Know Your Deal. Price is only part of it. | Think Realty | A Real Estate of Mind
Weekend Investor

Know Your Deal. Price is only part of it.

If you’ve met me in person it’s likely my height and nose already tipped you off, but for those of you that haven’t, I’ll fill you in: I am Dutch. Because of this, by both nature and stereotype, I LOVE a good deal. Yes, it’s true, we Dutch are tall and pragmatic—some note us as “greedy” and others as “stingy” but I just like to think of it as: “only shops in the sale section.”

Given my background, it’s no wonder that I first started the investment property search zooming around Zillow and clicking on the houses available in KC for $8,000 or less (and trust me, there are a LOT!).

As attractive as their cost was, these homes turned out to be:

  1. Generally, in high-crime neighborhoods of town
  2. In need of a LOT of renovation work
  3. On the market for a long time (aka, sitting empty, likely pillaged, and with utilities that hadn’t been used in a while)

To be clear – these were not BAD deals per se, but they were bad deals for Lucas and me. I’ve learned in this process that every investor has their own threshold for what makes a good deal. You’re always assessing the cost to secure the property + the cost to update the property against the re-sale or rental value, all in light of the cash you have access to and the risk you’re willing to take.

We had a small budget (again, this is a relative term!) we were able to set aside for a down payment + renovation costs, and because this is our first property, we didn’t want to take on too much risk. Though purchasing an $8,000 house fit great with our budget, the $30K+ in renovations needed to get it up to code and livable, made it unfeasible for us.

 

So, how did we find the deal we settled on?

  1. We worked with our Realtor to set up a search on MLS that only showed homes in the areas we approved. Our search parameters bounded only those areas we knew were great for rentals and/or resale and that were available up to a certain price range (our range went up to $125K, knowing we wouldn’t want to spend that much, but wanting to see what was on the market in that price range as well).
    • NOTE: Many advanced investors are finding what we’d call “off-market” deals (or deals that aren’t on MLS). There are strategies for this that I’d definitely recommend (here’s an article about finding Off-Market Deals). Since this was our first go-around, we started on MLS, but were open to digging into off-market properties, if we needed to.
  2. We marked the properties that we were interested in, and then our Realtor got us in to see them. (Good deals go FAST in KC. So, we had to act quickly.)
  3. We struck out several times before finding anything we wanted to put an offer on.

 

Let’s take a look at a deal we passed on:

Bell Street is in an awesome rental area of KC. It’s an up-and-coming part of town situated between a wealthy neighborhood, a cute shopping district, and a state-of-the-art hospital with a very reputable medical school. The chance of finding a med student, nurse, or resident that needed rental housing was high, and this house was the perfect size:

  • 2 Bedroom
  • 2 Bathroom
  • 910 square feet
  • Foreclosure
  • On the market for $95K

We visited with our Realtor and found it to be in rough condition – the basement had flooded and had mold growing a quarter of the way up the walls, but we were still interested because the water issue seemed easily fixable – even to the untrained eye. To be safe, we went back to the property with two different contractor friends and reviewed the list of things that needed to be rehabbed, and how much they would cost. Here’s what we got (Please note: these are not sophisticated estimates OR calculators for determining cash to close. We knew we were missing some costs complete, but once we saw these numbers, we knew we could stop adding, because they'd already out-paced what we were prepared to spend):

Every single person that saw the house said the same thing to us: “This is a LOT of work.” The reactions of those more seasoned than us, and the way the numbers were looking pretty much convinced us to walk away. But, the final nail in the coffin was the fact that this foreclosure was a cash-only, bank-owned property and we wanted to buy/hold it. In other words, our goal was to purchase the property and then hold onto it and rent it, so non-traditional financing (like a private lender who might be willing to front us the cash for the payout once we flipped it and sold it) wouldn’t be interested in being involved in this deal.

If you’re interested in accessing funding from a private lender, here’s a great article about the process, how it works, and which investors they choose to work with.

We just didn’t have that much up-front cash to make it work, and we didn’t want to take on that big of a project or that big of a risk for our first property. So, we walked.

 

So, what did we end up with??

Drumroll please………….

The House on 78th Terrace

  • 2 Bedroom
  • 1 Bathroom
  • 576 square feet
  • On the market for $100K

 

What we found out when we visited:

  • Vinyl siding – in good condition
  • Laminate wood flooring – in good condition
  • Decently sized bedrooms and closets
  • Hot water heater – less than 2 years old
  • Furnace / AC – less than 2 years old
  • Roof – good condition, less than 10 years old

 

It had ugly cabinets and it needed a good cleaning, but, all-in-all, we estimated we could get it up to par with a reno budget of $5,000 total. This included estimating costs for:

  • New paint
  • New light fixtures
  • New appliances
  • New kitchen flooring
  • New backsplash
  • Updated kitchen cabinets
  • Light landscaping

 

Our closing story is long and involved, but let’s just fast forward to this: we got the house. A few lessons we learned along the way (if you don’t read anything else in this post, READ THIS):

  1. On investment properties, the seller can only cover up to 2% of the closing costs. So, while we negotiated for our seller to cover more than that in our deal, federal law prohibited them from paying more than 2%. This was an unfortunate lesson we learned the hard way and we had to cover the difference in closing costs.
  2. If you borrow from a bank, they will charge you a higher interest rate on a loan for an investment property. Be prepared for this and factor it into your calculations. We calculated at the interest rate we paid on the home we currently live in and were surprised to end up with an interest rate 0.6% higher than we expected.
  3. Always, always order an inspection and a drain scope on a property that’s under contract—even in a case where you put an “as-is” offer on a house. Our “as-is” offer was accepted, but when we scoped the drain, we found cracks that made moving forward with the investment too risky. We brought our concerns back to the homeowner, and they ended up fixing the issue, so that we could move forward with the sale. This was a $4500 repair, which meant, had we not uncovered it, we would have doubled our entire renovation budget!

Want to see the house? Check it out in the photo album here! (And while you’re there, sign up to receive updates from this column!)