Tyler, TX · Member since 2015 · 25 posts · 9 votes
Need help with seller financing!! I'm looking to BUY a small 9 unit complex. The seller is older and would like this to basically help with retirement. He's even willing to go 2% interest!! But he wants around $250k for the complex... need some advice on how to structure the deal AND what price I should counter with. Basically need help with structuring the deal and possible value adds on the deal. Below is info on the property and I will attach financials shortly.
- each unit rents for $695-$750 a month
- almost always 100% occupancy
- currently ALL bills are paid
- built in 1930s but its actually been updated and in good shape
- had a fire from a candle 1.5 years ago and that's the reason for the recent high repair costs etc.
- 2014 net income was $25k
- 2015 net income was $34k
- 2016 net income projections are $40k
- owns stove and fridge in all units
- does all repairs and maintenance himself
Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
9y
All the time and money you will save by not having to find money is enough to give him his asking price.
The interest rate he is giving you is enough to give him his asking price
The length of time you are locked in is enough to give him his asking price.
You have all three.
The only thing that I would worry about is his statement sheet. I would have my accountant look at the numbers and see if they jive. Unless you know the market and the area. I am not saying there is anything wrong with his numbers. A sheet like that you can make up.
Tyler, TX · Member since 2015 · 25 posts · 9 votes
9y
Thanks Mark! I'm an investor in the area and know the market pretty well. Just never invested in a multi-unit. Only single families.. thanks again for the help!
Investor · Knoxville, TN · Member since 2016 · 8 posts · 3 votes
9y
What is the typical cap rate on similar buildings in your area? Right now it is over 14%. That with the ridiculous 2% interest seems like a great deal to me. If you can raise rents (given the strong demand) and/ or implement rubs (or put separate meters for the utilities) you could really increase the value to the property. Good luck.
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
9y
@Rob Shipley looks like a great deal but I would ask why the repairs dropped that much from 2014 to 2015. If it's due to his age and he's been deferring maintenance then it could be a problem.
When it comes to structuring the deal, tell him you will give him his asking price but you need him to work with you on the other terms.
things like "I'll give you enough money for down payment to show that I'm serious" is a good start for the conversation about the down payment. You want as little as possible in it so let him name the number and take it from there.
Next you need to negotiate term, amortization period and interest rate. Make sure that if the rate is variable that you put a cap on it!
Tyler, TX · Member since 2015 · 25 posts · 9 votes
9y
Thanks.. just signed an option to purchase agreement for $250k and negotiated with him from 10% down to only 3.5% down ($8,750). So it looks like this..
Sales Price- $250,000
Down Payment- $8,750 (3.5%)
Interest Rate- 2%
Monthly Payments- $1220
Term- 20 years
Pretty sweet deal.. thanks for the help guys!!
Real Estate Agent · San Jose, CA · Member since 2015 · 84 posts · 50 votes
9y
Looks like a sweet deal Rob. I hope you have a property contingency in your offer. I would encourage you to pay for your own roof, pest, and property inspections and if identified as in issue in the property inspection, a foundation issue get an inspection done with a repair cost estimate. This will ensure you know the properties fundamental condition and to make sure there is no "falling knife" in this deal. If issues come up, you have a strong case to negotiate repairs or better yet a price concession provided you get legit bids on repair work estimates. I just got a 35K price reduction on a purchase because I did the inspections i recommended above.
Investor · Beverly, MA · Member since 2016 · 56 posts · 24 votes
9y
do you find it strange that year to year expenses are identical down to the last dollar though the inputs swung significantly year to year on some items?
Real Estate Broker · MI · Member since 2014 · 594 posts · 183 votes
9y
Rob Shipley you may want to draft up an LOi first. It's not an offer, it's a Letter of Intent. I would advise an LOi. Have your attorney/broker review it to make sure it's exactly what you want to say.
Best of luck!
Tyler, TX · Member since 2015 · 25 posts · 9 votes
9y
Ok so after looking at some of his future expenses he just called and wants to change it to a 10 year term...
I asked him what he really needs out of this deal, and he now feels that he needs at least $2,000 a month for him and his wife to live comfortably.
Here's the deal guys... this dude is super nice guy.. really old.. and doesn't even know what a cap rate is.
He's allowing me literally to write up the seller financing addendum. He just wants to deal with a good guy who he has a relationship with and get his $2,000 a month. NO balloon payment. I do feel there's definitely value adds to this property. #1 is raising rent.
What's the best way to structure this where it's a win win?? Should I look into lowering the sales price now? Thanks for the help!
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
Looks like a great deal all the way around, but.....your repairs and capex will Never be just $2300/yr on 9 units. As @Steve Vaughan mentioned, make sure title passes to your name and you execute a mtg.
Tyler, TX · Member since 2015 · 25 posts · 9 votes
9y
Here's my issue.. if I'm going to net 40k that's only $3,300 a month. And if I'm giving him $2,000+ that only cash flows basically $1,000 a month on a 9 unit property. Am I looking at this the right way??
I can cash flow $1000 a month on a few single family properties with less headache..
Rental Property Investor · Saint Louis, MO · Member since 2014 · 313 posts · 326 votes
9y
How about $0 down and just split the $250k by 120 months? If he wants income, then that's $2,083 per month for the 10 years and you have nothing out of pocket up front.
I'm confused how occupancy is "almost always 100%" and rents "average $695-750", yet annual rental income only averages $54,769 for the two years? Either there is vacancy or the rents are much lower. Where do you get "net $40k"? The gross revenue should be more like $75,600 if the rents averaged even just $700 each.
If rents are conservatively $700/unit then you'd gross at least $6300/month. Expenses were $2216/month (26,597/12)
$6300 - 2216 - 2083 = $2001 net or $222/door. Sounds like a great deal to me, even after you add in some allowance for vacancy, management, and CapEx.
If his income numbers are right though ($54,000 and change) and maybe they only rent for $500/unit each month or there is a lot of vacancy then it sounds pretty thin unless you can stretch it over more than 10 years.
Tyler, TX · Member since 2015 · 25 posts · 9 votes
9y
The problem recently was with the vacancy was 2 units haven't been used for awhile because of a fire due to a candle one of the tenants was burning. Normally it shouldn't take that long to rehab, but he's and older guy and does all the work himself. THANKS for the response and idea on zero down!