Deep discount vs Buying on terms: Analyze deal

5 Replies

Hey BP!!

The question that I have is, how should I analyze a deal that is slightly below market value, but I can get the property via seller financing with very little down? Here is a quick look at the numbers:

$1,100 for all carrying costs (PITI)

$1200 - $1250 monthly rent. 

Sales price will be slightly below market value and I would only need to put $2k down. Home is in great condition ( less than 10 years old) and in high demand area. 

Although this deal does not offer much monthly cash flow, if any after capex and other costs factored in, due to the fact I can acquire on terms, is this a deal to pursue??

There are lots of reasons to buy a negative cash flow property... you haven't really told us if this meets any of them.

Are you buying instant equity (i.e. below Fair Market Value)?

Are you buying in an area where the home will appreciate?

Are you buying in an area where rents are likely to rise quickly?

Frankly, I buy on today's numbers as my crystal ball is always hazy and I'm not much of a gambler.  That said, I would buy a break even property if I could get it for no money down even if it wasn't at a discount.

What I would not do though is buy a negative cash flow property... even for free.  That is what this is... unless you can answer 1 of the 3 questions above with a big Capital YES, sounds like a loser.

@Michael Baradell - I think it all depends on your real estate goals, primary there are two cash flow and appreciation.

For me low cash flow is understandable given I am confident of the appreciation values as you said it's in high demand area. So if the plan to get in and get out may be at some point in the future then I think it's a good investment to get in. Again many investors here on BP would not say appreciation is a good idea but some markets are saturated and we do not always have low prices properties to get in.

Also I would not completely neglect numbers I would atleast target 7-10% of cash on cash returns or 7-10% of cap rate. Hope that helps !!

Nilesh

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Hey @Michael Baradell  

I, personally would do this deal.  Based on the numbers I'm guessing its valued around 150k?  So you're looking at anywhere from .8% to 1% in monthly rental income. 

If it's in a high demand area, you've got appreciation working in your favor.  You could do a lease option and recoup your initial down and then some.  There are plenty of great people out there with cash who simply cannot get a loan.  Get 10% down... or more, do a 2 year lease option and factor some appreciation into the sales price.  Since it's a newer home your capex should be low.  Figure out what features (i.e washer/dryer, nicer appliances) it needs to be a 1500 a month rental vs a 1200 month rental and you've got 20% for capex.  You could be cash flow neutral with cash in your pocket.

Would love to hear what you decide to do!

Originally posted by @Michael Baradell :

Hey BP!!

The question that I have is, how should I analyze a deal that is slightly below market value, but I can get the property via seller financing with very little down? Here is a quick look at the numbers:

$1,100 for all carrying costs (PITI)

$1200 - $1250 monthly rent. 

Sales price will be slightly below market value and I would only need to put $2k down. Home is in great condition ( less than 10 years old) and in high demand area. 

Although this deal does not offer much monthly cash flow, if any after capex and other costs factored in, due to the fact I can acquire on terms, is this a deal to pursue??

Michael what is the existing financing? Payoff amount, payment PITI payment, ARM or fixed, current note?

Thanks everyone!! Great info. To answer a few questions, this specific area, although it is in high demand due to schools, I would not bank on appreciation. The current owners are renting out the property now and are at an age where they want to get rid of it. They purchased it in 2006 when the market was through the roof in this area due to Hurricane Katrina. It is on high ground with no chance of flooding, which put a premium on this area after the storm. The originally owner purchased the property in 2005 ( new construction) one month before the hurricane for $149k and ended up selling to the current owners 9 months later for $189k. Current values puts the home back around the $150k range. Some comps are in the high $160s and low $170s but have features that warrant higher price, I.e garage, and more Square footage. The sellers owe around the $130k range but are not hard pressed to sell. My goal is to acquire 10 properties in the next three years but I would feel much more comfortable with higher cash flow. I am on the fence because I know buying on certain terms offers its own value as well. Determining that value is my struggle.