Author Topic: questions about buying the house nextdoor to us to rent or sell  (Read 1051 times)

tag

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questions about buying the house nextdoor to us to rent or sell
« on: October 24, 2017, 11:36:31 AM »
Hi Mustaches!

I am not real estate savvy but am willing to learn and research my ass off, and like I always do, wanted to start here to make sure I at least start on the right track. Quick summary...

Part I:
We are FI and will RE in Sept 2018.
This includes a relocation to a LCOL area where we already own a home.
We'll gut the entire house and remodel it.
Home is in a neighborhood where people are flipping houses at an increasing rate.

Part II:
The house right nextdoor was on the recently market for several months and taken off last month.
Was listed for 400k, Zillow shows an offer was pending for 350k before the listing was pulled so I guess something fell through.
The property has 3 buildings on it - living space, office, garage - it's a double lot and I don't know if it can be divided for sale.
We have known the owner for years - though we haven't lived there in a very long time so have not had regular contact with him.

Part III:
We could live there while we renovate the home we intend to live in - the convenience factor is unbeatable.
We could renovate it after we move into our home next door....and then airbnb it or flip it - again convenience factor while renovating and management for renting would certainly be valuable to us.
We could flip it - in the near future, or just some day.
The home is not currently on the market anymore - which we see as an opportunity. We could contact the owner personally and offer cash. The listing was only pulled about a month ago.
The house on the OTHER side of us sold a year ago and someone tore it down and built a McMansion that does not fit the historic charm of the neighborhood at all and we were so disappointed about that. We'd love to help keep this little neighborhood quaint! But it is a hidden gem and people are finding it and overbuilding at an alarming rate.

My questions are:

Should we try to buy this house?
What is my due diligence process for determining the answer to that question?
-books to read?
-records to look up?
-people or places to ask?
-what are the questions I need to find answers to?

Guide me!

PS Reduced rent for all Mustaches of course if all of this goes through :)


« Last Edit: October 24, 2017, 11:40:58 AM by tag »

SwordGuy

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Re: questions about buying the house nextdoor to us to rent or sell
« Reply #1 on: October 24, 2017, 08:31:41 PM »
You need some info in order to get the best deal.

1) Your county registrar of deeds will have a list of all liens against the property.  Liens include mortgages, home equity loans, and any debts owed to contractors that have not been paid.  This information will include how many $ are owed and what date the debt was contracted.  It may also include the interest rate or other terms.  This information may be online.   

Sadly, you can't always just look up the property by the street address.  You may need some other identifying info like a property id, book #, plat #, page #, etc.   That info can often be found on MLS or Zillow or your county's property tax system (which may also be online).

2) If the loans you find out about didn't have an interest rate available to you, you can make an educated guess using the month prior to the loan date (to account for the time it takes to close after locking in the rate).   I just google for historical us mortgage rates and pick the first likely one.  Here's an example: http://www.freddiemac.com/pmms/pmms30.html.   Use the mortgage rate times that fit the loan if you know them, otherwise guess it's a 30 year fixed.

3) Now that you have the $, the date, and the interest rate, go to a mortgage calculator like https://www.drcalculator.com/mortgage/. Fill in the info and let the calculator do its magic.   It will tell you what the remaining balance on the loan would be.

4) Repeat the above process for each loan.

Ta Da!   You now have a reasonable estimate of what the person still owes.  No guarantees, but at least it's based on reasonable info.

Why use that?

Well, let's say the person still owes $325,000 and will have to pay 6% to the realtor.  Toss in a few thousand for closing costs and you're at a $350,000 price point.   They can't go any lower without coughing up cash at the closing table which, as you've discovered, most American's cannot do.

But let's say they only owe $280,000 on the property.   That means that it's possible for them to accept a much lower price without having to come up with cash.  You could offer them around $302,000 and they would break even.  $312,000 and they would walk away with $10,000 which might cover their moving costs to a new place.

I hope that makes sense to you.

What happens if they owe nothing on the property?  At that point, no bank has to be involved at all if they are willing to "be the bank".  We know that the laws tend to favor the bank!   If they don't need all the cash up front at the time of sale, they might be willing to be paid on a monthly basis.   Instead of putting that cash in the bank at 0.05% interest, you could pay them 2.0% interest, or 40 times more than they could get in the bank.

Let's say you settle on $320,000 at 2.0% for 30 years.  That would be $1182.78 a month.   You could prepay 12 months of payments ($14,193.36) to demonstrate that you have skin in the game, or .  Please note that I did not say "make a down payment"", I said pre-pay.   What's the difference?  If you make a down payment, your next payment is due in one month.  If you instead make a year's pre-payment, your next payment isn't due for a year.   Details matter!

Why does that matter?  If you are going to buy something to flip it, you want to tie up as little capital in it as possible.   It cuts down your risk and lets you do more deals for the same amount of capital.

Now, those are just strategies for getting a better price. 

It has nothing to do with whether you should actually buy the place.


For that, you need to know how to run the numbers.  Get the books recommended in the sticky thread in this sub-forum and read them.  Learn how to do the numbers.

Buying real estate with just a vague idea of how to run the numbers leads to the horror stories from folks who got burned in real estate.   Real estate is a numbers game and there's no substitute for knowing how to figure them out correctly.


montecristo1985

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Re: questions about buying the house nextdoor to us to rent or sell
« Reply #2 on: November 13, 2017, 09:47:23 AM »
I personally would NEVER own a rental property next door to me.  But that's my personal comfort level, and not wanting to mix the whole business/neighbor situation.  It can get ugly, and I just wouldn't go down that path.

tralfamadorian

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Re: questions about buying the house nextdoor to us to rent or sell
« Reply #3 on: November 13, 2017, 11:51:09 AM »
Congrats on your upcoming FIRE!  LCOL areas are often great places to make real estate investments.  SwordGuy gave some great advice on how to do some background research before approaching an off market property. However, be aware that if the market is hot, they may already be getting tons of letters, phone calls and texts from realtors. 

But before doing this, you should see if this area is promising for real estate investment.  Great books that I recommend are Building Wealth One House at a Time (https://www.amazon.com/Building-Wealth-Updated-Expanded-Second/dp/1259643883/ref=pd_lpo_sbs_14_t_0?_encoding=UTF8&psc=1&refRID=RCCWCEGGRGB95CYB3S68) and The Millionaire Real Estate Investor (https://www.youtube.com/watch?v=8EdFzYC-Vx4).

1%, 2%, 50% rules of thumb are not particularly useful starting out.  Take some time and crunch the numbers in your area.

Income:
Rent:

Expenses:
P&I:
T&I:
HOA&misc:
Management (10% of rent):
Maintenance (10% of rent):
CapEx (5% for condos/ 10% for SFH/MFH):
Vacancy (10% of rent):

Find a few places that at first blush you think might be good investments, then crunch the numbers.  Rent can be found via some combination of Craigslist, Zillow, Rentometer, etc. P&I can be calculated via a mortgage calculator. Taxes can be found on your county or city's site.  For insurance, ask your current insurance company to give you some quotes for targeted properties.  Then see what monthly profit number falls out.  A common minimum for many investors is $200/door per month.  But if I was looking at a property in the $300's plus renovation costs, I would want a good bit more than that. After you do the long hand version of this for a bunch of properties, you will see a percentage that you will be able to use to quickly determine if a property is worth serious consideration.  All this takes a little time but you're making a big investment; it's worth investing some time as well as $. 

ChpBstrd

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Re: questions about buying the house nextdoor to us to rent or sell
« Reply #4 on: November 13, 2017, 08:18:32 PM »
What would happen if you got neck-deep in real estate and the market dropped? What if you absolutely could not find a buyer, or generate a good return from rent?

Would your FIRE be imperiled?

If yes: skip it.

See http://jlcollinsnh.com/2012/03/15/how-i-lost-money-in-real-estate-before-it-was-fashionable-part-i/

Cubert

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Re: questions about buying the house nextdoor to us to rent or sell
« Reply #5 on: November 14, 2017, 04:33:52 AM »
I'm just curious if you live in Minneapolis. The way you describe mcmansions makes it sound as if you might!

At any rate, run the numbers, do some analysis. I like the cash on cash method I've written about at my blog. If you'd like a copy of the .xls, let me know.