what contract type to use?

hello all,

i have a seller who owns a property without a mortgage. they have two liens on the house, once of which is a credit card lien. the seller wants $10k in their pocket. this is doable, only if i can negotiate down the credit card lien. obviously i want to negotiate this as low as possible to build in some equity. since this is a variable in the equation, i don’t know the purchase price to put the property under contract.

is there any type of agreement i can put in place that allows me to purchase the property for as cheap as I can get the lien pay off for (plus the $10k in the sellers pocket)?

Hello, I am new to this but will still put in my 2 cents.

First of all, determine what your max purchase price should be. If your plan is to rehab and resell then you should determine the After Repair Value, find 65-70% of that number, and then minus repairs. If you are borrowing the funds, then minus your loan and carrying costs too. The result is the max you can pay for the property.

If you are planning to wholesale i.e. flip the contract to another investor, then instead of minus loan and carrying costs, minus how much you want to make on the deal, then the result is your max price.

If you are planning to buy and hold, a rule of thumb is the monthly rent should be 1% of the total cost of the property. So if the property is going to rent for $500 a month then purchase price plus repairs should be less than $50,000. So minus the repairs from $50,000 and that is your max purchase price.

Once you have your max purchase price, you can take out an option to buy at that price or less.

The current rule of thumb for gross rent yields is more like 2% per month at a $500/mth rent level. These yields are available in most markets in the U.S., but are tough on the west coast and in parts of the northeast, granted. As mthly rent moves above $500, I’ll allow the rent yield to grade down to 1.5%/mth at the $1,000 point, and then to 1.25% at the $1,500 point.

1% per month is a recipe for zero or negative cash flow! This is a 12% gross rent yield (and 6% net rent yield, or cap rate, assuming 50%-of-rent ratio for long-term vacancies, expenses, prop mgmt, and large capital expenditures). Buying property at 1% led thousands of investors into bankruptcy when the “sure-thing” appreciation stopped bailing them out.