Worst Case
Posted on May 16, 2007 - Filed Under Business |
As a recovering engineer, the worst case scenario of any design always falls directly into my field of vision. It is something I will always carry with me; a tool to help me keep my balance.
During the housing inspection, I leaned over to ask the RealEstate Agent, "Are you absolutely sure we can do this?"
I ask this question not because of any lack of self-confidence. Rehabbing these houses or maybe facing the possibility of going through an eviction: these items do not bother me. My question came from a financial standpoint: putting 10% down, getting the funding, making the mortgage payment.
To put this into perspective, the market in Southern California is on the higher end. This is no secret to anyone. In my area alone, the average house price $450,000. Putting 10% down means I am writing the largest check ever written in my life. And facing possibly two months with a large mortgage payment is daunting.
The Agent said, "The worst case scenario is we sell the houses for $20,000 more than we bought them. You’ll walk away with all your money plus a little bit more."
This is something my brain will have to be programmed: the worst case is to sell and walk away.
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5 Responses to “Worst Case”
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6% of $455K is more than $20K… By my calculations, you need to be able to sell the houses for $27.3K plus associated closing costs more than you bought it for just to break even…
OK so if I was to seriously do this option and sell the houses then I would do a full-blown analysis to figure out what my break-even point would be. In that case your number would be closer to being accurate.
The point he was making, which I understood, was we could sell the houses almost as cheaply as I bought them.
Cliff, you should have the answer to this question before you’ve come this far. You don’t want to waste $400 on an inspection and then figure that you can’t close or you don’t want to close.
You should figure you need $45k + $4k closing costs, plus $6k to hold for 2 months. So you’d need $55k to feel comfortable. I’d personally want another $10k in the bank.
Hey there Ken, this question was posed the first week the offer was accepted.
Standing at the precipice of this deal, today I can see no reason not to continue as planned.
“6% of $455K is more than $20K…”
It’s all in Cliff’s hands, as it should be. Either it will work out, or it won’t. If it doesn’t, Cliff will learn from his mistake and move on. At this point it’s a business deal+learning experience. Some of us would have made a different decision, but we are not Cliff.
“The worst case scenario is we sell the houses for $20,000 more than we bought them.”
This seems rather odd that the RE agent would say that; however, it is mostly in their best interest to close the deal. If that was true, for a small fee, he/she should personally guarantee against a loss; as there is no possibility of a loss (according to him/her), they would just pocket the fee and never have to cover. However, I doubt they would do that. If that was the case, why didn’t they snap up the property and flip it themselves (for a $20K profit)? Anyways, if you are committed to the purchase, it may be best to just forge ahead and let what may com, come. Again, everything is a learning experience. (However, I hope in the future that you become a little lest trusting (eg “more crusty”) when it comes to “professionals” who’s interests might not exactly line up with your own.