BiggerPockets

Hi Everyone, This is my first post so we will see how it goes. I would like some thought and analysis of a deal I am looking at. The property is a 3 family in a mid size city in Ma. The seller is offering financing so that is attractive. I am looking to get it for 165,000, he is asking 175,000. The numbers are below.

165,000 purchase price
10,000 down
2800 taxes
2200 insurance, I should be able to get lower rate
1680 water/sewer
2400 rent(3 x 800 per unit)

I am looking to pay 900 a month for financing. This area has been hit hard by market and this property would have sold 4 years ago for 260,000. Anyone have any thoughts on this deal? I figured cap rate at 13%. It looks attractive for me but am taking my time analyzing this one.

Also the seller said he took a mortgage out on the propety last year, to take out equity, how does this work with seller financing? What if I buy the house from him with seller financing and he defaults on his mortgage, the bank would forclose on the house right? Not quite sure how seller financing works if the seller has a mortgage on the property and transfers the deed to the new buyer. Any insught would be greatly appreciated. Look forward to hearing from everyone, thanks.

Seller financing is always a bonus. I'm one of those that isn't preaching the 50% 2% from the rooftops. What is rate of financing? You said $900 mo, but previous post shows 1051 at 7%. Any kegs of dinomite?(another words, Balloons)

It is possible the seller has creamed the property. Taken all the equity, value has gone down and he may just walk away at any time. Rich

I have my expenses figure at much lower than 50% or rental income. I have monthly expenses at $543, that excludes vacancies. I know I have to include vacancies but that should not account for an aditional $657 per month. I have positive cash flow at $962 per month assuming motgage payment or $880 per month, 155000 @5.5.

The sellers mortgage is a concern. How does this work, is he trying to maybe sell under the table and not report to bank? If that is the case it sounds sketchy to me. I will keep digging into this deal but if I decide I want to purchase I will get an attorney to handle closing.

Read the sticky threads in the rental property forum about expenses. The expenses you list in your original post include only taxes, insurance, water and sewer. You acknowledge you'll have vacancies. What about maintenance, utilities (at least when its vacant), tenant damage above security deposits, lawn care/snow removal (again, at least when you have vacancies), legal fees, accounting fees, property management (which you may do yourself and earn), or evictions. Hopefully, you won't have any of those items, but if you end up with 50 units and hold them for 10 years, you will have all of them, and they're in that 50% rule of thumb. If you just have this one triplex, they may be lower some months, but could be much higher some months. You may do better than the $271 I calculate, especially if you're self managing, which I would assume would add about $240 a month. $962 is overly optimistic, though. This is a pretty good deal, in my opinion. Just don't expect to be pocketing almost a grand every month.

Sounds like you're talking about a wrap. That's where the seller's existing mortgage is wrapped with a new one. You get the deed and give the seller a deed of trust or mortgage. The existing mortgage stays in place. I suspect the seller will want you to make the payments to him on the wrap, while he (supposedly) makes payments on the old one. Don't agree to that. Make the payments on the old mortgage yourself and send him the difference. The existing bank is not notified of the change of ownership. There are risks, but for the right deal it might be an attractive option.

I won't predict where values will go in the next few years. Lending remains very tight, and there are lots of foreclosures in the pipeline. I expected an RTC type bailout of all these properties, but that hasn't happened, and I don't think it will at this point. Too much money has already been pumped into the banks. So, I would plan for continued downward pressure on prices. Given that, I want to continue to buy properties but with significant equity. That is, I would want to be into the property for under 70% of its market price. Market price means the price similar, good condition properties have traded for recently. By "be into" I mean the permanent loan and any of my own cash that's into the deal. I would include purchase price, all costs, and any rehab. I have been purchasing with hard money, and then refinancing after the property is fixed up and rented, so I have some pretty hefty money costs.

If similar properties in good condition are selling for $170K, I would want to be in under about $120K. $120K for $2400 in rent would be quite a good deal. Some folks here would consider that about the minimum deal they would expect. That is, that's the most they would pay. In my area, I'd probably go a bit higher because I do self manage, and I think (and the data supports) that the Denver market is pretty stable. I would not, however, pay $155K for a proper that would retail for $170K.

Finding really good deals is hard. I bought a property last spring, and made about a dozen offers before getting two acceptances. One ended up falling through. This spring I made twice that many offers to get one acceptance (which I bought, details on my blog) and one quasi acceptance. That was a short sale that was accepted by the seller (meaningless) but not by the bank (who really matters.)

I've been buying REOs. Its rare here to see a multi that's reasonably priced, so I've stuck with SFRs. I don't think you'll buy a REO at a 30% discount with respect to other REO sales, but I think in many areas you can buy and fix an REO at a very significant discount. Banks try to price them at retail price minus the fixup cost. But realistically, most retail buyers would rather pay the higher price, which they can finance into their mortgage than have to pay for the fixup after they buy. So REOs command a much larger discount than just the cost of the fixup.

Ok, jsut got some more infor regarding the mortgage on the property. Seller is asking 175,000 with 10% down and is offering seller financing. I found out the seller owes 65,000 on the mortgage that was taken out last year on the house. That is good news that he hasnt stripped all equity out of house. I think this would be a good deal if I could get it for 145,000, not sure if the seller will accept that offer but I will be going to see it saturday, I will keep everyone posted. Anyone have any thoughts? Thanks for the replys.

Sounds like a deal plus when the market goes back up you will have tons of equity.

I have another on in worcester I bought for too much so with this next deal I am being very careful to find something that cashflows well.

And it appears that you're about to make the same mistake AGAIN!!! Surely, you should know from your other rental that you WILL have maintenance, management, vacancies, capital expenses, damage done by tenants in excess of the security deposit, advertising, legal fees, etc, etc, etc.

My suggestion is to not buy ANYTHING until you thoroughly understand the 50% Rule.

The ONLY purpose of being in business is to MAKE MONEY! Buying property without understanding the business is a recipe for disaster and the reason that the fast majority of newbies fail!

Good Luck,

Mike

Working purely off the rent, I'd do it like this:

Rent: $2400
NOI: $1200 (50% rule)
Desired cash flow: $300 (three units)
Max payment: $900
Max loan amount / price: $150,000 (6%, 30 years)

Now given it was under contract for $180K two years ago, you would want to adjust that downward. July 2009 is the latest Case Shiller data, and it shows a 10% decline from July 2007. So, $162K would be an upper bound on the value.

What are comparable properties in good condition selling for? I'd want to have at least 30% equity over other comparable properties. That way you have enough room to sell even if the market drops a bit.

I'd suggest you look at buying this subject to the existing mortgage (provided there are no balloons and its not an ARM) and a seller second. Even at $150K, this looks like a pretty good deal. Offer him $150K in the form of taking over the existing loan payments (not assuming the loan), and a seller second of $85K, 6%, 30 years. I wouldn't start there, but somewhat lower with some room for negotiation.

Insulting a seller is not high on my list of concerns. Its certainly way below getting a good deal.