K and compared to the appraisal of $43K seem to make this a pretty good deal, depending on how old the appraisal is. If the appraisal is current, you have automatic equity at the time you purchase the property, which offsets a good portion of the differed maintenance you mentioned. The rental income of $9300 per year ( a gross rent multiplier of 2.47 which is extremely low which is good) should service your loan and property tax depending on the terms and conditions of the loan. I would recommend a fixed 10 year, interest only loan. Your lender will explain the details of such a loan.

The offered price seems reasonable and I would not hesitate to offer the full price to tie up the property in escrow. A 30 day escrow, 17 days for inspections, and the same for formal loan approval would be attractive terms for your offer. Once you have an accepted offer, employ only licensed inspectors to report on the condition of the property, and have them present bids for the work that is recommended. You can still negotiate for costs either by way of credits towards your non-recurring closing costs, or a reduction in price. This can be done as a condition to the release of contingencies. There is a  way of presenting your proposed negotiated terms before you release your contingencies without giving up your position to purchase the property if a back up offer is in position. In other words, you will have the last say in the transaction, not the seller. A good Realtor will explain how to do this for you.

As far as owner financing, you can have your Realtor contact the other agent prior to writing an offer to determine if the seller would consider such financing. If so, ask for the terms and conditions the seller would be comfortable with and add them to the offer. In most instances, especially income property, owner financing is not an option due to the owner not being able to trade out of the property to another property which would defer taxable gains. You would be better served in an offer to cash them out.

Get your financing in order prior to presenting an offer. If your grandmother needs to be on the loan, get pre-approved first. If you do not have a Realtor, or a lender to help you as of this time, e-mail me with your contact information. I will make arrangements for a great Realtor in your area who will help you with the process of getting a good mortgage broker who will pre-approve you at no cost other than a credit report. Their job is to get you prepared to buy, and then Realtor will present an offer and negotiate the best possible deal for the property. The seller pays the commission, you don't, so why not get the best Realtor to represent you.

Hopefully this information has been a help to you, please e-mail me at JohnHendricks@Marin1.com with your contact information if you would like my help… good luck...

Warmest Regards;
John Hendricks