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..