Creative finance with 50k equity and $400 a month cash flow Alabama

9 Replies

First good creative finance deal in negotiation! Seller needs some equity to pay medical bills. I don't have all the capital and now have to find a $ partner. 

Comps and lender appraisal puts property at 218k(1 month ago) Alabama market doesn't shift, slow and steady. 

Seller put 30k into it when he bought it in 2013 for 199k. Still in great condition with tenants in place. 

Mortgage fixed at 3.375% and they payed the not down to 120k. 

Seller will keep financing in place for 45k cash. 

Tenant in place paying 1250 a month, they cover utilities. Mortgage payment is 837 a month. Lease ends in October and tenant will be moving out. 

50k in equity on the table and cash flowing at $400 a month. 

Downsides:

house built in 1900 and on 2 acres in the "country". Just on the outskirts of town. Plenty of homes around, but everything gets a bit spread out. Right off the old highway. 5 bed/3 bath, 3 fireplaces, big parking lot. storage shed. 

My first plan is to find a money partner and have him put up the funds. Split cashflow and resale 50/50. I have my license so It can be listed in the MLS and only pay the 3% plus closing. I am a buy and hold investor, so I would prefer to sit on it. Not sure on the vacancy factor due to its location.

Another Idea would be to take a hard money loan for the 45k. I have a lender that will do 12% and 4 points, problem is I don't have a track record to bring him. The tenants could possible move out early, I know where they want to move to and are committed to moving. 

Any other Thoughts and Ideas?? What Else am I missing? Thanks all!! 

Hi Zachary,

I do have some thoughts, but I wanted to clarify three quick items first:

  • When you say "Seller put 30k into it," do you mean as a down payment, or as repair expenses? I ask because...
  • If they did put $30K down, are you certain about their current loan balance? Unless they made a ton of additional principal payments, it's hard to see how they could go from $169K to $120K in two years. Lastly...
  • Does the $837 monthly loan payment include escrow for taxes and insurance?

I probably am missing some key pieces of info, so before going too far, I wanted to make sure I've got the facts straight.

Thanks!

    @Mitch Messer  

    The seller bought it for 199k and did some upgrades to the home. Fix up everything he could find wrong with it. I walked the house and everything looked very clean. Thats where he says he put 30k into it. 

    He has confirmed to me that he did pay down the loan to 120k. It was supposed to part of their retirement until health issues came up. I have asked for the statement from his lender to verify all and will have it shortly. He has been quick to respond with pics, appraisal, and lease so far. 

    @Zachary Phelan  

    Since you're planning to purchase subject to (Sub2) the existing financing, I'd only urge you to carefully review their mortgage statement ASAP. The quality and nature of that underlying loan is the key to this deal.

    It still doesn't sound like you're getting the whole story. If they've really got nearly $100K in equity, I wonder why they wouldn't just get a home equity line to cover the medical bills?

    You need to know about all the liens on the property, so you're definitely going to want to have title pulled. We've had Sub2 deals get days away from closing only to discover a second mortgage the seller "forgot" to mention.

    That said, if everything is as it seems, this sounds like a great deal: You'd be buying a home appraised at $218 for $165K ($45K cash + $120K financing)!

    Good luck and let us know how it turns out!

    Given that all the numbers are right a good price is 70% of the market value.  As a buy and hold the monthly rent is .73% of the price.  Be sure that this is a good deal.

    Bill

    Originally posted by @Zachary Phelan :

    Tenant in place paying 1250 a month, they cover utilities. Mortgage payment is 837 a month. Lease ends in October and tenant will be moving out. 

    50k in equity on the table and cash flowing at $400 a month. 

    ...

    Downsides:

    Any other Thoughts and Ideas?? What Else am I missing? Thanks all!! 

     I do not see how the property is cash-flowing $400/mth, your debt service alone is 67% of the rent.   If you deduct the debt service, you have $413/mth ... are you telling me property taxes, water and sewer (if they cannot be put in the tenants hands), etc are only $13/mth ($156/year)?

    @Mitch Messer  

    @Bill Jacobsen  

    @Roy N.  

    Thank you all for your input!

    Mitch, they tried to refi and didnt even have the cash to do that... I thought about the line of credit as well. I will dig in when we have our next conversation. I would get this over to title ASAP and find out all info. 

    Bill that is why I am reaching out to the community! Make sure this is a good deal!

    Roy, I am waiting for their mortgage statement still, but I believe the $837 is including taxes and insurance. The tenants are covering all utilities. 

    @Mitch Messer  I got the mortgage statement back from them and it all checks out. Total payment is 838.79 including interest and escrow. Outstanding principle balance is 118k. 

    Now how would you find a $ partner for this deal? I need someone to put up the 45k and I will do all the required work. We can either keep it as a rental or sell it and cash out. Refi would be another option, and keep holding. Lastly I could take an assignment fee for the contract and let the buyer do as he wishes. 

    @Zachary Phelan Not to beat this drum again, but now that you know the details of this one mortgage, you still need to ensure this is the only debt on the property. Don't skip the title work. Otherwise, you could be one "surprise 2nd" or "unexpected tax lien" away from total disaster. Because once these folks get their $45K, it's theirs and they aren't giving it back...

    That said, a private lender or JV partner would be best, since I'm not sure any hard money lenders would lend behind a $120K first. Since the tenant isn't out until October, the fastest exit strategy is a sale to an investor. And that means selling at a wholesale price.

    If your comps accurately put FMV at $218K, could you dump it right now for $199K cash? I mean no waiting, no MLS, just find a local investor and give them a great price in exchange for a speedy sale. If so, you and your money partner split the $34K ($199K MINUS $120K loan payoff MINUS $45K payback to money partner), less transaction costs. That's a pretty decent deal!

    And, yes, you could instead just hold it until October and try to sell retail for more money, but there are so many additional risks with that approach. I'm a firm believer that "a quick nickel is better than a slow dime!"

    Good luck!

    The biggest issue that I see here is that you called it $400 cashflow, when you don't have $400 cashflow, but $400 above mortgage. When you calculate for Vacancies, Repairs, and Capital Expenses, 5%, 5%, and 10% (of rental expenses), you will not see that much cash flow. 

    One month without rent will put you back at least $900 for mortgage and utilities. If you need to repair the roof, you will want to have $6000 for that, but instead of it coming out of your pocket, you want it coming out of the money from the rental itself.

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