How to construct this deal..Any thoughts

Question

Hey People,

I met this guy that wants to get rid of his property (for what he owes) and i'm a little lost on how to structure this deal. I just bought a multi (2) family myself last year July so i'm very cash poor but i would like to take over this property.

The seller:

Seller owes 226k

Market value: Between 275K- 300k

Mortgage 6% (Conventional loan)

Tax: 14k, Insurance 1,5K

The seller is current with all his bills.

The rents are below market value and will cover mortgage, tax and insurance.

The seller is open to any creative deal.

How can i structure this deal so i don't have to put cash down and eventually refi the mortgage to get a better rate..

Thanks!

Alex

Dennis Shinn · Answer

Yes, but only because you mentioned that you are cash poor.  I am personally not comfortable thinking about taking on a lot of debt without having some sort of cash laid aside for carrying the mortgage (unless tenants are already in place that will carry that debt service).  And, when you go to refinance, the bank may offer you 70% loan-to-value.  So, a 300k value will give you a loan of 221k which will neither allow you to turn any of that equity into cash nor will it cover the 226k left on the original loan.  (It may be wise to go ahead and get an appraiser to value it to see how close these numbers are though.  If they think that its worth 400k, then that changes everything.)

Lets say it will take 3 months to rent or 6 months to sell.

You pay the $2000-2500/month principle, interest, taxes, and insurance

After 3 months you are $7500 down, but you now have a tenant and you may be cash flowing lets say $500/month.  If they stay and pay for at least 15 months you make your cash back and they pay down a few thousand of debt on the house, lets say $5000. You go ahead and refinance and the new bank pays the 221k to the old bank and now the loan is in your name.  (Good thing about that is you may be able to get an interest only loan which will make times that you don't have a tenant a lot easier on the pocket).

This same tenant can possibly be a tenant buyer if you make a long-term lease-option instead of a regular lease.  You can have them put down a $5000 option fee which helps to reimburse you for your mortgage payments.  If your payments are $2500/month, then you can make terms (price and interest rates) where the buyer pays you $3000/month.

If it takes 6 months to sell, then you will be $15000 down.  You sell for 276k, you walk away with 35k.  You sell for 301k, you walk away with 60k.

With all this said, I am assuming its a single family residence without a tenant in need of no repairs or make ready costs whatsoever.

Bottom line, the lack of cash reserves means that you have to have a job to finance your vacancies.  Selling the house will enable you to have a substantial amount of reserves as a sort of solid footing to finance the vacancies for deals just like this one (no job required).

Selling with the lease-option or selling outright seems to be the way to go.

Alex Langerhorst · Answer

Thanks for the input Dennis!

It turns out that because i purchased a multi family on a FHA loan last year this property will be hard to finance with a traditional mortgage since i'm almost maxed out (Income to debt ratio). I had another meeting with the seller and i also have some more specific numbers. He owes 224k on the property and the property was last appraised in 2012 for 315k (the market was a lot lower back then). There are tenants in place (and they have been there over over 20 years and the rents are below market value. There are also 3 garages beneath the units that could be rented out as well to get additional income.

His monthly bills are (mortgage, insurance, water and interest) are $2590,-

He is paying for all utilities which i think should be decided amongst the tenants.

I see what you are saying about having cash and keep it for the long haul.. Part of me wants to secure the property and sell it, i think this would be a easy sell. The owner also offered 20k as a note.. Anyway, a lot of things to consider..

Buy and Sell for profit or try to get financing and keep it for the long haul..

Alex Langerhorst · Answer

Dennis,

Thanks for your reply. So you suggest to sell the property?

Dennis Shinn · Answer

It sounds like you can leave the existing financing in place.  Get the guy to transfer the deed over to you, at which point you begin to make the monthly payments to his lender.  It doesn't look like you will be able to refinance in the near future so the scenario may look like this:  (Lose-Lose, his name is on a loan for a property that he doesn't have the deed to and you are morally and financially responsible for a property that may not be cash flowing very well).

But, if you chose not to hold the property in your portfolio and to put it on the market and sell it for market value the scenario may look like this:  (Win-Win, he no longer has to deal with a property that he doesn't want and his debt will be erased sooner rather than later and you convert that 50-75k of equity into cash that you can use for your future deals).  The downside is that you will no longer be in the cash poor club of which I am currently the president.

Once you have that 50-75k nest egg, then I can see holding deals like this in your portfolio because you will be able to weather the storms which will allow you as well as the seller to sleep a little easier.

But, it sounds like a great opportunity.  I hope this helps and I hope everything goes well.