Author Topic: I have a house under contract for 603K. Bring on the haters...  (Read 2513 times)

clarkfan1979

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The inspection is today (Thursday). I have until Saturday at 5:00 p.m. to get out of the deal.

Single family home in Koloa, HI on the island of Kauai. 3 bed/2 bath/2 car garage, 1850 sq. ft. It has an additional basement rental unit that is 550 sq. ft. (1 bed/1 bath).

It was a foreclosure listed for 550K. We bid 603K and there were 9 offers total. We ended up being the 2nd highest offer. The highest offer fell through and we were next in line.

The house needs about 10K worth of cosmetic repair. After repairs, it should comp out around 700K. The median price for Koloa, HI is 873K. The house sold for 547K in 2003. The person who bought it must have refinanced it because it foreclosed in 2010 with a balance of 882K. I'm guessing it appraised for 900K to 950K in 2006. They tried to sell it in 2007 with a list price of 987K and were unsuccessful.

Annual taxes are only $1481/year and insurance will be around $1600/year. With 20% down and a mortgage rate at 4.5%, our total mortgage payment will be $2700/month. I understand that is a big number. However, the basement unit will rent for $1500/month. We currently pay $1500/month for our rental unit and we are in a less desirable area. We will be left paying $1200/month + utilities.

I have two additional rental properties with equity. If I sold them off, I could probably put 330K down, instead of 120K. That would give me a lower mortgage payment. However, my rental income of about 15K/year, principle payments and tax advantages would be gone.

I am expecting a lot of hate mail because 603K is a big number. However, I think it's a good deal. I will know for sure after the inspection today. Fingers crossed. 
 


srad

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #1 on: April 05, 2018, 10:03:12 AM »
Hi eh?  You know how hard it is to FC someone in that state?  I work for a non performing note fund, we are sitting on a few dozen where they are next due for 2009.  Man, you can collect rent for years there and not have to pay that mortgage :)

And as for the purchase, with the basement unit rented, i like this deal.  Its not always about the 1% rule.  And i wouldn't punt your other rentals, you've got a good stream of income from them. 

SeaWA

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #2 on: April 05, 2018, 10:05:47 PM »
House prices are relative. Calculate the ROI and see if it is competitive.

I am a new landlord, but I look at a house as an asset and evaluate the asset performance, not the sticker price. A tool available here at MMM is in the Real Estate & Landlording sticky thread:

Link to thread: https://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/

Link to spreadsheet: https://docs.google.com/spreadsheets/d/10XGrJTyn-xDbPulj9t3STtshNd3Clx-2Ck1XQbLwd0w/edit#gid=2117251242

What could you get if you rented out the top of the house too? If you're getting $1,500 from the 550sf unit, then you should be able to get more than that for the top unit. If you look at the usual expenses in *addition* to the PITI, then would the property pencile out as a rental unit? If so, then you are subsidizing your housing costs and providing yourself another potential revenue stream.

To me the germane metric is the asset performance, and the price is only part of the equation. If you can rent the house and cover the PITI, capital expense, vacancy reserve, etc., and have an attractive cash flow, then you are buying a working asset. The fixation on price is a construct that can blind you to the appropriate financial analysis.

To put it another way, would you balk at buying a business for $1M if it were kicking out an attractive return? Why or why not? What about a $100K asset, or a $10M asset? To me the only thing that matters is access to capital (or credit), the asset performance and risk.


waltworks

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #3 on: April 06, 2018, 11:53:57 AM »
This is a house you want to live in, right?

Sounds fine to me. Kauai is nice, and it's not cheap, and the rental unit sounds great.

I mean, I live in a house that costs way more than that, but it's where I want to live. Built a 2 bedroom rental in our basement and boom, mortgage is paid by the renters.

Do it - though I wouldn't put much stock in your $10k of repairs raising the value $100k. Doesn't matter if you want to live there long term anyway, though.

-W

thd7t

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #4 on: April 06, 2018, 02:06:55 PM »
Okay, I'll bite.  Were you renting on Kauai before?  Are you looking at a substantial increase in costs now?  Do you really need all that square footage?  And a two car garage??

I'm not opposed to home buying and I'm totally aware that you've been here long enough that you didn't make this decision lightly, but if you're going to put this out here, you should go ahead and show us that it's in line with a low consumption lifestyle.

acroy

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #5 on: April 06, 2018, 02:11:06 PM »
Cool, sounds like a good deal.
Wish I was there ;)
Good luck!!!
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Kierun

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #6 on: April 06, 2018, 03:27:41 PM »
Wish I could find something similar to that on Oahu, not hating, just jealous.

lhamo

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #7 on: April 06, 2018, 04:16:27 PM »
Sounds like an excellent deal in an expensive market.

Median house price in Seattle is now close to $820k.  It is very, very hard to find a 3br/2ba in decent condition for 600k -- they may list for that, but bidding wars are driving prices up 50-100k over list in most cases.  The estimated value for our house, which we bought last May, is up 130k on Redfin (still priced 12k below what we actually paid -- they use inappropriate comps, in my opinion) and 60k on Zillow.
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Carrie

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #8 on: April 06, 2018, 04:18:01 PM »
If you want to be a badass you could rent the main house and live in the apartment.

Another Reader

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #9 on: April 06, 2018, 04:43:57 PM »
Been looking at adding an ADU here in Silly Valley.  That could pay the entire mortgage after all expenses.  Supposed to be easier under the new state law.  Easier, but not cheap.  Having one in place at the time of purchase is much better.  I think you have made a good choice, as long as there are no major inspection issues.

Slow2FIRE

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #10 on: April 06, 2018, 05:36:06 PM »
How do the numbers work out doing an AirBNB with maid service vs long term rental?


clarkfan1979

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #11 on: April 07, 2018, 02:07:46 AM »
How do the numbers work out doing an AirBNB with maid service vs long term rental?

Airbnb.com is not an option. The house is in a residential neighborhood where short-term rentals are not allowed. They have specific zoning on Kauai for vacation rentals. Leases need to be 6 month minimum to be considered a long-term rental. People who run illegal short-term rentals make it more difficult for local people to afford housing (renting and buying). I would like to be part of the solution and not the problem. 

If we ever run into financial trouble we would live in the basement and rent out the main house. I would probably try to market to people on the mainland for a 6 month vacation at $3500/month. If I advertised locally, I think $3000/month is the max. My preference would be to rent to a local person, but this situation is based on myself being in financial distress.

Cash-flow should be about the same as renting. This doesn't count major repairs, however now with owning we start with about $630/month going toward principle and we also get appreciation. I would consider the principle portion to cover major expenses and any appreciation to be gravy.

I agree that if we stay, the new appraisal price doesn't really matter. However, I was looking for a purchase to have at least 7-10% instant equity in case we ever needed to sell for some odd reason.

clarkfan1979

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #12 on: April 07, 2018, 02:11:21 AM »
MMM principles of the house.

1) Solar panels for hot water heater

2) Orange tree and avocado tree on property

3) 14 minute drive to work

4) providing affordable housing for another person/couple.

5) propane tank on property for hot water heater, kitchen stove and dryer.

waltworks

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #13 on: April 07, 2018, 10:46:34 AM »
However, I was looking for a purchase to have at least 7-10% instant equity in case we ever needed to sell for some odd reason.

In my experience this really only happens when buying properties that aren't on the open market/MLS. If you go to sell in 6 months, you'll lose a bunch of money (unless house prices skyrocket during that time, of course).

If you are buying houses using direct marketing/pavement-pounding type techniques you can certainly find deals 10% under market (or better). It would be really, really unlikely to happen when buying on the open market, foreclosure or no.

That said, I still think you should buy the house.

-W


clarkfan1979

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #14 on: April 09, 2018, 03:34:22 PM »
However, I was looking for a purchase to have at least 7-10% instant equity in case we ever needed to sell for some odd reason.

In my experience this really only happens when buying properties that aren't on the open market/MLS. If you go to sell in 6 months, you'll lose a bunch of money (unless house prices skyrocket during that time, of course).

If you are buying houses using direct marketing/pavement-pounding type techniques you can certainly find deals 10% under market (or better). It would be really, really unlikely to happen when buying on the open market, foreclosure or no.

That said, I still think you should buy the house.

-W

Maybe a better term is "sweat equity"? Some houses have sweat equity, some do not. I was looking for a house with potential "sweat equity"

I am going to be trading my time for sweat equity for 3-6 months after we close. After 300-400 hours of my time and 10K worth of material, the house should easily sell for 675K. That would be about 62K of sweat equity or 10%, which is what I was looking for. I am optimistic that putting in the sweat equity will be a good use of my time. However, nothing is guaranteed.

If I did sell, I would have to factor in about 7% of total transactions costs, so my profit would be about 18K, not 62K. A "profit" of 18K is based on free labor provided by myself. If I hired out all the repairs, my sweat equity would be lost.

I would agree that my sweat equity is a "job". However, I would have to disagree that I would lose a bunch of money. I don't think I need massive market appreciation to experience a small gain.

waltworks

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #15 on: April 09, 2018, 07:37:19 PM »
Ah, ok. The house needs like $60k of repairs that involve $10k of materials. I was confused because you said "$10k worth of cosmetic repairs".

Keep us updated, sounds like a great place!

-W

KTG

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #16 on: April 10, 2018, 07:35:48 AM »
Dude if you can afford it then awesome. I imagine living in HI has to be nice. If you can save money other ways, like just enjoying the view from a hammock in the breeze, as opposed to spending money on other material things, then awesome. There are some places I would make exceptions for. For example, I wouldn't spend that money to live in NY.

I don't know much about the specific area you are in, but when I was last in Honolulu it was really crowded.
« Last Edit: April 10, 2018, 07:49:42 AM by KTG »

KTG

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #17 on: April 10, 2018, 07:37:20 AM »
Ok, I just googled for pics of Kauai. You are a bastard and I hate you.

tralfamadorian

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #18 on: April 10, 2018, 01:58:19 PM »
Congratulations @clarkfan1979 ! I know you've been talking about house hunting in Kauai for a bit. It sounds like you all found a winner.

MrThatsDifferent

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #19 on: April 11, 2018, 03:06:16 AM »
No hate, only love. Enjoy your home and forget about the haters.

Mr. Green

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #20 on: April 13, 2018, 08:10:32 AM »
When a good deal is really a good deal, numbers are irrelevant. Congrats!
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clarkfan1979

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #21 on: May 31, 2018, 07:21:41 PM »
Closed on the house two days ago. Appraised "as is" for 615K. A comp house two lots down sold for 710K about one month ago. Smaller house, smaller lot, but not a foreclosure.

After I fix it up with about 10K-15K of material, it should appraise for at least 700K based on current market conditions. I'm not looking to sell. However, when making an expensive house purchase, I feel better when I have a little extra equity.

Villanelle

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #22 on: May 31, 2018, 07:30:53 PM »
Not sure why there would be haters.  This isn't a fancypants McMansion.  It's a modest house and has a rental unit.  Yes, that is a large number, but in a high COL area, the numbers are always large.  That's doesn't automatically make the purchases foolish or lavish.

Congrats on closing and good luck on the repairs!


jeromedawg

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Re: I have a house under contract for 603K. Bring on the haters...
« Reply #23 on: June 07, 2018, 11:38:05 AM »
How do the numbers work out doing an AirBNB with maid service vs long term rental?

Airbnb.com is not an option. The house is in a residential neighborhood where short-term rentals are not allowed. They have specific zoning on Kauai for vacation rentals. Leases need to be 6 month minimum to be considered a long-term rental. People who run illegal short-term rentals make it more difficult for local people to afford housing (renting and buying). I would like to be part of the solution and not the problem. 

If we ever run into financial trouble we would live in the basement and rent out the main house. I would probably try to market to people on the mainland for a 6 month vacation at $3500/month. If I advertised locally, I think $3000/month is the max. My preference would be to rent to a local person, but this situation is based on myself being in financial distress.

Cash-flow should be about the same as renting. This doesn't count major repairs, however now with owning we start with about $630/month going toward principle and we also get appreciation. I would consider the principle portion to cover major expenses and any appreciation to be gravy.

I agree that if we stay, the new appraisal price doesn't really matter. However, I was looking for a purchase to have at least 7-10% instant equity in case we ever needed to sell for some odd reason.

Congrats! This sounds like a great deal!

I wish we could do something like this in our current situation since I work remotely. The main issue would be that my team is located on the East Coast and I'm in SoCal, so it's already a 3 hour time difference. Telecommuting from Hawaii would make it a whopping 6hr time difference! So I'd basically have to start my days at 2-3am and possibly even earlier depending on meetings... lol.

Anyway, it sounds like buying there would make more sense if you intend to house-hack it and live there (versus purely renting), which it sounds exactly like what you're planning to do or are doing.
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