Author Topic: First real estate purchase, wondering if we are over our head?  (Read 3406 times)

ballhawk

  • 5 O'Clock Shadow
  • *
  • Posts: 3
We recently purchased what seemed to be a great deal (auction) on our first rental property. When we went to look at the property, it has some nice aspects: large, 3 bed 1.5 bath, plus a separate entrance 1 bedroom, 1 bath apartment. Huge 4-car separate garage/pole barn. Located on a 1.5 acre lot, but very close to major highway and within 10 minutes from mall/stores and a major college campus. Also in a top-rated school district and happens to fall in a very small area with lower township taxes but in this higher taxed school district. We don't know the exact value, but on Zillow the estimate is $169,000 and we got it for $81,000.

All sounded good until we walked through the property, it is old, and it has been vacant for quite a while and needs a great deal of work to get it rented to the quality of tenants we would like. We can tackle some ourselves but we will have to hire a considerable amount out now as well.

My question is, based on other's experiences, should we invest in fixing it up and how much would be reasonable to still make a good profit? Or should we re-list and let a builder (or handyman) pick up the property that can make more money flipping it? We think we could immediately re-list for about $125k at least if the Zillow estimate is accurate.

Thanks!

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: First real estate purchase, wondering if we are over our head?
« Reply #1 on: June 22, 2014, 09:48:06 AM »
The two tactics (fixing up and renting, vs. selling... and the other one you didn't mention, fixing up and selling) are suited to completely different goals. In other words, what was your goal in buying this place? Why did you get started in real estate? Do you want to be landlords or house flippers?

No one can advise you on what the right move is without knowing what your goal is, any more than people can give you directions without you first saying where you're trying to go.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Re: First real estate purchase, wondering if we are over our head?
« Reply #2 on: June 22, 2014, 09:57:15 AM »
Why on earth would you buy a property without knowing the value, at least approximately?  Zillow is not great in cookie cutter subdivisions and it is completely unreliable for valuing unique properties. 

I would find a couple of good agents that work that area, have them walk through the house, and give you their estimates of market value "as is."  They will know the ins and outs of school districts and taxes.  They should provide you comparable sales as support for their estimates.   The house also could have been on the market for 6 months before the foreclosure auction, and they will be able to get the MLS history.  You can also ask them their opinion of market value after the improvements you are considering.  They may have opinions about which improvements would add the most value.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3395
Re: First real estate purchase, wondering if we are over our head?
« Reply #3 on: June 22, 2014, 01:23:33 PM »
1: Forget the Zillow value. Zillow goes by location, size, and basic MLS-listed features and compares to comps using publicly available data. It does NOT account for condition in general so you probably did not (especially at a public auction) get a smoking deal. I'd expect it's worth about what you paid for it, so if you relist I'd not expect any profit (in fact I'd expect to lose some money due to transaction costs).
2: What was your goal (cash flow rental, quick flip, slow flip, live there and fix/sell?) It's not clear to me that you had a plan going in other than "OMFG Zillow says it's worth $x! Let's buy it!" Maybe I'm wrong about that.
3: How much do similar houses (fixed up or not) rent for in this area? Did you do any research on that? If so, you should have a good idea of how much would be worth putting in for repairs (ie, 1%/50% rules?)

You have to remember that if you're buying at public auctions these days, there are mostly not going to be amazing deals because there are tons of pros who know what things are worth who are very active in them.

-W

Bearded Man

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: First real estate purchase, wondering if we are over our head?
« Reply #4 on: June 22, 2014, 05:28:12 PM »
I agree with walt. It's probably worth what you paid, if that. First real estate purchase, at an auction at that; with you as a first timer winning the bid...You were probably a shinning beacon of noob to the seasoned investors there who passed on it.

The only thing zillow is good for is showing you what other similar properties of the same size, age and condition, not to mention features sold for in the same area. Find 3 properties to compare to yours, and that will give you a better idea of what it is really worth.

In order to know whether you should fix and flip/fix and rent/sell as-is, we would need to know what the property is actually worth today, what it will cost to fix up, what rent would be fixed up, and what you could sell it for as-is as well as fixed up.

I hope this was money you could afford to lose, as this was speculation, not investing. IMO no first time RE purchase should be at auction.
« Last Edit: June 22, 2014, 05:30:37 PM by Bearded Man »

ballhawk

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: First real estate purchase, wondering if we are over our head?
« Reply #5 on: June 23, 2014, 09:59:11 AM »
We know the area very well and we know that this area is desirable for many reasons, but it is on the comeback still from a depressed market. We definitely have done some research and due diligence, I just wasn't trying to give every single detail here but obviously I'm missing giving some background.   

We bought with the intention of renting. One of the reasons we wanted to buy in this area is there are very few SFH rentals on the market, we have researched and rent would be at least $1100/month. That is for the 3bed/1.5 bath. There is also the separate apartment which would generate approximately $500/mo. I have owned a small 2bed/1bath house with a .75 acre lot and 900SF house for 20 years (being rented currently for the past 7 years) in the area that was appraised for $85,000 about 10 years ago, although the market has gone through some major shifts.

I'm not relying on zillow as the exact estimate, I was just trying to give an idea of what it said. The area is surrounded by homes that are 200-500k, but most in subdivisions. We have checked comparables and there is nothing that is apples to apples, but anything with this much land or this size house is much further out in the country or is smaller and there hasn't been anything like this size that has sold for anything less than 130-140k.

Another unique factor is there is a major life insurance company that relocated 10 years ago and built a division headquarters about 2 miles away (175 acre/323,000SF building), and they broke ground last fall on another building bringing a predicted 1,100 jobs to the headquarters, so we are assuming there will be a good amount of people relocating in the next year.

Our only hesitation in keeping as a rental is that there was more work than expected on getting the property fixed up. Initially, we were hoping to invest 5-8k but it is realistically more like 12-20k. That is they number that makes us nervous but even then I still think we make the 1% rule. Just nervous about all the headaches along the way in hiring contractors and if others had experiences like this that they could shed some light.

We did have a contractor friend walk through yesterday and he called it a "gold nugget", he said just the land in that particular area is worth $100k he would guess. So that did ease our minds a bit.

And finally, we are  in a financially sound position, but I would never say we can afford to lose any money...can anybody? ;) Mostly, I was looking for advice from others that had purchased a property thinking they were going to rent and then decided to flip, if so, what aspects made that a more viable option.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3395
Re: First real estate purchase, wondering if we are over our head?
« Reply #6 on: June 23, 2014, 10:54:27 AM »
Ok sound like you're ok, then. So this was NOT your first real estate purchase? Might want to change the title of the thread.

I am still guessing that if it was sold at public auction, you got it for about what it's actually worth, though - there is just not much that is going to go for ultra cheap at auction anymore. You didn't buy a second lien, did you? That was actually my first thought when I heard the Zillow value vs what you paid. Did you do a full title search before bidding?

Get a BPO/CMA if you want to flip it, but IMO it sounds like it makes sense as a rental.

If it will rent for $1100+$500 for the house/apartment... you should be able to sink $20k (or more!) into repairs and not think twice. Go for it. Not sure what advice you would need from us, it sounds like a fantastic rental (assuming you own it outright and don't just hold a junior note). Go get some stuff fixed and get it rented!

-W
« Last Edit: June 23, 2014, 10:57:50 AM by waltworks »

former player

  • Magnum Stache
  • ******
  • Posts: 4750
  • Location: Avalon
Re: First real estate purchase, wondering if we are over our head?
« Reply #7 on: June 23, 2014, 12:22:35 PM »
So this was NOT your first real estate purchase? Might want to change the title of the thread.

OP might have inherited the other places?


1.5 acres is a big plot for an urban area, and there are renters who will want the house and apartment but with less land to look after.  If there is decent access, can some building plots be carved out and sold separately?  Otherwise, yes, get the current properties done up and let out.

ballhawk

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: First real estate purchase, wondering if we are over our head?
« Reply #8 on: June 23, 2014, 12:43:57 PM »
Well, the other rental was a starter house I bought when I was 21 and lived in for quite a while and now it is being rented to a family member, so I really feel like this is our first true investment of real estate/rental.

I felt like I needed some advice on learning all of the things I don't know. We have researched quite a bit and have been talking to people with experience for the last year or so but I am realizing that there is also quite a bit we don't know and I began to doubt our purchase as a rental and was wondering if flipping would be a better option. Plus adding more cash than expected to fix it up got me worried that we would have been better off finding a 40-60k property to start. Hope that makes sense.

I am learning quite a bit just by reading others experiences and hope to keep expanding that knowledge and getting advice.




waltworks

  • Magnum Stache
  • ******
  • Posts: 3395
Re: First real estate purchase, wondering if we are over our head?
« Reply #9 on: June 23, 2014, 12:52:27 PM »
Yes, I guess that's possible. I think it's one other place?

Anyway, IMO if you are scared to put $20k into rehab, you should not be buying foreclosures. Especially at auctions where you're competing with expert RE investors. If you are buying at auction (ie as-is, where-is, no title insurance available in some cases, no inspection or financing contingencies) you have to expect that you are going to get a few duds. The pros are spreading their exposure out over lots of properties so that they can survive a few bad ones. If you are just buying one you need to be very sure of what you're getting.

-W

So this was NOT your first real estate purchase? Might want to change the title of the thread.

OP might have inherited the other places?


1.5 acres is a big plot for an urban area, and there are renters who will want the house and apartment but with less land to look after.  If there is decent access, can some building plots be carved out and sold separately?  Otherwise, yes, get the current properties done up and let out.

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: First real estate purchase, wondering if we are over our head?
« Reply #10 on: June 24, 2014, 08:17:32 PM »
I agree that $20k in rehab should not be scary, given the price you paid and the anticipated rent. And the beautiful thing about multi-units is that you can rehab one, get it rented, and then rehab the other--IOW you can start getting some cash flow before the total rehab is complete. We did that with a duplex: bought in December, rehabbed one unit, had tenants moved in by the second week of January, rehabbed the other unit and had tenants in there by the second week of February, shortly after our first mortgage payment was due (and the first tenants' rent alone paid most of the mortgage).