The previous Section 8 tenant paid $800 per month. The investor is asking for $100,000 for the 900 sq. ft. house with 3 bedrooms and 1 bathroom. Recently, I sold a similar fully remodeled 3-bedroom, 2-bathroom house for $135,000.

I have several short term rentals in this area and over the last 12 years, I have owned, bought and flipped over 50 houses there. I know South East Lake.

The investor claimed the property was in good condition with a new roof, HVAC, and updated electrical and plumbing systems. I estimated that with an additional bathroom and a renovation budget of $20,000, I could list the property for $135,000, which would make an $80,000 purchase price feasible. Initially, the numbers seemed to work.

THE INSPECTION

However, a visit to the property revealed a different story. The photo he used was outdated and from Zillow. The house is now overgrown with large bushes obscuring it from the street. While the roof and HVAC seemed fine, I had doubts about the electrical and plumbing systems. The interior needed significant work. The carpets need to be removed, refinish and restore the original hardwood floors, and the kitchen was tiny and cramped with a stackable washer and dryer. The third bedroom was more like an oversized closet accessible only through another bedroom (functional obsolescence).

2-bedroom, 1-bathroom houses in this area are difficult to sell, even when renovated. However, converting the adjacent tiny bedroom into a bathroom could create a master bedroom. The washer and dryer would need to be relocated from the kitchen, possibly by building a utility room off the kitchen, which would push renovation costs to $40,000 – $45,000.

THE OFFER

• Appraised Value: $90,000
• Max Investment: $67,500 (75% of $90,000)
• Renovations: $45,000
• Max Offer: $22,500

The high renovation costs significantly impact the offer price. The investor owes $60,000 on the property, so he would need to take a considerable loss of $37,500 for me to buy it.

SHORT TERM RENTAL

The investor also considered turning the property into a short-term rental (STR). Although I have several STRs in South East Lake, not every street is suitable for this purpose. There are some rehabs by other investors on the street, which is positive, but significant blight remains, with many vacant houses sitting for years. To upgrade the property to retail level or STR quality, he would still need to spend over $40,000. Given the current condition, guest reviews would likely be poor, making this an unsuitable property for an STR.

RECOMMENDATION

With his $60,000 debt, the best strategy is to convert the tiny bedroom into a laundry room and perform minimal renovations, costing around $10,000. He can re-rent the property to a long term tenant as a 2-bedroom, 1-bathroom house for $800 – $850 per month. In 2-3 years, if the neighborhood continues to improve with more investors renovating houses, he could reconsider a full renovation and retail sale providing values continue to rise, or converting it to an STR.