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Hey guys! I don’t really know any of you but ever since I’ve been on this site it seems like we are a like minded group of people. I need some advice!
I just bought a house recently for myself and my partner to live in. I also took on a new job which was a pay cut for me. (better situation, less money). I am now leaning harder on eBay more than before, which I appreciate, because it is pushing me to do the thing I really want to do which is work for myself.
An opportunity has presented itself from a friend selling another house and she wants me to buy it. Its about 65,000 dollars which in this area is unheard of. It has good bones but needs work. A pretty good amount. Houses are selling here left and right and they barely stay on the market for less than a day. She said she would finance it through her that way I don’t have to go through a bank. I also couldn’t get another loan at the moment because I just got one for my current house. I feel like this is an opportunity I can’t pass up but I literally have no money to my name at the moment. The house is livable and my mom said she could move in and pay me more than the mortgage so that I can start doing some work to it.
This has always been a goal of mine to buy another property. While I feel like the timing may not be ideal for me I feel like I should figure out how to make this work. I know I won’t always have no money and I should scoop up this place and just sit on it and pay the bills until I have money to get started on working on it.
How risky does this sound?
Any feedback would be greatly appreciated! 🙂
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If your mom is happy to live in it and pay you rent that covers your mortgage, and if her source of income is secure, then it doesn’t sound all that risky to me. I mean, worst case scenario if she moves out for some reason is that you would have to sell it, but it sounds like selling a house quickly in your area is not a problem.
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Thanks! yeah I feel like I don’t really have much to lose! I might just have to take the fixing up process really slowly as money comes in. It is located in richmond, yes. Church hill specifically which is an up and commming neighborhood that is blowing up right now. Houses don’t usually last more than a day or two here.
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Hi, sounds fortuitous, but I have a couple of questions for you. My background, by the way, is finance and banking, about 2 decades of which are in the mortgage space. I can tell you that you’re right about your market. I used to do mortgage financing for an investor group of commercial bankers by trade who bought in your area of residential properties for renting. It’s a great rental market for that kind of thing. I would ask, did you, of will you be getting a home inspection done? Is there a down payment structured in? And, what are the terms of financing? Friend or no friend, there’s a reason it’s being offered contract for deed to you rather than on the open market. Good luck!
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Thanks Ryanne! Yes I think you’re right about it never being a good time to drop the dollas!! Hey there Marjean28!I was planning on getting a home inspection done, yes. Im not sure how they were thinking about doing this sort of thing and was wondering why they would want to because I have a hard time seeing how it would benefit them. So agreed, friend or no friend, there would have to be some personal gain for them doing it this way. Part of the reason I think may be that they see their younger selves in me and want to give me opportunities that they wish they had had. But again they’d have to get a little something. Im not sure what their terms are yet. I wanted to see the house first before I sat down with them about it. They mentioned something about me basically paying monthly for it, which I assume is some rent to own type of deal, until I have enough money saved for a down payment later and then maybe going through a bank to take it from there? So to them Id basically be paying them interest until I had down payment money and at that point the bank would come in to play. Does that make sense? Im not sure how a lot of this works, this is all new to me. It is also on the market at the moment. It got listed about a week or two ago which is a tad alarming because things don’t usually sit here. But also it is small house and I’m not sure flippers would be willing to put in the work to only make a small chunk of change. I on the other hand would be willing to put in some of my own time and skills to get it in better shape and am willing to see it as an investment rather than a quick flip and would plan on hanging on to it for years and paying it off in hopefully under 10 years.
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would love to see the listing if you’re willing to share. or you can email me off list, just curious to see how they’ve described it. thescavengerlife@gmail.com
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also, you might want to join Bigger Pockets forum and throw the scenario up there. lots of friendly people with good advice there–
https://www.biggerpockets.com/forums/67-rehabbing-and-flipping-forum
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Here are the questions I would ask.
–Why is this person doing you a favor? Is it a favor? Ask them point blank why they would give you such a good deal. Maybe these are the nicest people in the world. If so, they wont mind honest questions.
–Don’t agree to anything till you see the terms of the loan, take time to read it over, and have it read over by someone who knows contracts.
–Get the home inspected. Never assume anything about “good bones”. If you have to replace the roof, electric, plumbing, floor joists, etc…the price stops being a good deal. If there are active termites, yikes!
–Along with the inspection, you should start making a punch list of what improvements need to be made. Will it cost you $15k to update the house or $75k? Will you have the extra cash t fix the place up?
–It’s cool that your mom will move in and pay the mortgage. Will you be able to update the house while she lives in it? Will she live there for a long time? Or are you trying to rent it for higher rent after renovation? You and your mom should have a clear understanding about the end game. -
Jay brings up some good points. I would also add that if the price of the house is significantly below market value according to comps in the area, something is seriously wrong.
I would guess there’s an issue with the house that would prevent people from getting traditional lending from a bank. Some of those issues may be, title issues (especially contested easements), poor/broken septic system, contaminated water (if on a well system), exposed asbestos, to name just a few.
It’s nice to think the best of people, but usually that type of thinking is wrong.
Some houses are so far beyond repair, it would actually be cheaper to tear it down and build new.
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You’ve had a lot of positive encouragement, and I love that. But… When considering buying another house, we look at a lot of “bad things happen” scenarios to ensure we can cover ourselves. Running the same devil’s advocate for your situation, you have this:
(Please remember, these are all ‘God Forbid they would happen, but if…’)
1. To quote Dave Ramsey “100% of foreclosures are on houses with mortgages” and you already have one. If you lose your job, will you lose your house? Do you have an emergency fund? If you miss a payment on the owner financed house, will they take it back? Will you get any money back out of it?
2. If your mom passes away, can you find the money to cover the repayments on that house? You won’t be able to put a tenant in there if you’re renovating the place.
3. What happens if the hot water heater/central air/foundation/roof goes out and needs to be repaired or replaced urgently?
4. You discover, upon lifting the carpet that the entire underfloor is rotted through. Your mom has to move out so that the rotten wood can be removed and the mold cut out and eradicated. Where does your mom live and who’s going to pay for rent for her/cover the costs of the house for you? Inspections don’t catch everything. We’ve just had to totally redo a bathroom that was tiled, so it looked great, but the undershower pan had been incorrectly installed and all the water was pooling in the walls. It cost us over $5,000 to repair, as we had to totally remove the entire shower, remove all the walls in the bathroom and in the other two rooms it butts into, and then rebuild.
5. Your mom may be okay with the idea of you doing renovations now, but after a while, it gets very wearying. (We just renovated half our house while living in it. You can’t believe how much you want it over!) What happens if she says she can’t take it any more?
I don’t know your situation or your set up, but if I were to consider a possibility like this and it were feasible, I would move into the house that needs to be renovated, let my mom live in my house and pay THAT mortgage, and then work on the house I live in. But that’s IMHO and may be totally impractical for you.
Good luck!
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Alexandra, what are your long term intentions with the house? Move in, rent out, AirBnb or other? If you are not experienced with remodeling, get a home inspector. Try to find one that will let you go with them to the house as well as give you a detailed report upon completion.
Your friends that you are buying from, are they ok with whatever you do with the house? What about just selling it as is. I recently bought a house through a friend, and they just wanted it gone, they did not want to deal with it. The house had some issues, I cleaned it up and am selling it for a nice profit. I have less than $1,000 in the cleaning. I should make around $15k for some red-tape headaches and a couple weeks of cleaning in the evening.
Just read the rest of the posts, is the asking price $65k on the market, or are they offering it to you for cheaper? If it is a hot market and has been listed for a while at $65k, then there is some missing information somewhere.
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Here is how I evaluate whether to buy a house to flip.
Fixed up selling price in current market
-Selling realtors fees
-repairs (a home inspector can give you a ballpark)
-holding costs (mortgage, utilities, taxes)
-asking priceThis will give you a theoretical profit. I always assume there are some hidden “gotchas” so I want to be very conservative on everything.
Another point, be careful with the paperwork. Say you spend $20k fixing the house and getting it ready to rent. Work slows and you get behind on your payments. If they “repo” the house, do you lose the $20k?
Make sure everything is in writing. Imagine the scenario where your friends pass and their heirs take over the property, if the paperwork is not crystal clear, it may create a legal battle that could be undesirable.
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Is the house cheap or undervalued?
In Nashville the housing market is crazy hot, but I could find a $75k house that is worth $75k. The challenge is finding a $75k house that has a value of $100k.
If it is a cheap house, but it is not a deal, then it is not worth it. You can find a cheap house when you are ready.
Hope for the best, but plan for the worst. It could be a huge blessing if you are ready for it, but it could be a weight around your neck if it stretches you too thin.
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Advice from a risk-adverse person:
Brainstorm everything you think of that could possibly go wrong, and how you would deal with it. For example, you/your partner/your mom gets sick/loses a job and can’t pull her financial weight for a while. Can you deal?
How does your partner feel about this? At least some of this risk will attach to her/him since he/she lives in a house that you own.
Consider the additional stress that another payment might bring you. Is that an OK possibility? Will this tie you to your day job/Ebay? Is that acceptable?
I would be concerned about going into this with no slush fund. I feel like this is akin to buying on margin, which I would probably not do (never say never). But lots of people do it every day and some of them make a lot of money.
PS – Give your mom a big hug for even entertaining the idea of living in a perpetual state of remodeling for your sake. That’s real love, for sure!
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Thank you guys! So much helpful advice here! Definitely a lot to consider! I thought about it for two days and after all of the points everyone made I think I’m going to wait. While I think it would be a good investment, I don’t think this is the only time in my life ill ever stumble upon a good opportunity again! Im honestly not ready to take this on right now. Everyone was right about thinking if anything bad were to happen or bills not being able to be paid. Im gonna focus on building up my eBay store and when the timing is right it’ll happen again!! I appreciate all of your perspectives!!
Alex 🙂
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Kind of related, but more of a thought that I have had for a while. REI is a major outdoor outfitter in the Pacific NW that was founded when a group of friends decided to pool their money with regular contributions and buy outdoor equipment that each one could use when they reserved it. It morphed and they ultimately became a retailer.
Has anyone thought of putting together a group of friends or like minded folks and buy property for AIR BNB or monthly rentals? It’s a scary proposition as we do it ourselves and has the potential to be either a homerun or catastrophic if a property does well/fails when it is one person. But what if you put together 10 who contributed a defined amount per month to buy/rehabilitate property? 10 putting in just $200 a month give you 24k in a year as a down payment. Double that and you are talking real power. Form a partnership with defined parameters and you could be a true force.
The downside, as I see it, is agreement. Agreement on property acquisition, rehab, rental amounts, etc. But what if 1 or 2 were given authority to make it happen like project manageers?
Just something I have toyed with for some time but have never said out loud.
whiskey
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Sounds like you’re looking to create a fund for investors. This would be the most traditional and tested form of buying houses as a group.
People give you money, people get a percentage of the profits, and you run the operation.
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After graduation, a group of us and a few others, attempted to form a partnership with a similar purpose. At the time, the state of Michigan was using single family homes to house individuals under state care. They would pay for all of the improvements for handicap use. Including any repairs. When the lease was done (min 10 years) they would also pay for construction to have it put back. Could never get the project off the floor.
Two of my mates went on and did it on their own. Huge success.
Bottom line. Everyone needs to have the same fire and passion to even remotely work.
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Whiskey, there are people and companies who actively do property investment. Have a look at Bigger Pockets for a wealth of information.
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