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Friday, April 11, 2008

Weekend Reading: How do you know if a deal is a steal?

Here's what I'm looking at now: A bank-owned property in Oakland priced at least 40% below its market value in 2005. And the question is: Can this really be the screaming bargain it appears to be on first glance, or am I the proverbial sucker at the table?

The house was built in '02-'03 and was initially priced about $100K more than it's selling for now. (You'll forgive me for not disclosing its precise location; this is business, after all.) In '05, the house next door-same square footage, same floor plan, built by the same builder-sold for another $100K above that.

I know what they were originally listed for (and when) from MLS data. I know what the house next door sold for in '05, and how much was owed to the bank on this one, from PropertyShark, ironically, Flipper's best friend...

That said, the location is iffy-one block over and you're solidly within a well-kept middle-class neighborhood where home values have been holding steady, but one block the other way it starts to gets kind of dicey. There's a small senior living apartment building across the street, and a good public elementary school at the end of the block. And there's one bit of obvious damage: At some point the upstairs toilet was leaking, and you can see the water damage on the living room ceiling. (Since it's bank-owned, I'd be buying "as-is.") But rental comps in the area suggest that, at 30% down, I can easily cover the mortgage, taxes, and insurance and probably would even eke out some positive cash flow.

So...deal or no deal? Discuss.

Read the Flipper's last adventure here.

8 comments:

Bob the Builder said...

The developer sold it 5 years ago for $100K more than it's selling for now? And you can rent it w/ positive cash flow? Hard to see the down side, unless it's really shoddy construction or the area is iffier than you think.

Bob the Builder said...

The developer sold it 5 years ago for $100K more than it's selling for now? And you can rent it w/ positive cash flow? Hard to see the down side, unless it's really shoddy construction or the area is iffier than you think.

Nancy Jackie said...

WEll, what are the comps like in the neighborhood? That would seem to be the real question here.

The Flipper said...

Comps in the neighborhood are substantially higher, but it's not quite that clear cut. A house exactly the same size sold for $300K more about 4 months ago. Another that's smaller, with 1 less bathroom, sold for $220K more 3 months ago. But those were a block away in the right direction, where the neighborhood takes a dramatic turn for the better. The only recent comp that's apples-to-apples, blockwise, was double the square footage, with 1 more bed and 1.5 more baths, and sold for a little more than double the price.

Anonymous said...

If the cash flow is positive, why not go for it?

Anonymous said...

I would spend the money for a very complete home inspection to know what other, non-obvious, problems exist and to investigate any potential mold issues.
You seem somewhat concerned about the neighborhood. Can you spend some time there at various times: weekday/weekend, mornings, evenings--observing the people/patterns? If you don't feel comfortable in the neighborhood in the evening, it probably will feel the same to potential tenants.
Are the neighbors owners or renters? A majority of owner-occupied would be great. Consider whether you would want your (adult) child to live there.

Skepticle Sally said...

To anonymous: Well, let's see... The bubble is starting to spread to the Bay Area. (Hell, STARTING to spread? It's already here.) So the risk is, you're buying in a marginal area at a sub-marginal time. The cash flow could go negative very fast.

Robbie Williams said...

I wouldn't do it. I'd buy a fixer-upper in Marin County instead.