Our First Offer

I’m still running behind in telling you about all our experiences in real estate investing. So much has happened since we joined Lifestyles Unlimited and finished our “Two-Day Seminar”. It took us a few weeks to just absorb all the info and spending tons of time searching the local Multiple Listing Service (MLS) and working the numbers taught me a lot.

Lifestyles teaches you to cultivate a group of 20 or so Realtors to help you find houses but they also offer the services of Lifestyles Realty to their Challenge members. It costs $4000 to be a Challenge member but it comes with a whole host of benefits, so we decided to join. We don’t have the time to call 100 Realtors and increasing our membership gave us the resources to find deals. I think it was mid-July when we increased our membership and immediately we scheduled a meeting with one of the mentors, Chuck Maley.

The Challenge Membership includes the following:

Single-Family Mentor – consulting whenever we need it and we can meet face-to-face
Ability to use the Lifestyles Realty agents for single-family deals
Email blasts of houses that have been identified as good potential deals for investing
Single-Family Road Trips where a group goes to look at deals for education and/or purchase
Single-Family classes for Challenge and Preferred members only

There’s one more level, it’s called PIG or Preferred Investor Group. It’s for those who want to invest in Multi-Family and at that level you get your tuition rebated back to you when you make purchases. At the Challenge level, you can’t get any of the tuition rebated but the Challenge was all we could afford. And since we can increase our membership to PIG at any time and only have to pay the difference, we decided to go ahead and join at the Challenge level.

Anyway, during our meeting with Chuck we were able to find a couple of deals that were potentially good. He introduced us to the agent that ‘tagged’ the properties and we got to work. John Warner was the agent we were to work with and we got right to business.

The house we were looking at was an estate sale and boy oh boy was it a mess. But that’s part of all this real estate investing stuff. You buy houses that have a foreclosure or the owners are super motivated to sell. Quite often they are a MESS! We didn’t get this particular house, we were outbid, actually we were third on the list. Here are the numbers:

Asking Price: $74,000 ish

Our Offer: $77,000 ish

Rehab estimate: $20,000 ish

Comps in neighborhood: 2 houses at $116,000, and 1 house at $109,500

Foreclosures in neighborhood: 2 houses at $80,000

Rent comps for neighborhood: $1050 per month

Here’s what the deal would look like with 20% down:

Cash Flow

Monthly rent $1,050

Loan payment (30 yr) $375

Property taxes $250

Property insurance $100

HOA monthly $30

Monthly cash flow $295

Unrealized capital gain $13,000

Cash Out-of-Pocket

Down payment $15,400

Closing costs $5,000

Rehab $20,000

Cash Out-of-Pocket $40,400

As you can see, we would need over $40k cash to get into this house. This scenario gives us an annual return of 8.76% from the cash flow and a 32% return on the capital gain. However, it’s way more than we wanted to invest into just one house.

Consequently, we were considering a ‘double close’ mortgage. Basically a ‘double close’ mortgage is like a construction loan that you refinance into a conventional FannieMae mortgage. The first loan, the one you buy the house with, is a short-term balloon note (usually 1-3 months) at the same rate as the final mortgage will be. They allow you to finance up to 100% of the purchase price, rehab, and closing costs as long as it doesn’t exceed 75% of the market value. Then you can refi up to 75% of market value into the conventional loan. This allows you to finance a portion of your rehab.

Here’s an example using the house above:

Cash Flow

Monthly rent $1,050

Loan payment (30 yr) $545

Property taxes $250

Property insurance $100

HOA monthly $30

Monthly cash flow $125

Unrealized capital gain $8,000

Cash Out-of-Pocket

Purchase Price $77,000

Closing costs -2 closes $10,000

Rehab $20,000

Total $107,000

Max loan 75% of market $86,250

Difference of Total & Max $20,750

Cash Out-of-Pocket $20,750

In this example we would earn much less on cash flow but would preserve some of our capital to buy a second house. The return on cash flow on the cash invested would be 7.2% which is still reasonable. The unrealized capital gain also dropped to $8000 from $13,000 because of the cost of the extra closing but the return increased to 38.5%.

In all honesty, I’m glad we didn’t get the bid on this house, I think we can do MUCH, MUCH, better. The house itself is good and so were the comps in the neighborhood. What blew it out of the water were the amount of repairs that needed to be done. It needed a new roof, all new floors, new counter tops, all new appliances, new toilets, paint, and more. If this house didn’t need the roof and maybe if the floors just needed rejuvenation or maybe if it had good appliances, it would have been a great deal.

Here are couple of pics of the worst: