Saturday, April 4, 2015

Recent Home Buying Experience

Finding a nice home where you can cash flow positive is a tough business. The main reason being we will be occupying one of the units so that we can finally get out of the ghetto. I am going to share with everyone my last experience with trying to buy a home. Let's take a look at what the home looks like and then we can talk numbers:




 Now let's take a look at comparables in the same area. 






















The home is at a list price for $159,900 and is currently only a 1 bedroom on each floor. This was the first problem because the listing states that it is a 3 bedroom which is very misleading.The first floor unit was in mint condition and did not need any work. The tenets are already paying $800/month with heat included which is below market average for this neighborhood.  The cheapest rent I found for this town for a 1 bedroom was $900/month and this did not include any utilities. The second floor is paying $650 in rent without any utilities. The apartment is very messy and would need some renovations to get market rent of $850/month. The second floor unit needs a substantial amount of work that includes:

  1. Egress Ladder
  2. Toilet
  3. Tub
  4. Bathroom Tile floor
  5. Bathroom sink and vanity
  6. Bedroom carpet
  7. Paint whole apartment
  8. Refinish stairs
  9. Dome light fixtures
  10. Door knobs
  11. Refinish cabinets and knobs 

 At this point we are looking at about $6,500 in renovations just to get this apartment ready for some quality tenets. Keep in mind that this is just an estimate and could be more. Now we have to figure in all the costs of purchasing the home and moving costs.

Description
Cost
5% Down Payment (Offer Price $152,000)
$7,600
Renovations
$6,500
Moving Costs
$925
Total
$15,025.00


My first offer to the seller was $150,000 + Closing Costs with a deposit of $1,000. The seller would net $146,000. He refused the first offer as I expected and said that he was looking for a price closer to list price and a deposit of $4,000. I was very taken back my the seller demanding such a high deposit. After further investigation I took a closer look at the numbers. I decided that I should offer him $156,000 + Closing costs and would give him the $4,000 deposit. This means the seller would net $152,000 after closing costs. My mortgage would be estimated at $1,065/month and this includes taxes, insurance, and PMI. Even if we were to get the second floor at $850/month in rent we would still be cash flow negative because we would be occupying the first floor unit. So the negative cash flow would be -$215/month at best. 
      However I took at look at the value of the home if we were not occupying the home. Let's assume I was to get $900/month for first floor unit and $850 for second floor unit. Now were are looking at $21,000/year in income. The expenses would be about $16,080 and this also assumes the following:
Annual Expenses
Cost
Mortgage
$12,780
Water
$350
Sewer
$250
Gas
$2,700
Total
$16,080.00

Net Operating
Cost
Income
$21,000
Expense
$16,080
Net
$4,920

First Year ROI
Cost
Net Profit
$4,920 
Investment Cost
$15,025
ROI
32.74%

Based on all this information I offered the seller $156,000 + Closing costs + $4,000 deposit. He would net $152,000. This is $7,000 lower than the listing price. He again counter offered and wanted an extra $4,000 on top of my offer. I finally gave up and said the hell with it. It's unfortunate we were only $4,000 off but at this point he was getting greedy. The house has been on the market for almost a year and I feel like it's not going anywhere at this point. I felt like my offer was very fair considering the amount of work I would need to put in it. And the deposit of $4,000 was already a huge risk for me in the first place. Oh well better luck next time.

What do you think of my recent home buying experience? Do you have any similar experiences? 

12 comments:

  1. I hated the home buying/selling experience! Easily the most stressful time in my marriage as she was completely emotional and I was completely analytical about it.

    Notwithstanding, I'd love to get into the rental side of things, but it is hard where I live since at the low end (very low end) I'd be looking at $350K minimum purchase.

    ReplyDelete
    Replies
    1. Evan,
      I am in that same situation where I feel like I am over analyzing everything, but that is probably a good thing. It's tough to find value in the housing market in nicer towns around my area. I am trying to find something that needs a little bit of work so I can put some sweat equity into it. 350K is a lot of money and way over my budget at the moment. Just to give you an idea of a 2 family home in a nice neighborhood that needs no work will go for 200K minimum. The home I looked at was cheaper because it needed work and it was only a 1 bedroom in each apt.

      Delete
  2. I'm curious to know where you live? I'm in Canada and these prices seem pretty cheap compare to what we see here. Always thought of buying and renting as a possibility but never made a move to it. As for my house, I like the buying part but the selling one demands a lot more in my point of view! Getting ready to sell the house for a year-long trip.

    ReplyDelete
    Replies
    1. DivGuy,
      I live in Massachusetts. The homes here can get very costly depending on which town you are looking in. Boston for example is very expensive and probably in the 350K-500K price range for a multifamily. Unfortunately the seller and I were only $4,000 apart from making a deal. I offered him 152K but he wanted 156K. In my opinion it is still a buyers market so I will continue to look elsewhere for value. Good luck on selling your home. I know that is probably very stressful. Where will you be taking your year long trip?

      Delete
    2. Yes, it's definitely a buyers market... happy news for you, less for me! haha! ;-) We will be traveling with our three kids, starting from Qubec, Canada to the Canadian West Coast, then down the States all the way to south countries like Costa Rica and then going back to Canada by the US East Coast. It demands a lot of organization, but I can't wait to get to it!

      Cheers!

      Mike

      Delete
  3. Hey Mongrel,

    Congratulations on the property. It looks like a lot of bang for your bucks.
    Just a small comparison, this is what you would be able to buy with that money in my city in The Netherlands. It's a 2 bedroom 73 square meters appartment. (http://www.funda.nl/koop/utrecht/appartement-48362131-aartsbisschop-romerostraat-341/)

    Best of luck with the renovation!

    DfS

    ReplyDelete
    Replies
    1. DFS,
      The seller and I were $4,000 off of making a deal on the home. Unfortunately I have to keep looking. That home in Netherlands looks interesting. I like the outside of the home. Any idea what a 2 family home would go for in your area? I am hoping to find a 2-3 family between 150K-180K but this has been quite the challenge so far.

      Delete
    2. Oh, I misread that. Thanks for the clarification. :)

      It's not very common to have several families in one home in this country, but of course there are bigger houses where you could arrange something like that. If both families would require 2 bedrooms and a bathroom, a house like that would cost around 450-600K.

      Example: http://www.funda.nl/koop/utrecht/huis-48927841-vlindersingel-218/

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  4. This comment has been removed by the author.

    ReplyDelete
  5. Dang, real estate is super cheap where you live. 2bed, 1 bathroom house where I live is >200k.
    Cheap doesn't mean good investment, glad you're doing your homework.

    Thanks,
    WE

    ReplyDelete
    Replies
    1. WE,
      It really depends on which town I am looking in. Towns with very low crime and great schools are >200K. In Boston a one bedroom apartment can be bought for >450K. I am really trying to find a deal in the real estate market so my target price is between 150k-180K in a nice town. I actually just put an offer in for a short sale so I will be putting a post together about how that is going. Thank you very much for stopping by.

      Delete
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