Seller financing my second deal
So I listened to a podcast today and one if the nuggets I got from it was post what you're doing even while it's going on. Hence I'm putting it out there. Even though this is in the success stories for him it does not mean I'm not open to suggestions. Also I'll warn you that you got to read the whole thing to let the story reveal itself.
We we are in the middle of renovating a duplex, but that's not stopping us from looking at other deals. We found a four Plex on the MLS that was in need of a full renovation. The property is been listed for over a year and a half . The seller attempted to list it then draw the place then upped the price then drop the price again then up the price over the course of 2013/14. Which turned out to be invaluable information to my wife and I.
We contacted a friend who is an agent to represent us in the transaction. After seeing it and meeting with a few contractors on 2 separate occasions. We decided to put in an offer! I before I had met with the contractors I was doing some estimating of the repairs on my own listening to podcasts doing form searches and going off the knowledge that I already had. J Scott wrote an article on how to estimate rehab cost and how to determine the max purchase price that I found helpful. I also read a forum discussion on how to value a four Plex that I thought was very helpful in determining what I would offer on the place. Ultimately I use the method suggested in the forum of valuing it similar to a commercial property because there are many fourplexes that have sold recently in the neighborhood.
The formula is : property value = NOI/cap rate
Because The building is completely vacant and needs a rehab I don't know what the expenses are or will be except the taxes and I can estimate insurance but I just use the 50% rule to come away with my NOI .
Area rentals for a two bedroom one bathroom range anywhere from 600 to 1200. It's one of those neighborhoods with diverse housing and a really nice neighborhood on one side and a transitioning neighborhood on the other. This house is right on the edge of the really nice neighborhood. The downside is if it were going to be a four Plex there's really no room for parking above of four small cars. So my wife and I agreed that we couldn't go off of an expected rental income of $900 per unit. Also I use loopnet to see if what I could expect for cap rate. It seems 7% is average.
$900 x 4 units = $3600 (monthly gross income )
$3600/ 2 (50% rule) = $1800 (net monthly)
$1800 x 12 (months) = $21,600
$21,600 / .07 (7% cap rate) =$ 308,571
So after I was comfortable with the valuation of 308 I estimated the repairs to be at least $20 a square foot plus all the mechanical and electrical etc. the building is 3800 sq.ft. So I thought the the repairs would be in the hundred thousand dollar range.
The seller was asking $160,000. So I thought with repairs at 100,000 being all in at 260,000 I might still be good with a down payment. Then I thought but this should not treat this like a flip and use the 70% rule just in case I want to refinance and be below the 70% LTV even with the down payment.
308 x .7 = 215
So that lead me to lowering my purchase price accordingly $115,000 is the if I'm max being conservative.
A couple days later I met with a couple contractors to solidify the estimated repair numbers. I got it all in around $30-$35 a square foot or $25-30,000 per unit. So that's about $120,000 .
I already knew I wouldn't build to get a conventional mortgage on it because of the condition it was in. My options are cash or seller finance. So we made him two offers :
1.$85,000 in cash or
2. $115,000 seller financing over 30 yrs at 7% int. balloon payment at 10yrs. No payments until construction was completed or in 6 months which ever came first. 10% dwn pyt
He countered our offer at $125,000 at 4% $65,000 dwn with the same terms. Or $115,000 cash.
We then countered back with $125,000 pp same terms $50,000 dwn.
We are waiting to hear from the seller.