Advice on negociating land contract

[Dustin B.]

I am trying to obtain my second rental property and was wanting to do so through a land contract to avoid having to put 20% down. The property is a fully renovated sfh and they are asking 125000. The property is fsbo and they own it free and clear. I would be able to get 1200 a month for rent and my idea was to negociate a cfd for 2-5 years until I had 20% equity in the property and refinance it with a local bank. I have already spoken to my lender and he said I would need 12 months of documented payment to refinance the property. I would just like to know is this a feasible idea or a long stretch???? Any advice or tips on negociating the contract would be much appreciated!!!

Details on this property again are:
Asking price 125000
Fmv 130000
Taxes 3500
Insurace 600
Market rent 1200-1300

Thanx,
Dustin

[Dion DePaoli]

You are missing an important detail. What type of interest rate would you offer on the CFD?

If we just play with the numbers, 8.0% on a 30 year amortization is going to put you at $1,260. At 7% on a 30 year amortization, you are at $1,173. (I am rounding these PITI) This also assumes the Seller takes only the $125k and doesn't want to push up to FMV.

Your plan is to rent this out and more than likely on the high side you have a spread of $127 per month or $1,524 annually. Not likely enough money to handle repairs or vacancy loss. So, you can put something down to get you some better margins on your cash flow. Generically every 5% down will get you around $40 in cash per month. Or I suppose you can set aside capital into a sort of reserve account to accommodate for vacancy loss and repairs, etc. This also presumes you get $1,300 for rent.

Attempting to refinance in 5 years might be tough. You will gain equity through payments but you will only pay down around $6,600 in principal. So you will need some market appreciation to help hit that 5 year refinance goal at 80% LTV.

For my taste, this deal seems a little tight assuming the Seller wants a decent rate on the contract. Certainly if you can get them down to 3% or 4% you have a bit more room.

Or take a look at the numbers the bank gives you, they will require the down payment but you have good cash flow margins and that might be all the difference to sleep well at night.