House Hunting: Episode One

Over the course of the last year, we were preparing to live on one income and so we were taking a break from the house hunt while we recouped our cash reserves.

Well, starting about a week ago, we’ve resumed our search with the goal of finding one by the end of April. It’s not going to be easy but I think that we’re up for it. But so far, it’s not going well.

The Garden Hose

Before Mrs. Dollar got her real estate license, we relied on another realtor to help us find deals. We gave him our parameters and he set up a custom search which would email us the updated listings every day. When he first set it up, there was a ton of houses that matched our criteria and 90% of them weren’t really deals. But after wading through the muck and eliminating all the clutter, you end up with a few that you can make offers on.

Since the real estate market operates as kind of silent auction, you aren’t always going to be the one with the best offer. Sometimes, a cash-buyer will swoop in and get the property for cheap. And even if that doesn’t happen, there’s still a ton of competition since we aren’t the only investors in the DFW area (far from it!). That being said, you typically have to write a lot of offers before you get one accepted.

So, with this system you go for a hundred or so possibilities down to maybe 10 from which you might get 1 accepted offer. Probably less than 1.

The Fire House

Well, as a realtor, you have access to all the data. And as my wife’s “unlicensed assistant”, I also have access to it and she doesn’t even ask me to make copies or run errands. :)

The little searches we set up before were filtering out a lot of non-deals but also a lot of deals too. It’s literally like turning on a fire house and it’s very easy to be overwhelmed. Every day, you can run a report called a “hot sheet” which will show you all of the activity in the system during the last 24 hours. Typically, this will return 50-100 listings which you have to scan through to find the 5-10 you might want to consider.

After that, you have to figure out the true market value by running searches to find the comparable sales (comps). For these 5-10 prospects usually between 5-10 of them turn out to be unworkable. That’s right: you could spend all morning running comps and not get a single. good. deal.

Frustration

Why? Because the market is so beat up right now. In order to use hard money and minimize our out of pocket, we need to buy it and fix it up for around 75% of the true market value. A few years ago, that was a lot easier but many of the working class neighborhoods in our area have had nothing but distressed/foreclosure sales in the last 6 months. That means it’s getting harder and harder to get to that 75% number.

We could just go ahead and buy it, knowing our out of pocket is going to be higher. These areas may “comp out” to around 70-80k now but 2 years ago these houses were going for 100k and it’s only a matter of time before we get back to those levels. Hell, it only takes a few good sales to start pushing the numbers back up.

But for now, we’re sticking to our strategy and trying to stretch our investment dollars as far as they will go. We have one property we are keeping an eye on but we can’t make an offer for a few more days since it’s a HUD property. (With HUD, investors can start making offers after 15 days).

We’ll keep you posted!

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10 Comments

  1. Posted March 30, 2012 at 7:29 am | Permalink

    House hunting is so exciting! Sounds like a lot of work, though. That data you were referring too sounds like a saving grace. House hunting last year proved to be sooo annoying when I’d contact my realtor about a house online and it would have an offer on it.
    Daisy recently posted..Taking Care of ClothesMy Profile

  2. Posted March 30, 2012 at 12:14 pm | Permalink

    Well you are fortunate that your wife has her realtor’s license. That must make the whole process a lot easier. Actually I guess that just puts all the work on your plate, but at least you are probably more knowledgeable about the whole routine. It would be frustrating to put multiple bids in and have none of them accepted.
    Modest Money recently posted..Purchasing Life Insurance on a BudgetMy Profile

  3. Posted March 31, 2012 at 6:54 am | Permalink

    say, I happen to know of a house for sale up in NH…..

    I knew selling was a PITA, didn’t know how difficult buying is. Wasn’t for me. Just look at Part I of my series. :)

    Oh, but then, you insist on making money….
    jlcollinsnh recently posted..How I lost money in real estate before it was fashionable, Part V: Sold! and the taxman cometh.My Profile

  4. Posted April 3, 2012 at 5:06 am | Permalink

    Stick to your guns when it comes to finding that deal. Do not rush it, you have plenty of time with the market the way it is looking.

  5. Posted April 11, 2012 at 11:23 am | Permalink

    A year ago my wife and I considered buying a rental, took a second look at my financial situation and decided it was safer and easier to pay off the loan my wife had on her car. Since then I have managed to stock pile 15k in an ING account. We’re saving about 2,200 a month, plus we’re puting 10% in our 401k accounts.

    At this time last year I was advised that banks won’t give a loan for a rental, unless you put 20% down. Does that match your experiance and is that still true?

    • Dollar D
      Posted April 11, 2012 at 11:36 am | Permalink

      That is true IF you go directly to a bank. If you buy a house that’s move-in ready and you go to a bank, they will ask for 20% down.
      What we do is buy these beat up foreclosures, ones which banks won’t even lend against, and we use a hardmoney or construction loan to get the place rentable. The hard money loan is 70% LTV where V is the “after repaired value” NOT the purchase price. So we can borrow money for the repairs. When we’re done, we got to a bank and they are happy to refinance us out of the hard money loan because we are < 80% LTV. So it’s as if we put 30% down, but really we come out of pocket a lot less.

      • Posted April 11, 2012 at 12:42 pm | Permalink

        Thanks for the response.

        I’m not sure I’m bold enough to go the hard money route that you have. Is there a less aggressive step that you would recommend to getting into renting? I was considering buying a house with the 20% down that was rental ready, or buying a rental that actually had a tenant in the house already. Granted the returns are a lot less from that, but can still be substantial. If I had success with that sort of arrangement I think I would be more confident to buy a foreclosure and fix it up.

        I should also mention that my wife isn’t really on board with the idea of buying a rental. She would support me if I ultimately do buy a rental, but she has been urging me not to do it. That again is part of the reason I’d rather buy something that is close to rent ready.

        • Dollar D
          Posted April 11, 2012 at 12:55 pm | Permalink

          Well, one option is owner financing. You might be able to find a seller who owns their house free and clear and would be willing to “be the bank” and sell it to you on a mortgage. But if that were me, I’d want a pretty big down payment…

          There’s another method called purchasing “subject to” which basically means that you buy it subject to the original financing. You take over the payments and own the house but the mortgage is in the original owner’s name. The problems here are that 1) the original mortgage might have some bad terms or a high interest rate, and 2) there are no more “assumable” mortgages anymore which means that the bank could call you up and say they want all of their money. Now. Or give us the keys. That’s because mortgages today have a clause which says that the loan is due when the property is sold (the “due on sale” clause). A lot of people claim to have a lot of success with subject to properties but personally, I wouldn’t want to risk it. Just seems kind of shady to me.

          Another option would be to partner up with someone. You could split the downpayment and the profits but you have to figure out some way to divvy up the responsibilities or hire them out. This can be a good way to spread out the risk but it could also go spectacularly wrong if you don’t spell out all the details of the partnership up front. You definitely don’t want to ruin your relationship with a friend or family member over a business deal gone-wrong.

          • Posted April 13, 2012 at 1:06 pm | Permalink

            Thanks for the comments.

            When I had first looked at renting I was working with a real estate agent and she had found someone that was willing to sell as owner financing. Even had a renter in place and wanted 10% down on the rental. However, the interest rate was 8.5%. She suggested that I get the rental, pay the loan down until I had 20% equity and then refinance with a 30 year loan. In my opinion the interest rate was too high so I passed without too much consideration.

            “Subject to” sounds very difficult to find, but maybe that’s why it pays well for people that actually are able to use it. Does seem a little shady. Bringing on a partner seems like a good idea. I know that here in Charlotte, NC there are some real estate investment meetups that I could attend. My primary goal of going to that sort of group would be to learn from the other investors in the area. If I met someone there that I wanted to partner with it would be an extra bonus.

            At this point I have 15k saved so within a few months I should have enough to buy a nice rental with 20% down. Only real question is trying to get a good enough deal that it’s worth it.

            Semi different topic. Have you ever considered renting out some sort of alternative dwelling? What I had in mind was a small home, ie under 200 sq ft., or a tree house. Less exotic idea, rehabilitating an old barn, church or factory. Maybe at that point its more of a hobby than a money making idea. Not sure if I would actually do it but it is a fun daydream.

          • Dollar D
            Posted April 13, 2012 at 1:20 pm | Permalink

            8.5% is pretty steep but not that high compared to historical mortgage rates. You also have to consider that this might be up for negotiation! If you are a good borrower and can prove it, then they might be willing to accept less, especially if they are having trouble selling the house. However, your cashflow is going to be a lot better if you can put 20% down and get 5% :)

            I’d definitely meet up with some local investors before making any purchases. If for no other reason then to get more acquainted with the rental laws. One of them might even let you use their lease, which will save you the trouble of finding one or having one drafted by a lawyer.

            In every market there’s a crossover point for price to rent, below which it will be profitable. Around here, that’s houses which are < 120k and rent for < 1200/mo. At that price point, you will have a LOT of people who are able to afford it.

            I hadn’t thought of anything that *exotic* but I had considered buying and flipping mobile homes and offering owner financing. It’s hard to get financing on mobile homes in parks because banks just do lend on them. Compound that with the fact that people who live in mobile homes tend to need financing to afford them and it adds up to an interesting opportunity. Unfortunately, I don’t know anyone in my area who does this that could mentor me.

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