Possible Deal

General Real Estate Investing
1

I’ve been contacted by a seller that wants to sell an up/down duplex to me on contract. I would like some advice on what kind of terms I would need to get in order for this deal to be a deal.

Here’s what I know…
The seller is 88 years old an in poor health.

Top rents for $350/month and bottom rents for $385/month
Electric and heat are on separate meters and tenants pay this.
Owner pays water.

Monthly costs to buyer are:
water approx $60/mo
Insurance $60/mo
Taxes $71/mo

Total rent income is $735
Total known costs are $191 for taxes, insurance, water

The seller and I talked about a purchase price of 49K (It was listed with a realtor for 56K and didn’t sell).

I could come up with 2K for a down payment but don’t want to do this if possible.

What would be the terms I would need to make this a deal?

Thanks for your help with this!

2

Hi,

Although this is a duplex you will still need to put money aside for reserves, replacement and short / long term maintenance.

The rental total of $350 + $385 = $735 x 12 = $8,820 - (Vacancy Factor) 10% for example = $7938

Now if you factor this like a landlord you will basically have fifty percent for overhead and expenses (Reserves) and fifty percent for debt service and positive cash flow.

$7938 divided by 2 = $3,969 divided by 12 months = $330.75

So a purchase price of $49,000 you could offer a straight 30 year note at 7% interest for a $326 payment per month maybe due and payable in 5 years (You would refinance to keep property) but probable best thing you could do is close and refinance 6 months to 1 year from now for the best possible interest rate which would reduce your payment slightly.

Property taxes and insurance will surely go up to reflect this sale!

Closing costs will still be $1,225 seller and $980 buyer estimated so you probable end up paying all closing cost’s since seller would be receiving a note and no actual cash at closing so your going to spend $2.2k anyways.

If your note interest rate initially exceeds 7% it would bite into your operating costs by about $15 to $20 dollars per 1%.

Does your water bill figure include sewer and trash fees? What is yard maintenance? Snow Removal?

Good luck,

               GR
3

Thanks GR for taking the time to respond and analyze this deal. The water bill does includes sewer and trash. Snow removal and yard maintenance would probably run around $50 a month. I would prefer to have one of the tenants be responsible for this if we could work out a deal.

I meet with the seller tomorrow so we’ll see how it goes.

Thanks again GR!

4

GR – I forgot to ask…you mentioned closing costs. I’m assuming these would occur only when I get conventional financing, correct?

What might be some negotiating points I can use with the seller?
One you indicated was that the insurance and taxes would increase after the sale (these will increase even after I buy on contract, correct?)

Other negotiating points I should bring to the table?

Thanks!

Brian

5

Are you sure you want to go close to 50k on this? We’ve got a duplex with about the same rent and expenses you listed that we got for 22k. Are the rents below market? I think your key in this situation is getting the owner taken care of and cashed out in as short of time as possible. Since you don’t have much money to bring into this deal, that’s going to limit your financing options.
Is there a way you can add value to this building which would help you re-fi sooner than later?
I agree with GR that you probably need to get the owner out of this deal within a year since there are health issues.
You’ll still have closing costs for a title company or closing attorney. There will be prorated taxes, recording fees, etc. So there are still things you’ll have to pay.
I’m still just not sold on the price. Just because it didn’t sell at 56k doesn’t make 49k a good deal. That’s only a few grand less than what the owner would’ve cleared if it sold at list price with commissions paid for the sale.
If you could get bank financing, you would have better bargaining power over the price since the owner would be clear of the property at closing. As it is, the owner will be involved until you can re-fi and I’m sure they would rather be done with it because of the health issues. You may have to come up some on the price considering you need the seller in this situation, but I wouldn’t extremely overpay on this property.

6

Brian,

What’s the purpose of buying this duplex?

Is it for cash flow? Appreciation? Inflation insurance?

At this point, you’re describing a high leverage situation, that is otherwise, at best a marginal deal, and is only a long-term hold type of investment.

Any cash flow will be slow in coming, and any appreciation will occur over many years.

This may be your only option, and I understand this. It’s a way to (stay) get into the game. That’s fine, too.

Meantime, determine why you’re buying this place. What’s the point? What is the exit strategy/target?

If I was starting out, the strategy/target point would be to build my portfolio, to improve my financial statement.

I always listed the highest ARV for each property I bought, to provide the largest equity quote possible.

Also, banks and sellers don’t check to see if the properties are actually worth what you say. They just accept it, unless it’s ridiculous sounding.

When I first started, I was buying houses simply to increase the bottom line on my financial statement. This makes difference to banks, and sellers that we want to do business with.

When I could show my first million dollars on paper, a real estate agent asked, “How much of this is real?”

I said, “It’s all real. However, if you chopped my financial statement in half, I would still be worth a half million dollars.”

He agreed and this gave the agent reason to push my seller financing offer.

Of course the agent told the seller I was a millionaire. So, it served it’s purpose. Of course after I closed on that deal, my net worth climbed another $30,000, on paper.

7

Thank you for your responses – btw Javipa, I’m the guy you wrote an article on about the bandit signs (put 5 signs out and get all kinds of leads).

Here’s the listing for this property…http://niowarealty.net/listing/good-rental-property/

Justin…thanks for taking the time to respond! I believe the rents are below market. For sure they should be $400-$450.

I am going to try to get the purchase price low enough so I can get conventional financing with no down payment. I have a relationship with a local banker and he might be able to do this for me IF I can get it low enough. He always does an appraisal however to determine market value. The appraisals are a joke generally. They always come in around what the purchase price is even if the value is considerably higher–I don’t understand some of the appraisers thinking!

I now have 9 houses and a business. I feel like I’m flying by the seat of my pants and need to get a better handle on my business. I don’t have much equity in my properties. I’m house rich and cash poor. But the deals keep coming to me.

I’m doing this for cash flow and to build my retirement. I’m 55, a school teacher, own a restaurant my wife and I are trying to sell, and investing in real estate. I like to work and be busy. The teaching and restaurant job account for around 75 hours of my week. With school being out for the summer I don’t work so much.

I’m going to try to get this property for around 40K. I meet with the seller in a couple of hours.

8

Brian,
Thanks for posting the listing. Looks like a nice place. Roof looks pretty new and the inside pics look pretty decent. My place was in worse condition than this when we bought it. The previous owners deferred maintenance and skimmed off all the money for a few years so there was plenty to do when we took over. If you can get $800-900/mo out of the building and it looks to be in decent shape, I think 40k sounds like a pretty fair number.
I know the house rich / cash poor story well. When you take on other people’s projects and mistakes, the cash flow goes to getting the houses into the shape they should’ve been in. We’ve looked good on paper for a long time now, but have spent lots of the rent on rehabs and repairs. We’re finally turning the corner from that, but it’s been a long frustrating road to get here. That’s also the downside to having shorter amortizations on the loans. We’re finally making it more of a priority to take money out of the busines for us. Sometimes I’m overly-ambitious and try to get too much done too soon.
Good luck with it. Hope it works out for you!

9

Thanks Justin!

I talked to my banker and he said if I could get it for 40K he thought he could do it with nothing down. I’m going to tell the seller I can put 38K in his bank account in 45 days and see what he says.

I find myself juggling our accounts. We have our personal account, restaurant acct, and real estate acct. I am going to try to not take anything out of the real estate acct and let it build.

I haven’t done very well with the 2% rule. But somehow I’ve made it work. I need to be better at getting the deals so they meet the 2% rule.

Take care!

10

Just met with seller. He agreed to 45K, 40K from bank and I have a note with him for 5K due in 2 years at 5%.

My mortgage payment will be approx. $338/mo. My banker will only do 15 year loan at around 6%.

I’ll then owe the seller $5,500 in two years.

The bottom unit is not rented so I should be able to get $450 for it and $350 for the top unit.

Furnace are newer, roof is good, elect. is updated. Not much needs to be done, maybe stretch the carpet in the lower unit and some paint.

I think this deal will work for me.

11

Hi,

You need the transaction to go through escrow / title your not putting $38k in his account as the bank will require you to use an escrow / title company to provide title insurance and prepare and record documents.

Your seller will get his settlement wired from escrow!

         GR
12

Looked at another house today and would appreciate your thoughts on if this would be a deal. Seller doesn’t want to be a landlord and wants to sell it.
You can check it out here…http://worth.iowaassessors.com/parcel.php?gid=1791

I think I can buy it on contract for 40K with nothing down and payments of $200/month, 6% interest with a balloon payment after 3 years.

It is a HUD house and currently rents for $400/month–rent should be closer to $500/mo. It’s my understanding rent can be adjusted March 1st.

The house has new roof, windows, furnace, water heater, electric has been updated. Exterior could use a coat of paint.

I’m sure I could sell this on contract NOW for 55K @ 7% interest but I would hold it for a rental for now.

Please let me know if you think this is a good deal.

Thanks!
Brian