Is He Making a Financial Mistake????? HELP!!!

**Beautiful Disaster** · 12-02-2010 07:22 PM

I think so...

I need some wisdom here from you fellow homeowners, those of you that have bought and sold homes, flipped homes, etc. Please bear with me, this will be long but I need to give you the facts.

The guy I am currently dating (about 2.5 months) is looking for a house to buy and flip. He intends to live in the home and do the improvements himself. He has asked my opinion which I'm hesitant to give, so I'm just trying to give him the facts. Here's a bit about the home:

Built in 1988, 1200 sq ft, 1 car garage, on .50 acre. The home needs : new flooring throughout, wallpaper stripped and all walls painted, repainted ceiling, ALL new appliances, new sinks and vanities in both bathrooms, new shower kit in 1 bathroom, new countertops and cabinets with a bar addition to add more cabinets, 1 section of fence to complete the fencing, new fixtures. Those are just the things I can think of and that I gathered after one viewing of the home...in the dark.

The seller has agreed to give him $11k in cash, and a new washer and dryer. The seller is asking $96,500 for the home. Since he does not have a downpayment, and it will be a rural development loan, his actual loan amount would be $104,000. The home appraised this week for $104,000. So, here is what I sent him in an email to try to help him see things for what they are:

"Home Value: $104,000
Payment at 4.6%: $533.15
Escrow (prop taxes and insurance estimate): $100.00
Total monthly payment: $633.15
Total yearly: $7597.80

At the end of year 1-
You've paid: $7597.80
Amt applied to principal: $1648.00
Amt paid in interest: $4749.54
Amt paid in escrow: $1200.00
New principal balance: $102,351.74

At the end of year 2-
You've paid: $15195.60
Amt applied to principal: $3373.94
Amt paid in interest: $9421.66
Amt paid in escrow: $1200.00
New principal balance: $100,626.06

So...at the end of year two you owe $100,626.06 (for selling purposes) and you've invested $15195.60 in payments which means with that alone, you'd have to sell the home for $115,821.66 just to get back what you've invested (not including the $11k or so you'll spend in improvements).

Here are the other homes on the same street:
-170 Crabtree Lane is 1278 sq ft, 2 car garage, porch, patio, on .51 acres, built in 1998, listed in "VERY GOOD" condition, reassessed in 2009 for $89,000

-150 Crabtree Lane is 1584 sq ft, 2 car large garage, porch, patio, on .50 acres, built in 1989, listed in "GOOD" condition, reassessed in 2007 for $94,930

-111 Crabtree Lane is 1200 sq ft, 1 car garage, on .46 acres, built in 1988, listed in "GOOD" condition, reassessed in 2009 at $115,500

-131 Crabtree Lane is 1440 sq ft, no garage, porch, patio, on .46 acres, built in 1988, listed in "GOOD" condition, reassessed in 2008 for $89,000

-110 Crabtree Lane is 1256 sq ft, 2 car large garage, small porch, on .48 acres, built in 1988, listed in "GOOD" condition, reassessed in 2007 for $101,670

*by reading this email you agree to pay your "financial advisor" in the form of Barefoot Reisling."

So that is what I sent him. To me, this screams "YOU ARE NOT GOING TO MAKE A PROFIT OFF THIS HOME". He's being sold hard by the sellers who bought this home on a short sale and are also friends of his. They flip homes and say they have "too many" going on right now and can't handle this one. Friend or not...I think they know they're not going to make any money off this house and want to get rid of it.

Do you think buying this home with intentions of reselling it for profit is a good idea??????

**Seeker_Advice** · 12-02-2010 08:02 PM

TELL HIM TO RUN, RUN, RUN AWAY FROM THIS HOME or any other for that matter for the next six to twelve months.

As someone with a little experience in this area, different market area perhaps, but same basic idea and someone who has "turned and burned" (flipped) more than twenty and less than fifty homes, I am not even considering any "opportunities" from my network of friends, most of whom represent banks that are taking back homes by the dozens.

There is a HUGE inventory of homes on the market right now and there has been for a long long time. There will be for a long long time too. So now is not the time to do this, especially if it's his first, second or third attempt at it.

I listen to deals or get offers to buy homes everyday and I wouldn't consider this one for a minute in my market.

Take your new BF and RUN, RUN, RUN away from this "deal".

**Seeker_Advice** · 12-02-2010 08:05 PM

The one place in real estate where people are going to make a TON OF MONEY, in my opinion, is people that have lots of money to buy homes where prices have been hammered and CAN AFFORD to sit on them for a few years or more, until their values return.

These people are going to make dump trucks full of money! Only thing is, you need a dump truck or two full of money to get into the game.

the days of "turn it and burn it" are gone, at least for a while.

**WildChild** · 12-02-2010 10:01 PM

I've worked essentially for the banks, going into hundreds of foreclosed properties, securing them, inspecting, bidding essential work to preserve the value (roof leaks, broken windows and ext doors, winterizing, safety issues and such). There are homes in far better shape for less money.

Unless he really knows his stuff, he shouldn't touch this kind of business. Can he assess the condition of the foundation, roof, piping, electrical ?

The only way you make money at this is if you can get the house subtantially below market for the area, do most of the work yourself and then actually are able to sell it or can afford to hold on to it, perhaps as a rental until the market improves.

Assessed value, donesn't reflect what they are selling for. A realtor or some counties tax assessor web sites can tell you the comps, what similar homes have actually sold for. You may also find some info on Zillow or ABC

**rcoreyus** · 12-02-2010 11:20 PM

I think this is a game for experts who can tolerate a big loss if it happens. The housing market is very uncertain right now - there is a chance of making a lot of money, but it could easily fall still farther. In addition unless he is an expert he may miss expensive repairs that the house needs.

If he is competent to do all that work, would he make more working as a contractor? If there are no jobs for contractors, why haven't the current owners of the home hired one to fix it up and make it easier to sell?

I should say though that I am very conservative and tend to very much distrust any scheme that looks like easy money. As I see it you make money with a combination of investing capital, your labor, your skill, and then decide how much of a gamble you are willing to take. If something looks like a great deal you need to ask which of the above you have that other people don't.

**Beautiful Disaster** · 12-03-2010 06:37 AM

The thing that bugs me is that they're "selling" him the home for 96,500 (the appraisal came in at 104k) but by the time all his loan fees are added on, his loan amt is going to be 104k. He argued with my logic last night saying "I'm paying $600 where I live now to rent...so I'll be paying $630 there....so I look at it as a wash and if I sell the home for 110k after improvements, then I make 6k". I see WHY he thinks that way, and even if I did agree and say "okay, the monthly payment is a wash", I'd still stick to the fact that it's not a sellers market, property values are not where they need to be, houses foreclosed, for sale, etc are a dime a dozen right now. I tried to tell him that if he's looking for a house he wants to live in for a long time....then fine....but if he's looking for a house he's going to make money off of, now is not the time and this is not the house. It is an older home (built in 88) that's about a 15-20 minute drive into the city. Even if he's able to make all the improvements that need to be made in that home for 11k, AND was able to increase the value of the home to 115k within one year (which I HIGHLY doubt), he'd have to be able to sell the home for it's appraised value (which I also HIGHLY doubt as most people won't pay full price) in order to do what he's calling "profit". From my perspective, he even at that, he would barely "profit" 5k.

So I guess really for him it's going to come down to, "Can I increase the value of that home at least 10k within 1 year?". My thoughts to that are absolutely not. That house is not a "diamond in the rough" so to speak. It's VERY basic, no open floor plan, older, and other than having a nice backyard, has nothing that would set it apart from any other house.

WC - as far as comps, I would consider a few of the ones I listed above to be comps. That info came from our counties PVA website. He mentioned last night "well there are a few other homes 4 or so miles away that are same sq ft same style home that sold for in the 120's". I said "Who gave you that information.........the seller?" and he said yes. *rolling eyes*. I said "Did the seller tell you about the homes on your road, that are the same style, size, lot, and age that reassesed 2 years ago for $80-90??" and he said "No....". But I gave him that information....and to some extent its' like he still doesn't see it. And as far as inspection, he has one of those scheduled. So if he DOESN'T buy this home, he's already out $500. Even though my opinion on it when he first looked at it (before he agreed to an appraisal and inspection) was that this was not a good purchase.

I don't want to be narrowminded and fail to see this as a good opportunity for him if it truly is. But so far...I can't see it. And Im disappointed in his logic...he seems like such a smart guy, so grounded, independent...and we have had a good connection......... but I'm struggling not to lose some respect for him over this. Because if he can't view big financial decisions realistically and logically, then we won't be compatible. I'm frustrated.

**caterpillar79** · 12-03-2010 07:49 AM

Sorry, BD. The figures you showed us here already clearly screams "NO", it's not a good deal. If the house is going to be sold lower than $96,500 (haggle for about 30% lower - wishful thinking...), it might be a good investment. Unfortunately, with the current economic condition, I don't see any reason to buy this house, seriously.

I hope he's not as "boxed" as he appears to be with this deal. That would be disappointing....

**KMonte85** · 12-03-2010 07:50 AM

Originally Posted by Beautiful Disaster

He argued with my logic last night saying "I'm paying $600 where I live now to rent...so I'll be paying $630 there....so I look at it as a wash and if I sell the home for 110k after improvements, then I make 6k".

Is he factoring in the cost if insurance? The increase in utilities? Township services? The property tax? He's going to be paying much more than $630 a month, that cost will only cover the loan... not the actual cost of living in the house. I hope he realizes that...

Originally Posted by Beautiful Disaster

It is an older home (built in 88) that's about a 15-20 minute drive into the city. Even if he's able to make all the improvements that need to be made in that home for 11k, AND was able to increase the value of the home to 115k within one year (which I HIGHLY doubt), he'd have to be able to sell the home for it's appraised value (which I also HIGHLY doubt as most people won't pay full price) in order to do what he's calling "profit". From my perspective, he even at that, he would barely "profit" 5k.

Agree with you 100% here. I don't personally flip homes. I know some people that have, and no one would touch an over $100,000 investment for a profit of $5000. From a financial investment standpoit, that is a ridiculous ROI, laughable really. And the very real risk that he won't even be able to SELL the home, that he's going to be incurring more cost, makes the ROI even LESS. He'd be better off buying a 2 or 3 year CD from a bank.. really.

Originally Posted by Beautiful Disaster

I don't want to be narrowminded and fail to see this as a good opportunity for him if it truly is. But so far...I can't see it. And Im disappointed in his logic...
...
Because if he can't view big financial decisions realistically and logically, then we won't be compatible. I'm frustrated.

I think you've got your head on straight. I, like everyone else who has responded, don't see the benefit in this. It's a shady deal with the sellers, the work will be tremendous, there is a very real chance he won't sell the house as quickly as he thinks, and even if he does sell quickly, the profits are atrotious. He would be better of working at McD's part time for a year if he wants to make $6000. this has bad news written all over it. I can't fault you for worrying about his financial decision making when he is so very gung-ho about this already - walking into it with a blindfold on.

All you can do, is try to explain the cons to him in a way that doesn't say "ARE YOU FRIGGEN CRAZY?!?!" He may ignore everything you tell him, but at least you tried... even if it ends in disappointment.

**caterpillar79** · 12-03-2010 07:59 AM

I hope that man doesn't make the mistake we made buying the house we have now....

Running the sewer line level up-hill....not disclosed....we didn't know. We had to dig it all up and replace everything....spent more than $3K for it to get fixed!(long story, but suing is not an option). Prior to that, we thought we had a really great deal - best neighborhood in town, where the rich and the famous are....and mind you, even the developer who built this house lived here for years! Just make me want to F'n it.

**kygirl** · 12-03-2010 08:54 AM

You've given him the statistics and I agree completely. I mean, especially with not knowing what is going to happen in the market in the next few years. I just think he shouldn't do anything without some experience especially since like CAT said, it's not a "great" deal. *Maybe* if he were getting it for like $85,000 then at least he could have a wash. That being said, I think all you can really do is just give him the numbers and hope he figures it out. He may end up losing $10k on the deal but it won't be bc you didn't try to explain it to him, but ultimately, he has to decide.