Property under contract banks don't want to finance it.
A 79 Yearl old house 3/1 remodeled 2 year ago is for sale including 3 single wide mobile homes on same lot all occupied. House rents for $650/mo and singles rent for $100/week. Owner pays water. The asking price is $109K. Banks don’t want to finance this deal because of the mobile homes in the property. I thought It would be a plus because the mobile homes are producing, but apparently for banks it’s not. There is one bank that I just applied and might finance it at 5% interest with a balloon in 5 years. I am not familiar with this kind of loans. Numbers so far look as follows.
Purchase price 109K (home inspector scheduled to inspect it)
Total monthly rent $1950
Property Taxes $57
Insurance $70?
Water $120
P. Mngt $195
Cap Ex. $200
Vacancy $100 (5%)
Maintenance/repair $200
Mortgage Pmt $580
Cash flow about $514 monthly.
So far the numbers are not looking too god. I might place a cash offer much lower since banks don't want to finance it. A number that would at least give a 15% ROI. Please I need your opinion on this deal.
Those numbers look good to me. Am I missing something? Obviously not being able to find financing is a problem, but with a 30% down payment, isn't this almost a 19% cash on cash return?
Have you checked with any Portfolio Lenders, rather than traditional banks? May be an option.
I agree with Greg Leach in that ROI you mention looks good.
But I probably would not do all cash on this deal. At 20-25% down, you could likely purchase at least 3-5 properties with that $109K, and realize a better ROI overall.
Thank you for your opinion Chris Coleman and Greg Leach. I am not sure if I am missing something either. I am concerned about the age of the house and the fact that mobile homes do not appreciate. But you're right it's about 20 % cash on cash return. I have not checked portfolio lenders yet. I definitely will check that too.
Clarifying: You're actually purchasing the mobile homes as well? The $100/week isn't just what is being charged for the homes to be parked on the property?
Yes I am purchasing the mobile homes too.
I am going to check what similar mobile homes rent in the area to see if I there is any room for rent increase.
By the way, you said you are not familiar with a loan that has a Balloon in 5 years. In simple terms, this means that after 5 years of paying the mortgage (like you would normally on a 15 or 30 year term), you will either have to pay off the remaining balance of the loan (i.e., balloon payment), or refinance it.
The risks -- First, assuming you refinance rather than pay it off, interest rates may be higher in 5 years when you go to refinance. Second, what if the value of the property actually drops? Then you may not be able to refinance, and will have to pay off the note or lose the property.
Hope this helps...
Thank you Chris Coleman. I have been analyzing my exit strategies. (1) In order for the banks to finance it, I need to subdivide the lot. Leave the house on a separate lot, so it will qualify for a conventional loan (will have to check with the county). (2) I have other assets free and clear and I can get a home equity line to pay the mortgage if I need to. If anybody can think of another exit strategy, I will appreciate it.
Portfolio lenders have beeen mentioned, I agree. My guess is that you are talking with a large, traditional bank that will likely sell the mortgage to Fannie or Freddie shortly after the deal closes. To do so, it has to fit in their neat little box of criteria. The mobile homes won't fit.
You need to find a commercial mortgage lender or a (most likely) smaller local/regional bank that holds mortgages in their own portfolio. Ask if they do that first, saves time. If they do, put on your salesman hat and show the banker the numbers. Sounds like you have other things going on too, so this will be a perrson you want to stay in touch with long term for future deals.
Don't be too surprised if they mention a 5 or 10 year adjustment, that is common in commercial real estate mortgages. There is a difference between balloon and adjustment too. An adjustment allows the lender to adjust the rate to an index at that period of time. Because rates are low now, it will likely mean a rate increase, but I don't worry a ton about that because I also buy properties with strong cash flow. Rent increases will almost certainly cover the higher payment if the rate jumps a little.
Read and understand the terms on the commitment letter from the commercial lender and ask questions if you don't.
Does the seller own this property outright? If so, have you approached them about financing the property? If the mobile homes on the property are stopping you from getting financing, they will also stop any other potential buyers (both past and future) from securing financing.
#2 Mobile Home Park Investing Contributor
- San Antonio, TX
If you can get seller financing as @Bob Derwin mentioned or look into private lenders, it may be another option. Good luck!
Hi Bod Derwin. I don't know if the seller owns it outright. I am buying it through an agent, and he said they want to sell because they are getting divorced. Do agents still get their commission if the seller accepts to do owner financing?
Yes. You may have to put some of your own cash into the deal to facilitate closing. Also, since a divorce is involved, you may need to help one spouse buy out the other.
As stated above, this property will fail underwriting. Some commercial lenders will balk too, unless you put in a substantial amount. Buy cash, then split the MHP from the SFR and create value that way. Refi the SFR as an independent property, which should get through to close.
I would look at small local banks as your primary option. Large banks have very traditional lending criteria which is what you're up against. Assuming there is not some sort of title or other inherent issue with the property or the homes - this should be something you could get a loan on if you visit 3 to 5 local banks.
If you're still getting nowhere then there is a different underlying issue.
See if you can buy it Subject-to if the seller has a mortgage.
Then in a year or so sub divide the lots and refinance or sell one or the other.
Moving mobile homes are expensive and this impacts the value of the house. Hope you are not paying a lot for the mobile homes (maybe 3-5k each).
Good News. Two small local banks are interested in financing it.
Bank 1: 5.5% interest fixed for 3 years amortized in 20 years.
Bank 2: 5% interest fixed with a balloon in 5 years.
What do you guys think is the best option? If I go with bank 1 I'll get $458 cash flow during the first 3 years and then it will decrease depending on the variable interest. With a 7% interest I will be getting $387 in cash flow. Roughly $100 per unit.
If I go with bank 2, I will be getting $481 for the first 5 year. Then I will have to refinance it at whatever the interest is in the market.
I am not sure what would be the best option. What questions do I need to be asking? Should I try to negotiate a lower rate? Any ideas will be greatly appreciated.
I think the rate is where it needs to be. I would ask bank 2 if there is an option to renew at the 5th year and simply adjust the interest rate to market at that time. Find out what determines whether they will or won't. Also, is the amortization the same between the 2?
Without knowing enough, I like option 2 better for 2 reasons - rate is fixed for 5 years is the strongest reason, lower rate is the 2nd strongest reason.
Interest rates are going up over the next few years, very little doubt about that. So fixing the rate longer is better, in my opinion.
Also, assuming the amortization is the same, locking in a fixed rate for the longer term keeps you fixed long enough so that you start making headway on the principal balance. If you look at an amortization, the first few years are really heavy in interest and really light in principal paydown. By fixing for a longer period, you get further into the amortization, which puts you in a better equity position in case you have to/want to refinance for whatever reason. Better equity position increases the likelihood of getting approved for the refi with little or no out of pocket money to close.
Option 1 isn't bad, but option 2 looks better at first glance. Keep both banks talking, though, let each know you have another bank interested and see if they are willing to improve their terms (longer fixed rate primarily).
Personally, I like mostly 15 year amortization, but I have a few at 20. You sacrifice cash flow, but pay down the principal quicker. I have cashed out of a few mortgages on refi's already, giving me capital to invest into more (and larger) properties.
This is all good advice @Abad Marroquin. The posters have hit a few angles and very well for you to consider.
Thank you everyone for your help. I just wanted to give you guys an update.
Home inspector found some things that needed repair. Roof and water heater needed to be replaced, foundation will have to be leveled (according to foundation specialist), and mobile homes need some repairs such as replacing carpet, fixing a leaking, and replacing a couple of sheet rock pannels. With all this, we were able to negotiate the price down to $92k and with closing cousts it shoulb e around $95k (me paying 100%. We just agreed on this a few minutes ago. Hopefully everything goes well with the bank, and we should be closing in the next 3 weeks.