Contract for Deed Offer on a Duplex

Buying & Selling Real Estate
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Contract for Deed Offer on a Duplex

Mariquita De Mira
Member since 2018 · 9 posts · 7 votes

I live in the Twin Cities and have been looking at duplexes to move into and house-hack to get started with real estate investing. I made a 6-Month Contract for Deed offer on a duplex located in a B/C area with 3 bedrooms and 1 bath in each unit priced at $290k. It appears it is in solid condition and move-in ready. The bottom unit has been occupied for 6 years by the same tenant who gets some assistance to help cover her rent at $1600/month which about covers the monthly mortgage. She just recently signed a new lease and is a good tenant. When I move out, I could potentially collect $3200/month in rent from both units. 

The reason my agent and I arrived at a Contract for Deed offer is because I still need to sell my house before I can buy my next property due to my DTI ratio and I need more time to prep my house for sale. However, the seller of said duplex already has an FHA offer but was willing to consider mine. Our offer was $290k, $20k down, 4.25% for 6 months. He countered with $295k. But after my agent and I started to review what I need to bring to the table, it appears I need another $5k for closing costs, inspection, etc. I have exactly $20k and no more unless I want to move some money from my brokerage account or borrow it. However, if I were to do the former, I will have no money for reserves or emergency funds and I keep thinking how the worst can happen like a furnace going out, I get laid off, etc. and now I have no net to fall on or umbrella to cover me.

As much as the numbers seem to work I don't have all the money on hand to do this deal. However, I'm wondering in this hot market with most rents not meeting 1% rule and in this case it is more than 1%, am I letting a good deal pass me by or will there be more deals down the road, I just need to be patient. This is a huge financial decision and I'm terrified of making a mistake: spending money I don't have to buy an investment or passing up a great investment opportunity, hence it's worth moving heaven and earth for an extra $5,000. 

Sorry for the long post and appreciate any guidance on this major decision. Thank you very much in advance!

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Noah Chappell
Investor · Minneapolis, MN · Member since 2016 · 254 posts · 228 votes
5y
Originally posted by @Mariquita De Mira:

I live in the Twin Cities and have been looking at duplexes to move into and house-hack to get started with real estate investing. I made a 6-Month Contract for Deed offer on a duplex located in a B/C area with 3 bedrooms and 1 bath in each unit priced at $290k. It appears it is in solid condition and move-in ready. The bottom unit has been occupied for 6 years by the same tenant who gets some assistance to help cover her rent at $1600/month which about covers the monthly mortgage. She just recently signed a new lease and is a good tenant. When I move out, I could potentially collect $3200/month in rent from both units. 

The reason my agent and I arrived at a Contract for Deed offer is because I still need to sell my house before I can buy my next property due to my DTI ratio and I need more time to prep my house for sale. However, the seller of said duplex already has an FHA offer but was willing to consider mine. Our offer was $290k, $20k down, 4.25% for 6 months. He countered with $295k. But after my agent and I started to review what I need to bring to the table, it appears I need another $5k for closing costs, inspection, etc. I have exactly $20k and no more unless I want to move some money from my brokerage account or borrow it. However, if I were to do the former, I will have no money for reserves or emergency funds and I keep thinking how the worst can happen like a furnace going out, I get laid off, etc. and now I have no net to fall on or umbrella to cover me.

As much as the numbers seem to work I don't have all the money on hand to do this deal. However, I'm wondering in this hot market with most rents not meeting 1% rule and in this case it is more than 1%, am I letting a good deal pass me by or will there be more deals down the road, I just need to be patient. This is a huge financial decision and I'm terrified of making a mistake: spending money I don't have to buy an investment or passing up a great investment opportunity, hence it's worth moving heaven and earth for an extra $5,000. 

Sorry for the long post and appreciate any guidance on this major decision. Thank you very much in advance!


Hi Mariquita. This is a decent deal, but nothing earth shattering. I'd say that's market price based on your description of the duplex, area, etc. Before jumping into this, I'd get together at least a decent emergency fund for the property, maybe 10k. Imaging if your furnace went out, then your water heater 3 weeks later - you'd need 8k fast and could lose your house to the seller if you aren't able to make your payments. Another thing, if selling your other house is all that separates you from, say, a low down payment Minnesota housing or FHA loan, I'd definitely wait the month or 2 until you do that instead of using a contract for deed, which is basically like a hard money loan from the seller. Just think, you'll have to close twice (1x initially, and a 2nd time to refinance out of the CFD), that means 8-12k of closing costs. Also, you'll likely pay interest only monthly payments on the CFD that are at a high interest rate. In summary, the deal is not bad, but not stupendous, nothing worth putting yourself at financial risk for. I'd wait and find a similar or better deal in a month or 2. You might take advantage of the winter months and anticipated end of several aid programs to swipe a great deal up in Jan or Feb when you're ready. Feel free to reach out and run any deals by me!
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  • Noah Chappell
    Investor · Minneapolis, MN · Member since 2016 · 254 posts · 228 votes
    5y
    Originally posted by @Mariquita De Mira:

    I live in the Twin Cities and have been looking at duplexes to move into and house-hack to get started with real estate investing. I made a 6-Month Contract for Deed offer on a duplex located in a B/C area with 3 bedrooms and 1 bath in each unit priced at $290k. It appears it is in solid condition and move-in ready. The bottom unit has been occupied for 6 years by the same tenant who gets some assistance to help cover her rent at $1600/month which about covers the monthly mortgage. She just recently signed a new lease and is a good tenant. When I move out, I could potentially collect $3200/month in rent from both units. 

    The reason my agent and I arrived at a Contract for Deed offer is because I still need to sell my house before I can buy my next property due to my DTI ratio and I need more time to prep my house for sale. However, the seller of said duplex already has an FHA offer but was willing to consider mine. Our offer was $290k, $20k down, 4.25% for 6 months. He countered with $295k. But after my agent and I started to review what I need to bring to the table, it appears I need another $5k for closing costs, inspection, etc. I have exactly $20k and no more unless I want to move some money from my brokerage account or borrow it. However, if I were to do the former, I will have no money for reserves or emergency funds and I keep thinking how the worst can happen like a furnace going out, I get laid off, etc. and now I have no net to fall on or umbrella to cover me.

    As much as the numbers seem to work I don't have all the money on hand to do this deal. However, I'm wondering in this hot market with most rents not meeting 1% rule and in this case it is more than 1%, am I letting a good deal pass me by or will there be more deals down the road, I just need to be patient. This is a huge financial decision and I'm terrified of making a mistake: spending money I don't have to buy an investment or passing up a great investment opportunity, hence it's worth moving heaven and earth for an extra $5,000. 

    Sorry for the long post and appreciate any guidance on this major decision. Thank you very much in advance!


    Hi Mariquita. This is a decent deal, but nothing earth shattering. I'd say that's market price based on your description of the duplex, area, etc. Before jumping into this, I'd get together at least a decent emergency fund for the property, maybe 10k. Imaging if your furnace went out, then your water heater 3 weeks later - you'd need 8k fast and could lose your house to the seller if you aren't able to make your payments. Another thing, if selling your other house is all that separates you from, say, a low down payment Minnesota housing or FHA loan, I'd definitely wait the month or 2 until you do that instead of using a contract for deed, which is basically like a hard money loan from the seller. Just think, you'll have to close twice (1x initially, and a 2nd time to refinance out of the CFD), that means 8-12k of closing costs. Also, you'll likely pay interest only monthly payments on the CFD that are at a high interest rate. In summary, the deal is not bad, but not stupendous, nothing worth putting yourself at financial risk for. I'd wait and find a similar or better deal in a month or 2. You might take advantage of the winter months and anticipated end of several aid programs to swipe a great deal up in Jan or Feb when you're ready. Feel free to reach out and run any deals by me!
    1Reply
  • Daniel Anshus
    Realtor · Bloomington MN (bloomington, mn) · Member since 2016 · 451 posts · 263 votes
    5y
    Originally posted by @Mariquita De Mira:

    I live in the Twin Cities and have been looking at duplexes to move into and house-hack to get started with real estate investing. I made a 6-Month Contract for Deed offer on a duplex located in a B/C area with 3 bedrooms and 1 bath in each unit priced at $290k. It appears it is in solid condition and move-in ready. The bottom unit has been occupied for 6 years by the same tenant who gets some assistance to help cover her rent at $1600/month which about covers the monthly mortgage. She just recently signed a new lease and is a good tenant. When I move out, I could potentially collect $3200/month in rent from both units. 

    The reason my agent and I arrived at a Contract for Deed offer is because I still need to sell my house before I can buy my next property due to my DTI ratio and I need more time to prep my house for sale. However, the seller of said duplex already has an FHA offer but was willing to consider mine. Our offer was $290k, $20k down, 4.25% for 6 months. He countered with $295k. But after my agent and I started to review what I need to bring to the table, it appears I need another $5k for closing costs, inspection, etc. I have exactly $20k and no more unless I want to move some money from my brokerage account or borrow it. However, if I were to do the former, I will have no money for reserves or emergency funds and I keep thinking how the worst can happen like a furnace going out, I get laid off, etc. and now I have no net to fall on or umbrella to cover me.

    As much as the numbers seem to work I don't have all the money on hand to do this deal. However, I'm wondering in this hot market with most rents not meeting 1% rule and in this case it is more than 1%, am I letting a good deal pass me by or will there be more deals down the road, I just need to be patient. This is a huge financial decision and I'm terrified of making a mistake: spending money I don't have to buy an investment or passing up a great investment opportunity, hence it's worth moving heaven and earth for an extra $5,000. 

    Sorry for the long post and appreciate any guidance on this major decision. Thank you very much in advance!

    if you're going to sell your house won't that cover your emergency fund? Could you take a heloc or refinance your property? Or make an offer subject to you selling your home? This sounds like a pretty good deal so I would do anything to make it work.

    1Reply
  • Mariquita De Mira
    OP
    Member since 2018 · 9 posts · 7 votes
    5y

    @Noah Chappell Good morning and thank you for getting back to me. I totally agree with you especially about not having an emergency fund and everything going wrong, which they will when one doesn't have a backup plan or reserves. It happened to me a few years ago after I closed on my house, got my car stolen and had to get a new car, then got laid off and had no emergency funds. It was a scary position to be in. I think that is why this deal is stressing me out as opposed to making me feel good even though the numbers appear to work. That would be awesome to run deals by you! I appreciate it. Best wishes!! :)

    0Reply
  • Dan Vleck
    Deerwood, MN · Member since 2014 · 184 posts · 122 votes
    5y

    Brokerage account? If it’s accessible and not locked in a retirement fund, other than Roth, then you have more than $20000. Market is up too, so not a bad time to sell some shares.

    I emptied personal stock accounts to invest in real estate due to much better returns in rentals.

    1Reply
  • Mariquita De Mira
    OP
    Member since 2018 · 9 posts · 7 votes
    5y

    @Daniel Anshus It sure does, doesn't it? Yes the sale of my home will cover emergency funds should it sell (which we're pretty confident it will in this market) but until then, I need to have $20k down payment and try to scrimp to get the remaining for closing costs. If I use my brokerage account for it, I'll have maybe $5k for reserves but may not have enough when I close again down the road to refinance into a Conventional loan from a Contract for Deed before I receive the proceeds from the sale of my house...unless I'm incorrect in the order of how it works. I've looked into both refinancing (my rate is already low so I would save maybe $50-$80 a month but pay $4500 in closing costs) and a HELOC (they look at my DTI ratio and the numbers didn't work out). But thank you for your input. Best wishes! :)

    0Reply
  • Mariquita De Mira
    OP
    Member since 2018 · 9 posts · 7 votes
    5y

    @Dan Vleck Good food for thought. It's just that I don't think I have enough in my brokerage account to liquidate for closing costs, reserves, etc. I am researching Self-Directed IRAs so I can transfer my retirement money into them and use it instead for real estate. If you have any recommendations of companies that do that, that would be great. Best wishes! :)

    0Reply
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