The life and times of an Arizona Investor

This will be my personal journal to document my failures and successes during my real estate experiences in Arizona. All stories, thoughts, and successes will be documented..

Tuesday, March 07, 2006

I dumped this one like sack of potatoes..

I have mixed feelings about this one, but I ultimately went under contract and ended up walking away from this one. Here's the story..

I got a call from a seller in foreclosure last week. He had a house in Vail, and said it recently appraised for 505k! Anyway, he showed me the house, it was built in 2004 and was on the GOLF COURSE on the 18th hole! Below shows the numbers, he owed just over 350k so I thought that he had a lot of equity. At the time, the banks wouldn't let him re-finance and he had some financial trouble so wasn't making his $3150 a month payment! (Yes, I know, thats lot). He was a real nice guy and treated me like a professional.

After he showed me the house, I told him about my plan. I would buy the house subto and give him his money back on either a re-finance or until the house sells. The only exit criteria was a flip, I did not want to rent it out , although a lease option could have worked. Surprisely, he accepted the deal, and would go under contract for $374.

At this point, I had 90% due diligence done, but it was the weekend and I did not talk with my realtor. The next day, I got a market analysis from her, and the story unfolded quickly. There were over 50 houses in this neighborhood. There was high competition with the builders. The days on market were long (as I discovered), however, there were two properties that I missed from my research. The square footage and build dates were the same and were selling for 415 and 435k respectively. If selling using a realtor 6%, my breakeven point (no profit) would be 425-430k. This was very alarming. Do I want to invest nearly 40k to make 5k-10k at most if the market is weak? What sucks is that if the comps were stronger, and I could sell it at 475k, I could make nearly 40k easily! I was hoping that 445k would be on the low side, but unfortunately, it was not. :-(

I decided this was not good, so I called him to renegotiate. I told that I would give him 5k at closing and buy it subto. This was essentially 10k lower. After several days, he told me that he would pass. He ended up contacting a bank that said he can do a re-fi.

What a shame, I decided that I did not want to take the chance even if my numbers were on the conservative side. Secondly, my mortgage broker told me originally that I could not do the re-fi. He found a loop hole with a fixed interest to get it done later in the week. The problem is that most banks will give you 80 LTV of the purchase price or appraisal which ever is lower. Since my purchase price was so low, this would not work. However, there was a way if I got a appraisal when I bought and get another at time of re-fi and they would take which ever is lower.

My wife was a good sport for this deal. She supported me through the analysis and inspection of the property. She told me that she was relieved when I told her that I had re-negotiated. And I was too!

Until the next one..

Good investing!

Posted by Picasa
|| Bginvestor, 6:58 PM


I have to say I agree with your decision to pass on this one. That's one hell of a mortgage payment to make every month if you couldn't find a buyer at your price! It just wasn't worth the risk, given such a small potential reward.
Blogger Trisha#1, at 8:39 PM  
I agree, i think you would of had to make $50k at the minimum just to look at the deal. To risky, your break will come when you least expect it
Blogger SLOMONEY, at 7:30 AM  
I agree as well the margins were to slim. I recently passed on a similar deal. Since the house was so expensive, I decided to spend $300 to have an official appraisal done. That gave me the exact number of what it would be worth as well as the comparables in the neighborhood. I would rather lose $300 than $300,000.

If you find another deal that has better margins and it was similar to this one you might think about financing it as a second home purchase, since it was on a golf course and the house was so expensive. This would allow you to qualify for possible %95 or even 100% financing with a rate that would be better than a non-owner occupied loan.

That is if you need the cash to make the payments. Pay off the original loan, park the cash to cover the payments, and sell the house.
Blogger Dunwoody, at 8:23 AM  
I'll make it a 4th vote (or 5th, including yours) of doing the right thing. Holding that property for a few months would definately spell trouble for your reserves.
Blogger Steve, at 9:37 AM  
Trisha/Slomoney/Steve - Yup, walking away was the right thing to do! Moma didn't raise no fool!

Dunwoody - I do not qualify for a 2nd home purchase since my primary residence is in the same town!
Blogger Bginvestor, at 6:13 PM  
If I offended you I apologize. I was not aware that your primary residence was in Vail, AZ. Also, I did not suggest you do it on this particular deal. Mearly just a suggestion of another way to get a deal financed.

Here in Atlanta, I live about a 20 min. from downtown. However, it is more like an 1 1/2 hr. commute with traffic. I was sucessful in purchasing a condo downtown with my primary residence only being about 32 miles from the condo. This was not a non-owner occupied deal. My intention was to have a place to stay closer to town. A few months after I closed I was made an offer that I could not refuse and I quickly sold.

The criteria defining a second home are fairly loose. A second home doesn't necessarily mean a "house." It could be a condominium, a recreational vehicle, or even a boat. Basically, for your second property to be considered a second home by the IRS, it needs to have sleeping accommodations and cooking and toilet facilities. A second home qualifies for the home mortgage interest deduction, just like your primary residence, because you're using the home for personal purposes during the year. Many folks have second homes that are part rental. The catch is that your personal use needs to exceed 14 days or 10 percent of the time it was rented, whichever time length is greater. In addition, if you rent your home for fewer than 15 days a year, and personally use it for more than 15 days a year, you do not need to declare any rental income. If a mortgage broker told you that you do not qualify becuase it is in the same town then I would find another broker.
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