Is this a good seller financing deal?

Question

Good Morning BP,

I have a seller financing deal in place on a 6 plex property that I'd like your opinion on. Here are the terms:

-washer/dryer hookup

- 1 Bedroom/1 Bathroom

- Roughly 550 Sq Ft.

Purchase Price- 290,000.00$

Yearly Rent Roll- 42,840.00$

Yearly Expenses-

Trash-1200.00$

Tenant water- 2800.00$

Taxes- 4700.00$

Insurance- 2000.00$

Seller Financing terms-

10% Downpayment

3 year balloon

25 year amortization

5 % interest rate

What does everyone thing? Should I try and re structure this? Or do you think this is a decent deal? Thanks!!

Marcus Auerbach · Answer

Make sure the value is right. If someone is offering seller financing it is often to compensate for something else.

So, what is the catch? Ugly house, bad location, over value?

Darius Ogloza · Answer

I do not know your area well but a 1/1 property runs the risk of operating much like a long-stay hotel in some respects.  Assume a higher management burden to be safe.

Andrew Flora · Answer

I pay a premium when I can get seller financing so I think this is a fair deal based solely on the numbers given.  I would certainly get a thorough inspection done and a quote on the roof so you know what you're dealing with there.

I would also try to negotiate the price down a bit, do the math to figure up the sellers additional revenue from interest as your negotiation leverage.

I also always ask for delayed financing for 90-120 days to let you build a reserve account and get ahead of the ball.

Happy hunting!

Will Gaston · Answer

My experience is it's valuable to have another option other than the full balloon payment.

For example, you could agree to a 3 year ballon/5%/25 year AM but ask for 12 month extension at higher interest rate advantageous to him (6%-9% maybe?) but will provide you some flexibility if needed.

I personally wished I had asked for this on a deal I did in 2019. My balloon is coming up at the end of 2020 and I wished I had negotiated a 12-24 month extension options on the front end.

Scott Swanson · Answer

Stephen,

How much are your monthly payments? Based on the numbers you gave, the cash on cash return is only 7.22%. We don't offer investors properties in Illinois unless it's a minimum of 10%. Of course it's your decision, but the only reason it might be worth purchasing, in my opinion, is if the appreciation rate is high. Remember too, you're going to have a "common" area electric bill and also grounds maintenance costs as well.

Stephen Jones · Answer

@Steven Wilson

Great advice thank you!

@Marcus Auerbach

I would be paying a little bit more than I would like to on the property. It's a good location, all brick building, the only big expense I see is that it will need a new roof in the next few years.

With all this being said, I do own 28 units within a block of the 6 units, so that is what also has me very intrigued. Don't you think that is a huge plus?

Steven Foster Wilson · Answer

@Marcus Auerbach is right. You want to be sure that you can add some value and refinance at a higher price 3 years down the line.

Also you need to look at worst case scenarios, what if another covid like scene hit your area, would you still be able to refinance? Pay off $300k

Also I would start having those conversations about refinancing with local lenders today, so you will b better prepared when the time comes.

Darius Ogloza · Answer

Will the building be re-assessed for tax purposes at sale?  I understand that property taxes in Illinois are a lot higher than you quote here (but that just may be Cook and Lake counties).   Sounds like a cash machine if you could keep it occupied and collect rent.  1 bed/1 bath tends to attract some transient types so that may prove an issue too.  Sounds like you found a 10% cap rate property.  Good luck.

Stephen Jones · Answer

@Steven Wilson

My first thought would be just to re finance after that 3 year balloon. For a one bedroom, that 595.00$ price is pretty reasonable, in my area (right outside the St. Louis area across the river in Illinois)

Marcus Auerbach · Answer

I think you have to evaluate the components independently: the deal, the price, the financing - if you can get a lower price by using bank funding and your rates are also better using bank funding, thats two reasons not to do seller financing.

The only reason I would pay more is to get a closing cost credit to preserve cash.

The fact that you know there are is good, but not a major factor,  I'd leave that aside for the consideration of the deal.

Is this a good seller financing deal?

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