Please tell me how this offer (to me) makes sense

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Please tell me how this offer (to me) makes sense

Matt M.
Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

So I just received an intriguing offer on a property of mine from an investment/wholesale company. 
I bought this property in August of 2019 for $60k. I spent 6 mos on a complete rehab by myself, put in about $15k. (20% down, rehab $ was cash so I put out about $30k). It has been rented since May 2020 for $1450. My expenses are about $700/month with $380 of that going to small commercial loan (winner!) it is worth about $175k in this market.

So the offer I received was this: $300,000 total purchase price- 0% down/0% interest- $950/month to me, they pay the mortgage/taxes/ins for 8 years with a balloon at the end. So approx $91k to me over the next 8 years and then a balloon payment of $200,000. 

How does this make any sense? Before the pandemic this house was worth $140k conservative. In the mean time, they would not cash flow anything, actually negative, and then hope they can refi and give me $200,000 in 8 years. I don’t get it, please help me understand how this makes sense! 

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
Quote from @Matt M.:
Kk



This is a prop bet, Matt. Looks like one, smells like one, quacks like one. I think you're right, it's all a bunch of camouflage disguising the zero down. God only knows what they plan on doing in/with/to it. I would be interested to see how they respond to you.

No response yet @Jim K.. I have a feeling I won’t get one, I’m no long time super seasoned investor like @Jay Hinrichs, but I’m not an idiot and this is a loser all day long. 


how about this.. they get into title on your asset for Zero down..  in PA it takes what 2 years plus to foreclose and longer if contested.. they rip the rents pay nothing to maintance dont pay the tax's and just walk with 30k while you fight to get your asset back.. I have seen this play many times one sub too deals there are bad actors out there .. they do 10 to 20 of these and its real money.
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  • Taylor DaschBusiness Member
    Real Estate Agent · Temple, TX · Member since 2022 · 1k+ posts · 700 votes
    4y

    You never really know. There is a lot of value in Seller financing but like you said, the offer doesnt make sense. I would definitely get your lawyer to look it over before signing anything. They could be banking on appreciation but who knows! I have heard a couple stories recently of companies offering way over market value for properties so I'm not too sure what their plan is.

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  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y
    Quote from @Taylor Dasch:

    You never really know. There is a lot of value in Seller financing but like you said, the offer doesnt make sense. I would definitely get your lawyer to look it over before signing anything. They could be banking on appreciation but who knows! I have heard a couple stories recently of companies offering way over market value for properties so I'm not too sure what their plan is.

    I’m not going to do it. This is a loser for them all day long. My concerns are the 0 down, which leaves me nothing to go buy something else, and with them losing money every month, and having no skin in the game it leaves the possibility of a tenant trashing it and they walk away and leave me having to foreclose and rehab the property. Yeah, no. I just don’t see how they’d ever make money on this offer. Sure it could be worth $200k in 8 years or less, but then they’re basically paying full retail. 
    4Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    You're correct when  you say the problem is no DP.  As of right now, you're about $11k to the negative (cash cost - cash back from CF), so it would be at least another year with this offer to make it to break even.  With the property being negative CF for them, I would be very concerned about getting my monthly check.  In addition, I bet the first thing not paid would be that loan (in your name) they are supposed to take over payments.

    What this deal hinges on is very similar to deals where the buyer is banking on equity to make a bad deal work...in other words, future events they have no control over.

    You're right in passing on this one.  This offer is what I describe as a "shiny object of distraction".

    3Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    Thanks @Joe Villeneuve I just emailed them back asking them to educate me on how this would be a good deal for them over time. With nothing changing over the next 8 years, no maintenance, tax/ins increase, no turnover costs/vacancies, etc, they’d have $324,000 in this property after they paid me off. There’s no way a 1/2 duplex home will be worth anywhere near that in 8 years, or 15. These houses went just over $200k during the 2000’s boom but then back to $120-140 right before the pandemic. 
    I’ll keep you guys updated as to their rationale for paying this much. 

    1Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    @Joe Villeneuve

    Here’s what I sent them: 

    1Reply
  • Joel Scarboro
    Rental Property Investor · Knightdale, NC · Member since 2018 · 24 posts · 16 votes
    4y

    In the end it’s a business deal. It’s not your concern on what or why but that it makes sense to your goals. They may just want a tax shelter. Who knows but all you need to know is if it works for you and the criteria of the agreement is set in stone legally by a qualified lawyer let it roll. Just saying.

    3Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y
    Quote from @Joel Scarboro:

    In the end it’s a business deal. It’s not your concern on what or why but that it makes sense to your goals. They may just want a tax shelter. Who knows but all you need to know is if it works for you and the criteria of the agreement is set in stone legally by a qualified lawyer let it roll. Just saying.

    Well it is my concern if I’m holding the note, the house gets trashed and they stop paying. With $0 down they have no incentive to keep up with it when they can just walk away. 
    and if it’s all still in my name, I don’t see how it could be a tax shelter. 
    2Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    4y

    @Matt M.

    "Let me tell you a story. When I was a young man about to go out into the world, my father says to me a very valuable thing. 'Son,' the old guy says, 'I'm sorry that I am not able to bankroll you a very large start. But not having any potatoes to give you, I am going to give you some very valuable advice. One of these days in your travels, you are going to come across a guy with a nice brand new deck of cards, and this guy is going to offer to bet you that he can make the jack of spades jump out of the deck and squirt cider in your ear. But, son, do not take this bet, for if you do, as sure as you are standing there, you are going to end up with an ear full of cider.' "

    -- Damon Runyan

    This is a prop bet, Matt. Looks like one, smells like one, quacks like one. I think you're right, it's all a bunch of camouflage disguising the zero down. God only knows what they plan on doing in/with/to it. I would be interested to see how they respond to you.

    4Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    4y
    Quote from @Matt M.:

    I spent 6 mos on a complete rehab by myself, put in about $15k.

    ------------------------------------

     Unless you value your time at zero dollars, you put in more than $15,000.

    Also, see if there's anything in the proposed contract against you assigning the contract to someone else. There shouldn't be anything. If you are to be as "passive" as the buyer wants you to be, then the buyer should not care who is getting the money. If the buyer does care, then you know the buyer is playing you for a chump somewhere down the line, for whatever reason. 

    Even if there is a no-assignment clause (and ask why it's there), shop the proposed contract just for grins. That would tell you what the contract is really worth and what others think of the credit and counter-party risk you'd be taking on. If you can sell the contract, then doing so would give you money for your next investment.

    3Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y
    Kk



    This is a prop bet, Matt. Looks like one, smells like one, quacks like one. I think you're right, it's all a bunch of camouflage disguising the zero down. God only knows what they plan on doing in/with/to it. I would be interested to see how they respond to you.

    No response yet @Jim K.. I have a feeling I won’t get one, I’m no long time super seasoned investor like @Jay Hinrichs, but I’m not an idiot and this is a loser all day long. 

    1Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y
    Quote from @John Clark:
    Quote from @Matt M.:

    I spent 6 mos on a complete rehab by myself, put in about $15k.

    ------------------------------------

     Unless you value your time at zero dollars, you put in more than $15,000.


    yes I most definitely value my time, but sweat equity beats sitting on the couch! 


    0Reply
  • Joel Scarboro
    Rental Property Investor · Knightdale, NC · Member since 2018 · 24 posts · 16 votes
    4y
    Quote from @Matt M.:
    Quote from @John Clark:
    Quote from @Matt M.:

    I spent 6 mos on a complete rehab by myself, put in about $15k.

    ------------------------------------
    Are you telling me that you don’t plan on depreciation the asset or writing off your repair along with improvements?

     Unless you value your time at zero dollars, you put in more than $15,000.


    yes I most definitely value my time, but sweat equity beats sitting on the couch! 



    0Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y
    Quote from @Joel Scarboro:
    Quote from @Matt M.:
    Quote from @John Clark:
    Quote from @Matt M.:

    I spent 6 mos on a complete rehab by myself, put in about $15k.

    ------------------------------------
    Are you telling me that you don’t plan on depreciation the asset or writing off your repair along with improvements?

     Unless you value your time at zero dollars, you put in more than $15,000.


    yes I most definitely value my time, but sweat equity beats sitting on the couch! 


     Joel, not sure how my tax strategy came in to play here with you, but that’s not the conversation 



    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y
    Quote from @Matt M.:
    Kk



    This is a prop bet, Matt. Looks like one, smells like one, quacks like one. I think you're right, it's all a bunch of camouflage disguising the zero down. God only knows what they plan on doing in/with/to it. I would be interested to see how they respond to you.

    No response yet @Jim K.. I have a feeling I won’t get one, I’m no long time super seasoned investor like @Jay Hinrichs, but I’m not an idiot and this is a loser all day long. 


    how about this.. they get into title on your asset for Zero down..  in PA it takes what 2 years plus to foreclose and longer if contested.. they rip the rents pay nothing to maintance dont pay the tax's and just walk with 30k while you fight to get your asset back.. I have seen this play many times one sub too deals there are bad actors out there .. they do 10 to 20 of these and its real money.
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    6Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    @Jay Hinrichs

    I believe the process can start after 120 days of non payment in Pa. The process could take up to a year 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y
    Quote from @Matt M.:

    @Jay Hinrichs

    I believe the process can start after 120 days of non payment in Pa. The process could take up to a year 


    My experience there has been longer but technically it can probably be done that quick but very rare to hit one year time line   Just lease it to them with option to purchase safer that way.  

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y
    Quote from @Jay Hinrichs:
    Quote from @Matt M.:

    @Jay Hinrichs

    I believe the process can start after 120 days of non payment in Pa. The process could take up to a year 


    My experience there has been longer but technically it can probably be done that quick but very rare to hit one year time line   Just lease it to them with option to purchase safer that way.  

    I had no intention of selling, was just letting them run thru their sales pitch for a good chuckle. And there’s nothing to buy anyway.. 
    0Reply
  • Joel Scarboro
    Rental Property Investor · Knightdale, NC · Member since 2018 · 24 posts · 16 votes
    4y
    Quote from @Matt M.:
    Quote from @Joel Scarboro:
    Quote from @Matt M.:
    Quote from @John Clark:
    Quote from @Matt M.:

    I spent 6 mos on a complete rehab by myself, put in about $15k.

    ------------------------------------
    Are you telling me that you don’t plan on depreciation the asset or writing off your repair along with improvements?

     Unless you value your time at zero dollars, you put in more than $15,000.


    yes I most definitely value my time, but sweat equity beats sitting on the couch! 


     Joel, not sure how my tax strategy came in to play here with you, but that’s not the conversation 



    It totally is because I’m showing him an angle in which he might not be seeing his investment. You have to be able to see situations from different angles if not you miss certain aspects that add to the overall picture. 
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y

    They took a Pace Mosby class bottom line. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    Hard pass, Matt. They're tying up your property with little risk on them.....what if they can't/don't pay, sure you get the property back, but all the legal mess, etc.....?

    If it's too good to be true.......

    1Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    @Bruce Woodruff

    Oh absolutely hard pass! 
    I’d end up screwed for sure. 

    1Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    4y

    They’re probably banking on the property appreciating. They’re probably sending out a whole lot of offers and if they send out enough sun will probably stick.

    0Reply
  • Matt M.
    OP
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    @Joe S.

    I understand banking on appreciation, but this house will likely take 40 years to be $324,000 which they will invested in 8. 

    0Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    4y
    Quote from @Matt M.:

    @Joe S.

    I understand banking on appreciation, but this house will likely take 40 years to be $324,000 which they will invested in 8. 

    It’s probably somebody new that just got out of some sort of training about the power of owner financing and they are definitely overzealous… In my opinion they are very overzealous and do not show signs of being successful long-term.

    2Reply
  • Rhett KeltonPro Member
    Rental Property Investor · Murfreesboro, TN · Member since 2018 · 85 posts · 46 votes
    4y

    A slightly different take. First of all, the down payment issue is definitely legit. You would want at least 25% down on a deal this size.

    Now, I don't think you should try to interpret their reasons for doing something. People are weird.  If it makes sense for your goals, do it. They might be trying to build a portfolio to sell off to auction off to various hedge funds, might be banking on the appreciation, or maybe they see something you don't. Just consider if it's a good deal for you, and meets your long term goals.

    I remember listening to a podcast and they were talking about someone overpaying for a house at an auction. The auctioneer ended up asking why the (experienced) buyer purchased it, and the buyer just said that he had to keep his crews busy or else he would lose them.  

    3Reply
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