Do I risk my savings for an owner financed duplex?

30 Replies

Here’s the underlying question.

Do I spend my living expenses to pay for this opportunity?

I’m on the fence with this for several reasons and since this would be my first investment property I’m trying to get as much feed back as possible. I’ll be brief

Here’s the deal:

Location: Philadelphia, PA

Style: Duplex

Ask: $275,000

Unit 1: 1bd/1ba

Unit 2: 2bd/1ba

Gross Monthly Rent: $2,200

Sqft: 1,543

Taxes/yr: 3,000

These are his terms:

$10,000 down payment

Seller (him) pays closing costs

5% interest

He (the trust the property is in) holds the note.

The property is in a flood zone and the utilities are separated. The property is also zoned CMX2 and can have the first floor converted into commercial space.

Background:

I’m a licensed realtor in PA and helped introduce the owner to a buyer for another property of his. Since this was just a favor (I was not paid) he told me he would be willing to owner finance his duplex rather than traditional sale.

His goal is to liquidate his assets because he dislikes the mayor, city, Etc.

He has also provided a full inspection report and an Apprasial that provides a valuation of $290,000

I’ve currently got the $10,000 although that would be all but close to my entire savings that I’ve put aside for my living expenses. Since no paychecks are guaranteed I’ve decided I needed “x” months saved.

My question here is if this is a no-brainer or am I missing something. Is it worth to have the cash flow now or should I wait until I have more saved ?

Hey @Joshua Pagan , welcome to BiggerPockets!

What you've described so far looks interesting, but you're missing the punchline: What does this deal do for you? What's the return on your investment? How much actual cash flow do you expect to generate monthly? What are your assumptions for expenses, like repairs, management, vacancy, capex, etc.?

Without the financial analysis, there's no way you (or anyone) can determine whether this is a good decision.

@Joshua Pagan I would not do this deal for several reasons. Some you mentioned and others you didn’t.

1). As a realtor your paychecks are likely unstable. If I was making a call like this, it’s different as I’m a W2 employee, I make the same year round unless I’m fired. (Pros and cons to this, in this case it’s a pro).

2). I don’t think this is a very good deal, unless rents are severely under market. You’re paying 275k for 2200 in rent. This likely won’t cash flow as you’re going to have a huge debt payment

3). You’re getting it for a whopping 5 percent under market value. That’s okay but not a great deal..

4). Why didn’t you get paid on the last sale between this seller and your buyer? Do you work for free? I’m scratching my head at that one.

@Joshua Pagan and: 5). Forgot it’s in a flood zone, which means flood insurance (if you’re smart) and that’s expensive. Flood zones alone are usually a no-go for me.

Add it all up and unless you can get it cheaper or rents can go way up (1400-1500 a side), I walk away from this.

@Caleb Heimsoth fair enough. Seller was looking to show me another property he had and wanted to FSBO. Asked if I could bring a buyer. We happened to cross-paths with a friend of mine who I introduced to the seller.

Turns out she tried to purchase the house next door a year previous and was outbid. They ended up talking and she bought his property days later.

I had no involvement with the sale other than the introduction. He offered me cash and I refused because that’s not how I do business.

This duplex is his other property he was looking to FABO. This was his way of making it up to me. I wasn't interested in investing at this point of my career since I'm an active agent though I must admit it peaked my interest.

@Caleb Heimsoth fair enough. My estimated monthly expense would be around 1600 in an appreciating market on a commercial corridor with gross income of 2200. Yes this has the option to become a storefront by right.

Floods don’t happen often in this area and if they do let’s call it one out of fifteen years. Though I do understand the reasoning to shy away from the opportunity at first glance of flood zone.

Originally posted by @Joshua Pagan :

@Caleb Heimsoth fair enough. My estimated monthly expense would be around 1600 in an appreciating market on a commercial corridor with gross income of 2200. Yes this has the option to become a storefront by right.

Floods don’t happen often in this area and if they do let’s call it one out of fifteen years. Though I do understand the reasoning to shy away from the opportunity at first glance of flood zone.

Everyone is different, I've done deals others probably wouldn't have and others do deals I'd never do. Doesn't mean it's wrong. I know nothing about PA real estate.

Just going off the information provided I think it spreads you too thin financially.  That is the main “issue” for me.  Whether or not it’s a good deal Is a totally separate conversation  

@Joshua Pagan

You’re a Philly realtor so you know which neighborhoods are good and on their way up and which aren’t.

If this is in a good spot then I would seriously consider it. I would need to be very confident in my ability to lease it easily and push rents.

If the rent comps don’t support it then I would need to adjust price accordingly or walk. I would also talk to a few commercial agents for their opinions on the commercial space.

$275k for a 1/1 2/1? Seems like a ton of money. I would not do this deal based off those numbers not to mention the flood zone.

@Joshua Pagan I wouldn't because of your income stream. There is too much chance of income disruption in the near future before you would be able to get a nest egg back under you. If the deal was better then it would be worth the risk but it is too thin for me to want to risk it

@Joshua Pagan

I don’t see how this would cash flow without about 40% down payment.

PITI, flood insurance, utilities?, reserves for capex, vacancy, maintenance, management. Those numbers wouldn't even have me running the full numbers.

As Caleb alluded to , there’s a long list of reasons that this deal doesn’t make sense . The big thing for me I can see right now by your numbers that you’ll not cashflow which is going to break you .do not do this deal.. it sucks

@Joshua Pagan I'm paying $1300+ for flood insurance and the only option is through FEMA.

On top of that I usually like to apply the 1% rule and this just missed it. So for me it will be a no.

And on top of that you’re digging into your safety net. No again