Expert: Dick Dennis - 5/24/2006

Question
This is all preliminary as I havent even been inside the property yet. But assuming everything is in fair condition I would like to have rent around $375 each and tenets take care of utilites. This is what I know.

Stories:2
Baths:2.5
Beds:6
Market Value:43K
Asking Price:39K
On the market since:2/3/06

There has never been a for sale sign on the property, yet when I looked it up in a local database its listed as foreclosed and apparently for sale. What would be a good opening bid price?
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Followup To

Question -
Hello,

I understand that buying foreclosed property doesent automatically mean a good deal but I live in Ohio which has the highest foreclosure rate in the country right now. Are banks more willing to take low ball offers to sell thier property in a market like this?

Im looking into buying a duplex as an investment property owed by fannie mae. A realtor gave me a price of 39K. Considering the property is in fair condition in a fair neighborhood, what would be a good offer on this property in a high foreclosure market.


Answer -
Tell me what the rents would be on the property, what size are the units? How many bedrooms? Baths? then I could tell you what would be a fair price for the property. But when you are in such a high foreclosure market, who says you have to be fair?

The bank wants to be out from under the foreclosure because it costs them every day to hold that property. Most banks have a stable of investors to whom they offer these kinds of properties. So, you may not be able to steal it as you may have thought. But like I said, let me know what kind of income you'd have then I can tell you a fair figure for you.

I wish you well.

Dick Dennis          dixiedee13@aol.com

Answer
Because I would want a 10% cap rate on this property, I would therefore offer no more than $31,500. It is difficult for a smaller property to be under the same cap rate as larger properties. In fact, smaller properties often use a higher cap rate. But in this case, you are going to have to do substantial repairing without even looking at it. Also, I would want a positive income after I get the tenants in there. I arrived at the $31,500 this way: $375 times 2 equals $750 gross income per month. In a year that amounts to $9,000. The work that property is going to need will eat into your net income. Plus you have to set up a sinking fund for future repairs and replacements.

$31,500 equals 10$ net return. That means in a year's time your expenses is going to be $5,850. If you put 20% down payment that means $6,300. Plus closing costs. Your monthly payments will be approximately $167.66. Plus insurance. That takes it to $210 per month for your debt service total.

Plus figure on at least a 5% vacancy rate. That's another $37.50 you should be putting away to take care of future vacancies. So, to round it out, that means it is going to cost you $250 per month. $750 less 65% for miscellaneous repairs and replacements comes to $262.50. That means you would clear $12.50 per month. In Ohio, you don't have the appreciation we have in California, for example. With income properties, the way you increase the value of the property is by increasing the rents, therefore the income. But in your neighborhood does not warrant an increase in rents, then the value will remain until you are able to raise the rents.

I wish you well. Dave.

Dick Dennis

It would be more if you put a larger down payment.