This case study was discussed in the March Monthly Round Up.
- 3 Bedrooms
- 2 Bathrooms
- Sold Price: $~362,000
The layout of this home was exactly the type of home this client was looking for. They wanted a property that they could house hack and live in for a year before moving on to another property. This is a ranch style home and the previous owner converted the garage to a living space and hallway then built a new garage where the carport was. This created multiple entrances which could allow the home to be split into an upper and lower living area. It also has a room downstairs that only needs an egress window added to it to make it a conforming bedroom. We had the advantage that the home needed a little bit of work done and did not show very well. We still ended up in a multiple offer situation and agreed to buy "as-is".
The seller disclosed that the roof needed repair and that their insurance would cover the new roof. This delayed the closing for several weeks but saved the buyer significant money. After the inspection 3 major issues popped up and though we agreed to buy the property as-is these were health and safety issues that had to be addressed.
- High levels of Radon
- Very dated Federal Pacific electrical panel
- Sewer line
The seller had claimed to have had the sewer line scoped recently but our scoping proved otherwise. Nothing was disclosed on the seller's property disclosure and the sellers did not argue over the miscommunication of the state of the sewer. Due to this mishaps, we were able to get the full $9,500 of concessions that we had asked for.
This brought up an interesting scenario for us. Whatever the amount of that the seller agrees to pay has to be used for closing costs and cannot be used for something like replacing the carpets after closing. This left our buyer with a couple of options to use the money. Closing costs were about $5,000 so that left $4,500 to be used or be left on the table and returned to the seller. The seller had 3 options to best utilize the remaining cash:
- Reduce the price of the home by $4,500
- Buy down the interest rate
- Prepay private mortgage insurance
If you are ever in a situation like this your lender can help you determine which route will save you the most amount of money. Generally for homes that purchased with a low down payment buying down the interest rate or paying the PMI will help the cash flow out almost immediately. This buyer decided to buy down the interest by 0.5% and only had to bring $1,700 of her own money to closing to do so.
This $1,500 represents the lower half of the home and the egress window is going to be added to create a 2nd bedroom on the lower level. The cash flow is negative $850 on the spreadsheet but this is what is it costing the new owner to live here as well. A single room in Denver can easily go for $850 and they get 2 bedrooms, a living space, and yard for their share of living expenses as well. They also get the non-cash benefits of owning the home during this period.
They plan on living in this home for about 1 year before moving on to their next property. The $2,200 is an estimate for the rental price of the entire home. Annual cash flow is only about $500 per year but this does include setting money aside for repairs and maintenance. Keeping in mind the non-cash benefits along with the cash flow this is a great investment considering the small amount of money that was put down to purchase the home. As rents increase their mortgage will remain fixed and cash flow should continue to improve over time.