Closing on a owner financing deal!!! (3 properties)

35 Replies

Hello,

I am a new investor. I am currently 2 weeks away from potentially closing on 3 properties using owner financing (I am the buyer). The terms of the contract is all 3 properties listed for $278K, with 45K down, 30 years fully amort., at a int rate of 7.905. no balloon payment. The seller wants to do a bundle mortgage for all 3 properties. All of the properties are rented and half are 100% HUD bringing in $3625 per month in rent. I am at the appraisal stage awaiting to get the reports back.

My question is, what should I do if the appraisal come back 5k, 10k, or 20k/greater lower than the proposed price? I feel like this is a very good deal but I'm not sure on how should I negotiate if the appraisals come back lower. The owner is a good guy but obviously does not play when it comes to business. I am a good communicator but, smart enough to walk away from a deal if it's not in my best interest. Hopefully you guys could give some advice. Thanks!

Owner-financed deals can be incredible for obvious reasons. The financier is right there in front of your face willing to finance you. You could theoretically have 1,000 properties where all of them are owner-financed, and generate huge cash flow or whatever.

Without any details of the property, I don't really know what to say. I always personally appraise properties myself because I believe that I am better than 99.999999% of appraisers (unless it is a super expensive kind of niche property like appraising Apple's new donut-shaped office). The appraiser's opinion shouldn't be worth much because YOU, the investor who intends on being the successful investor, will make sure that you can appraise it more accurately than the other guy.

This seems like the kind of deal where you can say "$270,000 and 7.5% and I will do this deal", and the dude will probably agree to it.

Why the weird interest rate? Your payment will be $1,694.27/month. That should give you a pretty decent return on your $45K down. I don't understand how all 3 properties can be rented and half of them are HUD. Seems like there are some basic math challenges.

Because you're getting seller financing, I'd be more concerned with why you are getting it as a new investor. Are you doing property inspections with a licensed inspector? There may be some surprises you have not been told about. I recently closed a seller financed transaction with very similar numbers to your deal; 3 properties, $275K price, $45K down, but I got the seller to take $1,000/month with no interest. The properties are in need of repairs, but they are rented and once the repairs are done, I should be able to raise the rents closer to what your seller claims he is getting. 

Also, I'm not sure why you state it is obvious he does not play when it comes to business. We don't know this clown and you probably don't either. The one thing I have learned is that sellers are story tellers. If he's offering the seller financing, there is a reason and you should dig to uncover what that reason is or you may be getting taken for a ride. 

When you sit down at the card table, if you can't figure out who the patsy is, get up and walk away.

Originally posted by @Aaron Mazzrillo :

Why the weird interest rate? Your payment will be $1,694.27/month. That should give you a pretty decent return on your $45K down. I don't understand how all 3 properties can be rented and half of them are HUD. Seems like there are some basic math challenges.

Because you're getting seller financing, I'd be more concerned with why you are getting it as a new investor. Are you doing property inspections with a licensed inspector? There may be some surprises you have not been told about. I recently closed a seller financed transaction with very similar numbers to your deal; 3 properties, $275K price, $45K down, but I got the seller to take $1,000/month with no interest. The properties are in need of repairs, but they are rented and once the repairs are done, I should be able to raise the rents closer to what your seller claims he is getting. 

Also, I'm not sure why you state it is obvious he does not play when it comes to business. We don't know this clown and you probably don't either. The one thing I have learned is that sellers are story tellers. If he's offering the seller financing, there is a reason and you should dig to uncover what that reason is or you may be getting taken for a ride. 

When you sit down at the card table, if you can't figure out who the patsy is, get up and walk away.

Good point. Something about this deal is a little fishy.

Also just saw that the investor if from GAINESVILLE Florida.

You are getting into a deal that is very average based on the financial you have given. I am familiar with this area in general. The seller might be hiding some facts, and the thing he is hiding might be something huge like a sinkhole problem since it is Florida after all.

Id be super cautious about this deal and not be afraid to back out if things go awry.

If this is your first deal you need a few very important things - 1) a good inspection and 2) copies of all the leases and a verbal confirmation from each tenant and 3) a rent roll or proof of collecting the $3625. 4) as much proof of expenses as possible. If they are HUD rentals you should be ok as far as the inspection because often those are strict before tenant moves in and every few years. The appraiser is only good for a bank in my opinion and your peace of mind. I would call a few other investors who own Proprties and ask them for an estimate of value. What are the sales comps showing now? If you can get almost free money(owner financing with low interest) then this is something you can leverage in the future.

Not knowing repairs or actual condition it's hard to give you advice but seems like it's a good return after the mortgage payment. What are your expenses though? How much cash do you actually realize each month?

This investor is about 55 years old. He told me he is selling 12-20 of the 300 properties he owns per year and taking on owner financed mortgages. He also gives his tenants the opportunity to buy the property they are renting if they have shown that they could make on time payments for a year. I have had the properties inspected. there are some cosmetic issues and a few roofing issues. to fix all of the issues would cost me about 3k to have these properties in great condition. To be more detailed, I am buying 2 single family homes that are renting at $1000 and $1025 a mth. the third property is a duplex and renting at $800 for each side. One single family home and one side of the duplex are HUD properties 100% paid. The appraisal reports should be in by tomorrow. I "think" this is a good deal after paying $1700 for mortgage, roughly $600 for taxes and insurance, I'd have a ROI of $1325 a mth. I am wondering if the appraisals come back lower than the proposed amount for the homes, should I take the hit depending on how low the values come back? Or should I negotiate a lower deal? I figured getting a owner to finance for 30 years is a rare deal giving the circumstances, seeing that this is a sellers market, and being approved by a bank for a deal like this is highly unlikely. Also, the seller wanted to bundle these mortgages together for one payment, what advice can you give in regards to that?

@Kindrell Hutchinson Those numbers are not great. Especially if there is no upside (i.e., they are renting for market rent). Which might be the case. You probably won't be raising the HUD rents anytime soon. What is market rent for those SFRs? Where are they located in town?

Also, you wouldn't have a true ROI of $1325. Realistically, you'd have repair expenses, capital expenditures reserves, allowances for vacancy/turnover, and property management fees (even if you are self-managing, account for that as if you were paying yourself a property management fee).

If I was to account for these expenses (these are just the numbers I typically use, it could vary drastically from property to property and area to area) 

Property management fee 10% - $362

Repair reserve 5% - 165

Capital expenditures reserve 5% - 165

So net cash flow per month would be $633. 

If the appraisal comes in lower, I would negotiate lowering the purchase price to what the appraised value is.

@Arianne L. When I did my Rental report, My ROI was 22.14% ($830/mth) I thought the average is between 10%-15% Market Rental for the SFR ia between $1100-1200 in this area and they are located in C grade neighborhoods. Given the condition of these homes Cap Ex should be 4% and I work so I wouldn't require additional income as the property manager.

@Kindrell Hutchinson It's not about requiring income as a property manager. It's about what it is valued as an investment. Most investors / landlords will pay for a property manager. It probably doesn't make much sense right now cause you are not thinking of selling as an exit strategy. 

But if for some reason in 5 years, you don't want to be a landlord anymore, or if this portfolio doesn't fit in your overall portfolio anymore and you want to sell, most other investors will factor in a property management expense because either a) they value their time  b) they don't want to self manage c) it is more efficient for the PM to manage vs them managing

@Kindrell Hutchinson That interest rate is way more than I would pay. My owner finance's are at 5-6%. What about a prepayment penalty. Can you finance it later down the road for less interest? If his attorney or he is drawing up the promissory note/ deed of trust have your lawyer look at them before closing. I smell a rat here but dunno where it's at. Also be sure you did your analysis using real numbers. You should be in or have a due diligence period coming up in your offer. Get every number and all books you can from this guy. Plug them in to the rental calculator found here on BP. RR.

Any time you bundle multiple properties into a blanket loan, you want to have stipulations for releasing a property upon payment of some specific amount, so that you can sell a property off whenever you have some need or desire to do so.

You want to have some language in there that allows for you to sell a house - in order to do that, the buyer (and buyer's lender) is going to want to see no liens, so you would need to have a way to release a property from the mortgage. i cannot specify language for you - that would be the task of an attorney in your area.

@Kindrell Hutchinson

Im not seeing enough numbers to do an actual analysis.  You need to allow 10% of rent for a PM.  8% rent for vacancy covers 1 month rent a year but doesn't allow for turnover cost.  There is no way $3000 will even start a new roof much less 3 roof's.  What about monthly maintenance?  no number for this either.   The fact that one  needs repaired now means at least one is nearing the end of its useful life.  in my area this is $8-10K.  That means you better be putting a good chunk away for  at least 1 new roof  (You have 3).  What about monthly maintenance, yard care on the duplex, water and sewer on the duplex? who pays that?  you need a due dilligance period during wich time you can look at wats been done to the property recently and dig this stuff out.  New heaters? and Air conditioners? are you going to need to repair these things soon?   new hot water heaters?  how old are these buildings?  your cap-ex is going to be huge me thinks!  if I had 300 doors and was going to sell only 12-20 I would bet its the bottom 12-20 performers, the ones with the biggest headaches etc.  also DO NOT TIE ALL THREE PROPERTIES INTO 1 LOAN!!  what happens if you need to sell one?  what happens when you have the loan 1/2 paid for and cant make a payment?  you will loose all three that's what happens! what if values go up and you want to cash out re-fi one property?  you cant do it. At least not without paying him off.  The harder I look at this thing the more I think little red riding hood has met the wolf here.  what about pre payments on the loan?  is there a penalty?  maybe you cant pay the note off early.  That means your strapped for 30 years.  what if he dies?  now you have a loan with his heirs and estate.  don't sign anything you don't show your attorney.  we havnt mentioned neighborhoods here.  sect8 could be a little rough.  are you up to that?  there is a whole nother ball game there.  your offer should let you back out if they don't appraise.  do it if you can.  slow down and take your time  don't force this thing.  there are too many un answered questions here!  Buyer beware!     RR

@Ralph R. I completely agree. I need to ensure that there is some wording in the 1 loan that allows me to sell off one of the properties without issue. I ensured that there is no prepayment penalty. I also agree that if he has 300 homes these are the least profitable that he could possibly have. The owner told me he never does 30 year mortgages but "for some reason" he is doing it now. 

@Ralph R. Also I mentioned 3k for roof repairs because there was an incident on one of the homes where someone patched up a roof on one of the properties wrong and it needs to be redone. this happened because of a tree falling on the roof. the yard water and sewer the renter pays and takes care of.

@Kindrell Hutchinson  your dealing with a guy who has (or says he has) 300 doors.  He didn't get there by doing things for "some reason". He has a motive or reason for everything he does!!  You can bet on that. Your saying the duplex has seperate meters?? Gas water and electric?    Who pays the trash on the duplex?  The renters in the duplex share the yard work??  That's different than my area.   Even if all these expenses are tenant responsibility u need to figure some maintenance. In my areas I figure 30% of rent for vacancy cap ex and PM. Then 5% monthly  repairs and then I add water and sewer to that if need be. You won't get taxes and insurance both for $600 dollars. Not on 3 buildings. That number has to be bogus. 1325-30%= 927.50 this number minus taxes and insurance on 3 buildings isn't going to leave u much. Call an insurance agent and get a quote on each bldg. then look up the taxes online. You will see what I mean. 1325 X .04 =$55 (4% cap ex) x12x 30 years is less than $20,000. That's only 2 roofs and nothing else major. Your cap ex is WAY low. That's why I use 10%. You can juggle numbers to make the deal work. The numbers either work or they don't.  Not figuring a Pm is a serious mistake.   Do you really think you are going to manage your own rentals when you have 30-40 of them??  RR

I think the interest is high. I get 5.25% easy. The difference between that and 7.9% is a lot of money over a few years. If the deal makes sense on all other levels, why not try through a bank?

Hey Kindrell,

     Congrats on finding this deal.  A couple points  Definitely be cautious of capital expenditures.  If the homes and duplexes are old, you're going to have to ramp up from income to make sure you are at levels to replace them in due time.  We've had to do that our condos. because we had low reserves.  If he owns 300 properties, like you say he does, then he is a savvy investor, so be cautious.  But also, since he's at the end of his career, he may be willing to give you some breaks as far as the loan agreement.  As some other have mentioned it's best to make three mortgages out of this.  His money will be the same amount monthly, but it gives you so much flexibility in the future to sell individually or refinance.  Definitely have a no prepayment clause on it.  That way, if you wanted to pour the profits back into one property, you could then refinance to a lower interest rate and use that money to pay off the second....then third

Just some input.

Also, is he selling any other places?  care to share a name?

David

@Ralph R. The tentants work together to make sure the yard is kept up. Im my county the garbage is included in the Electric & Water payment. To give you the numbers completely There are 3 units I'm purchasing, one SFR rents for $1000 another SFR for $1025 and a Duplex $800 each side. All utilities, lawn, and garbage is the tenants responsibility. The terms of the loan is for $278,800 ($110,000 for the duplex, $83,300 SFR, and $84,500 for the last SFR) $45,000 down 30yr amortized at 7.905 int. For payments of $1700mth/ giving the taxes and insurance (which insurances will be bundled) is roughly $600. Do you think with what you guys would implement in Cap Ex, Vacancies, Maintenance, PM I would or wouldn't have a good ROI? there will be npt prepayment penalties as well as a clause of if an certain amount is paid that comes to the cost of how much each home is worth I could either sell off/ or get it seperated from the loan that is still being paid on? I took notes from what you guys have said and plan to negotiate on tomorrow at 1:30pm, if we can't come to a comfortable terms I will walk away from this contract based off of appraisal contingency.

Originally posted by @Kindrell Hutchinson :

@Ralph R. Overall, with the numbers I gave, would you say that this is a good investment? I plan to meet with the seller today.

 Just flinching a little because the TYPE of owner financing hasn't been discussed.  Are you getting a note and deed of trust with a warranty deed?  A land contract with a quitclaim deed after you pay it off?  

It is not a good deal if the type of seller financing doesn't give you ownership/title until it's fully paid off, Kindrell.  Double if you only receive a QCD.

@Steve Vaughan @Kindrell Hutchinson  Steve is right. The type of loan is critical here. Do you have an insurance quote?  In one of my areas insurance on each property runs 975 a year. (Lotta hail storms hard on roofs). That's 243 a month for insurance. Taxes here are cheap at $700 a year. Your 600 would work there but you need to get your own numbers.  We don't know the areas vacancy rates etc. wat you have told us looks ok but not exceptional cash flow. I can't judge the things without seeing them and having real world numbers.   Have you seen rent roles?  How often are they vacant? if it's not in a war zone with high turn over costs and high vacancy rates it mite work. Again use the rental calculator on this website!  And put real numbers in there don't use hearsay numbers. Or his numbers. Don't except a quit claim deed you want a warranty deed. That interest rate is still high as well.  Something else you havnt mentioned. Are there any realtors involved?  RR

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