We may have a great deal on the line but we need help analyzing.
Hello BP community. My wife and I are new to investing and we have what we think may be a great seller financing deal on our hands. It is a friend of the family and it all seems great but since we are new to this and have only purchased smaller properties through traditional financing we are nervous. We would love any feedback/help anyone can offer in analyzing this deal, below are the details:
Seller financing with a 5-year balloon payment
Price the family friend is listing the home: $495,000
Downpayment she is asking for: $45,000
Interest rate during the next 5 years: 3%
Monthly installment to the family friend: the balloon payment calculator is spitting out something like 2k a month
Renovations: We think we will need at least $100,000 to make the house livable (its a complete gut but good bones in a great neighborhood)
Current comps: somewhere between $600k - $630k (we've seen as high as $700k for something completely redone which this house would be when we finish)
The downpayment and the interest rate seem like a no-brainer but what makes us the most nervous is:
Will we be able to borrow the 100k for renovation and if so what will the monthly payment on something like that be? I know you cant answer that because of the variables but we are afraid the loan payment plus the 2k to the seller monthly plus taxes and insurance will be too much for us.
What happens if we can't get traditional financing when the balloon payment is due. We feel hopeful that interest rates will be lower by then, we feel confident that the value of the property (especially after all the reno) will be more than what we owe (including the reno loan) but what happens if for some reason we simply can't get financed? Do we lose all of our investment and hard work?
As you can see, we are struggling with this decision. Does anyone have any experience with this type of financing and can shed some light on this? We would really appreciate any little bit of info or even a point in the right direction. Thank you for reading and thanks in advance for any help!
Rene and Erica
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Hi Rene. Not to be a downer. IMO there are too many risks there even with the low interest and low downpayment in a family-friend type of deal. The market is a bit wobbly at the moment. A 100k construction loan, you're probably looking at around 10% interest or more. My advice to you is don't take this risk unless you are financially able to deal with the consequences if the market goes bad. Assuming you have good credit and stable documented income, you should be able to refi out of it, but there are still a lot of variables to contend with for you as a new investor. I am a seasoned investor but I am generally risk averse in a situation like this.
Thanks for your reply Ray, it helps to know that our doubts are well founded. We also thought about 10% on the reno loan =/. Not a downer at all, we have to be disciplined on how we think as investors. Thanks for the feedback.
Do it, Do it
But partner up with some one with rehab-BRRR method experience. Split the risk go in to a new business with the know-how.
As Ray mentioned market is Wobbly for the next 6 months banks are not lending in construction loans....They now what is coming.
I just say will you open your Mustang Shelby to fix the engine not being a top mechanic... You only learn the strategy in books and seminars. Then people tell you what they think from their own personal opinion and experience ...could be very good or very very wrong.
Go to local investors clubs and find out who is doing deals and how you can use their team.
My personal opinion on Paper do it, numbers are great. Still need to see the house, location permits open? violations?
Good Luck
Thanks Luis. I also agree with everything you are saying. You and Ray are a perfect representation of the two sides of my brain. To Ray's point, if things went sideways we could technically afford to cover the consequences. We would not be happy, it wouldn't be pretty but we can cover it. To your point my wife and I spoke further and now we are discussing the possibility of borrowing (possibly even just pulling out of the old bank account) much less than 100k and getting the house to the bare acceptable living standards and moving in. That way we are not borrowing as much and can continue to do the work while living there. It will uncomfortable but we think it will be a small sacrifice for a greater outcome. We also spoke about the fact that we should just schedule inspections, contractor, etc to go in and give us accurate breakdowns of what NEEDS to be done and what can wait. We may be out a couple hundred dollars but well worth it in our opinion. Maybe its good news and we wont need to spend as much as we think, maybe its bad news and it's worse than we think in which case we can back out. We don't think it hurts to find out. Also to your point we have a resource in a good friend who is a bit more seasoned with reno and he has been saying to do it from day one, that he will help us along the way. We also have a good friend/real estate lawyer who also says do it and he will help us structure the paperwork so we are protected to a certain degree (not sure what that means since we haven't gotten that far). I am also going to take your advice and look up some local investor clubs. Thanks so much for your response, time and insight. We really appreciate it. Whatever we decide I will post here so if we go through with it you and Ray can cross your fingers and toes for us =).
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I'm definitely curious on which path you will take. Just make to minimize your risks if you plan to go through with it. There are always risks, even in an excellent buyers' market. As Luis said, make sure you do your homework in financials, legalities and in the field. Check on the nitty gritty details of the house for things like settlement issues and plumbing issues that may not be easy/cheap to fix.
If it were easy, everyone could become a successful investor! lol. So just do your homework and make sure your minimize your risks to ensure success!
Thanks Ray, foundation/settlement issues are definitely on the top of the list as well as plumbing. I am doing my best to stay neutral, not get excited and not get closed off either. I think once we start having professionals come through and look at the house (as well as us looking into the legalities) the scale will start to tilt more one way or the other. I am as curious as you are lol. Send us some of that successful investor energy and I will keep this topic updated as we go along the steps! Thanks again!
This a sticky situation but can have a great outcome. There are other options out there that offer renovation funding along with the purchase of the home. We have assisted clients with purchase of the home and 100% of the renovation costs. This helps ease their mind to have one overall loan instead of two and the worry of financing later on.
I love that you are being mindful of rolling into permanent financing and making it a hold. Is there a way you could flip it instead? If handled with wisdom, and if comps are selling relatively quickly, there are many unsecured trade lines you can open up, many at 0% interest. It is playing with fire, but it helps make tight budgets work. Also, the $100k renovation estimate could be reduced with 2nd & 3rd bids or more DIY to control costs.
All in all, sounds like a decent deal, just a personal finance issue on some level, which is understandable starting out. I just hope to share some other possibilities and mindsets from what I might do if I was in that situation.
Hello Khemraj and Nate, thank you both for your feedback! Khemraj, it's still early on but if we get to that point I will definitely keep your services in mind. Nate, thank you also. I would appreciate and love to hear any possibilities or strategies you would like to share. I am all ears =). Thanks!
Quote from @Luis Maqueira:
Do it, Do it
But partner up with some one with rehab-BRRR method experience. Split the risk go in to a new business with the know-how.
As Ray mentioned market is Wobbly for the next 6 months banks are not lending in construction loans....They now what is coming.
I just say will you open your Mustang Shelby to fix the engine not being a top mechanic... You only learn the strategy in books and seminars. Then people tell you what they think from their own personal opinion and experience ...could be very good or very very wrong.
Go to local investors clubs and find out who is doing deals and how you can use their team.
My personal opinion on Paper do it, numbers are great. Still need to see the house, location permits open? violations?
Good Luck
Hi Luis, it was so great speaking with you today on the phone. I cannot tell you how grateful I am that you took the time to help guide me through this opportunity. From what pitfalls to avoid to even sharing your personal remodeling contacts, it truly means the world to my family and myself. I am so happy that we were able to connect. Thanks again for your time and wisdom, we truly appreciate it and I look forward to working together on an investment in the future!
Do it. The art of our business is solving problems and if you have the will, there is a way. Good luck.
Most of my deals are with sellers holding paper, and those are usually the best.
Quote from @Wesley N.:
Most of my deals are with sellers holding paper, and those are usually the best.
Hi Wesley, we started the process and are crossing our fingers, toes and eyes. We're waiting on the seller to speak with her lawyer and hoping he/she doesn't talk her out of the deal or convince her to change the terms. I will keep this topic updated and thanks for the well wishes!
Great. Lawyers kill deals. Listen to their advice but remember listen doesn't mean follow.
If they knew how to find deals they probably wouldn't be selling their time.