The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: d3minimis on December 06, 2014, 12:21:58 PM
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Hi all,
I posted this at Bigger Pockets but didn't get much action. I hope a few folks can offer their thoughts on my dilemma. We've been paying down student & car loans (7k left) but saw this opportunity come up and are really tempted by it. We don't have enough spare cash to pay down loans and buy a foreclosure so it's got to be one or the other.
There's an REO property in my neighborhood (all built around 1990) that was purchased by the bank for $88k and Zillow estimates it will sell for $95k. Comps in the neighborhood with the same floorplan have sold for $140k-150k. The house appears to be in pretty good shape. I'd bet I would need to put in between $10k-20k at the most and would take me 9 months - 1 year in my spare time.
My idea is to rent out my current home (only a few houses down) for $1500-$1700/month (another home slightly bigger than mine in the neighborhood lists their rent for $1800/month); I was surprised to see it that high. Running it through the SFH excel spreadsheet I found on here, I would be just slightly less than break-even for the first year taking into account potential maintenance, vacancy, etc. But I would be gaining equity in my current home while using my day job to service a lower mortgage on the REO property while I fix it up to either sell or rent.
I'm sure I'm wearing rose-colored glasses right now but it seems like a decent way to build equity in my current home (which we had $50k renovations done in 2012 when we purchased) while getting another property ready to sell or rent. I would appreciate other considerations I should be thinking about while my agent looks into the status of the foreclosure and I get more into the details of this idea.
Let me know if I should provide any more details that could be helpful here.
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I would personally jump on it if you have ran the numbers and can support the costs for both houses. The proximity to your current house would be ideal to keep an eye on it.
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If $7k is enough to make this an either/or scenario, you don't have enough cash cushion to be buying another house, IMO. How does the rest of your financial picture look? To me, if $7k isn't essentially pocket change, you should not be buying $100k illiquid items.
But that's just me. If your numbers are right, it sounds like a decent opportunity. I will warn you that foreclosures are really not cheaper than the overall market - if the comps are $150k, it will probably sell for around $150k. Banks aren't stupid, and they're not desperate anymore, either.
-W
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Thanks, Walt. $7k is definitely not pocket change to us. Our agent said the property won't be sold until 2015 sometime so our plan would be to stop putting extra cash towards loans and put it towards savings. Most of our savings are tied up in my 401k so unless we were able to save an extra 8-10k between now and when the house hit the market, we wouldn't be able to make it happen.
Assuming, we were able to buy the house and had cushion leftover to cover vacancy, maintenance, etc, we thought this would be a great idea to build wealth a little quicker early in life (we're 26/27). But if what you say is true and they sell at FMV, then I guess this won't really be in the cards. I'm thinking you may be right about that b/c another foreclosure that is a wreck is selling for only 11% less than a good condition comp.