Can we make a deal?

A short while ago, I wrote a post that got a lot more response than I was expecting (what I was expecting was.... well.... none, really). The post analyzed a deal that I found on craigslist and while it was obviously a bad deal from the start, the real point of the post was to walk through a bunch of basic steps that you should go through whenever evaluating a property.

Today we'll look at a condo for sale in Silver Spring, Maryland. We'll run this property through the ringers and try to understand what we can before even contacting the agent.

219000 900 sq ft 2 bed 1 Bath Condo with W/D in unit! Conveient Location!

Great location!900 sq ft 2 bed 1 bath condo.. Close to Metro and major highways. Bus stop at entrance. Closing help available. Seller will provide $500 credit for new dishwasher. Washer/Dryer in Unit!!! Not many units have this. Marble floors in Living room. Hardwood floors in bedrooms. Tenant needs to be notified prior to showing. Low Condo fee $369(compared to other units in bldg)includes all utilities.
As I mentioned last time, one of the first things I like to do when researching a property is look at it in Google Maps. As we can see here, the property is only a mile or so away from 495, which is The Beltway around Washington DC. The proximity is definitely a draw, though I wouldn't want to live that close.

In addition we're only about 8 miles away from downtown DC, which can be another significant plus. However the nearest metro station is about 2.5 miles away. Short, but not short enough to walk. So far the property looks to be in a relatively decent location, infrastructure-wise.

Let's start looking at some numbers. The seller is asking for $219,000 for this house. I'll assume for the moment that we intend to place 10% down on any property that we are going to invest in (since 100% financing rarely leads to an positive cashflow). So we need to finance $197,100 on this property.

Comparing a few mortgage rates, it looks like one of the better 30 year rates we could get for a non-owner-occupied loan would probably be around 6.25%. Using a mortgage calculator, we can see that we'd be paying about $1,213.58 a month in principle and interest.

To that we can add what we know as a fact, the condo fees, currently set at $369 a month. Giving us a running total so far of $1,582.58 to float this property.

On top of that we'll throw in a low estimate of about $50 a month to insure the property. You may be paying less on your personal home, but bear in mind that not only is this an investment property, but you also need an umbrella policy to help cover any liability issues you could have. So our running total is up to $1,632.58 to float the property.

We also have to worry about property taxes. With a little detective work (some playing around with Google Maps and then googling "Condo Piney Branch rd Maryland" I discover that the actual address of our condo is 8830 Piney Branch Road. I then go to the Montgomery County government's website (the county that the condo is located in) where I can look up our property taxes.

Using this website I can see the owners of all of the units, what their units were appraised for by the county (usually lower than sale prices), whether or not it's a primary residence, and finally how much their property taxes were. Since all of this information is part of the public record, looking this data up is not illegal nor unethical.

Taking a random sample of records, I can see that, on average, units in the building were assessed by the government for around $100,000 to $110,000. We haven't even looked at comps yet, but this is ringing the alarm bells. In my experience the government typically undershoots their assessments by 20-30%. To see an asking price that is at least double the governments assessment probably means that these sellers are looking to make some serious cash on the sale.

Looking back through past tax assessments we can see that Montgomery County reassesses for tax purposes every year. So that rules out the possibility of an old and out-dated assessment.

Ignoring that for the moment, I can see that the average property tax for a unit in this building ran about $700 a year. Which comes to around $58 a month. Which brings our running total to $1,690.58. Or around $1,700.

So those are our carrying costs. Looking at our friend rent-o-meter, we see that the median rent in our area was about $1,300. So even if your unit was a lot nicer than most units, you probably couldn't rely on getting more than $1400-$1500 a month for the place. In fact, the exact same unit in the building is currently being offered by another owner for $1375 a month. So we're looking at carrying around $200-$400 a month in costs.

Taking a quick look around the web at some other properties for sale in the same building, we find a 3-bedroom unit with more than 50% more square footage on sale for $229,000 (unit 212, which assessed in 2006 for $108,000), another 3-bed with the same footage also for $229,000 (unit 201), a 1-bed with 825 square feet for $189,000, another 3-bed for $249,900 (who is probably unaware of his $20,000 asking premium over his neighbors), and a smaller 3-bed asking for an astronomical $253,900 (with only 1300 square feet, this seller's Realtor is napping on the job to let them ask that price).

So bottom line. Is this a good investment? Well, there's a lot of work left to be done before making that determination. If I were investing in this area, I'd already have my model of the school systems and other amenities in place, so that could give me a more accurate picture. But on the surface, I might not bother to pursue this one further.

One of the flashing red lights is the number of units from the building currently on sale. Another is the fact that there is direct competition for renting the same unit-type within the same building. As I've written before, often the only difference between your condo and someone else's is the view. Add to that that you are considering a significantly negative cashflow until rental prices climb at least 25% and we're probably looking at a no deal.

Not that that is surprising. The MLS, Realtors and newspaper ads seem to be a fairly weak place to find good cashflow deals. More often these deals can be better found by word-of-mouth. But again, the point of these posts is more to discuss the tools you have at your disposal, than to actually find a deal to invest in (to be honest, I'm not even bothering to "research" in the area I buy in, so even if I found a great bargain, I wouldn't be taking it. Real estate is local, and buying out of your target area is a quick recipe for disaster).


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