Investor · Kansas City, MO · Member since 2016 · 130 posts · 64 votes
I am meeting with an 82 yr old lady in a couple days to begin discussions of owner financing her five paid for duplexes. She's had them over 20 years. She's been managing them for the most part for the last 6 years. She does have a tenant that helps collect rent and does some repairs she pays $300 a month. She told me some of the work she has done and sounds like they're in pretty good shape. It would appear rent is low but my only current source for rent comps is Zillow. If Zillow is correct, she's low by $2000 a month on the 10 units.
She thinks they are worth $900,000 - $1,000,000. A 10% cap rate puts the price at $850,000. I am thinking of offering her 8-10% down, maybe a 4.5-5.0% interest rate, on 30 year term. The higher interest rate because limited amount down. The 30 year term allows the cash flow to be $1000 more a month.
With her being 82, what's the exit strategy when she passes? Is it possible to pass those payments on to her 57 and 61 yr old children to maybe avoid some inheritance taxes? I could also offer to refinance in 5-10 years and pay them off.
Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
9y
@Michael H., have you considered a master lease and option on all the properties? Offer to pay her the current NOI per month and then you get the upside. Get an option for the $900k she wants for five years from now. Master Lease it for 5 years, then exercise your option. I would not depend on the Zestimate for your rents. Use Rentometer, or better yet, buy a rent report from Cozy. If you can raise rent $2,000/month, that's $24k increase in the NOI and a $240k increase in the value of the portfolio. Over 5 years, you should surpass the option price of $900k.
Developer · Portland, OR · Member since 2014 · 732 posts · 490 votes
9y
@Michael H. If you go the route of seller financing the seller can name her kids as the remainder beneficiaries to ensure continuity of payments. You'll want to add a clause in your note saying that you have the first right of refusal to purchase the Note in the event the beneficiary (seller or her kids) decide to sell the Note at any point in the future.
Investor · Juneau, AK · Member since 2015 · 980 posts · 741 votes
9y
Lots of good specific advice here....
One general source I like on creative strategies for situations like this are the books and teachings of Jay P. Decima. He has some tips on working with sellers in these types of deals, structuring them, etc. ( I think he even chimes in on BP now and then, too!)...
His Fixxer Upper book is a classic (but not just about places needing rehab, as it has lots of creative strategies for buying groups of houses and owner financing).
And the latest Real Estate Fisherman title is on precisely this topic: buying "colonies" of houses/properties (especially if these were lumped together, for example, but applicable if these are in some reasonable geographic proximity).
With these properties paid for, and the seller likely looking at some exit strategies, it is the type of situation where thekey ingredient may be your creativity and ability to meet the sellers need (for income, security, etc) and structure a deal to meet your investment goals....
Interesting transaction you got. Here are my thoughts
1. Due diligence. Inspect every unit. Look at every lease / tenant. Make sure property is in the sound shape and you understand the occupants. Value each unit individually.
2. Negotiations. Understand the owners objectives. See how you can help her and add value. In your seller shoes I'd look at establishing trust and putting properties in it. This way she can avoid inheritance tax, probate and what not. From your stand point, you want to buy properties for tax appraised value, so you don't give city / county easy reason to raise taxes. Hence properties may go to an LLC and you may be buying and LLC. Sign a letter of intent, outlining proposed transaction and giving you exclusive for the period of time.
3. Financing. She can finance it as Contract for Deed or Money Mortgage. Difference in 1st case properties are hers till contract is fully executed (last payment is made). In the 2nd case properties are yours and she is a lender. I would be looking at buying so many shares of LLC with each payment and her providing a money mortgage, with your payments going to trust, so it is clearly inherited by her children.
4. In my experience seller wants a balloon, so be prepared for it. One way to address it is to have a balloon every few years with automatic extension hinged on no late or missing payments. In my area in exchange for seller financing, seller usually gets 10-25% down and +1 to +3 percent to the going rate, so your down / rate are excellent.
5. See if she can discount a rate for a year or two, or do interest only payments so you get a bit better cash flow, will help you with some turnovers.
6. If you help her set this transaction up, spare her an expanse and hassle of dealing with broker and 7 different transactions - here is your value, ask for a discount. If you need to negotiate, look at individual values, tell her I think 3 a priced fair and two are overpriced of something ...
8. If you end up buying property, pay your friendly real estate broker a $500- $1000 or so per property and have transaction go under his license. He has insurance, there is a value to that.
9. At any rate make sure you have title insurance on the real estate.
To sum it up, it look at properties in LLC, LLC owned by the trust. You are buying shares in LLC with each payment. Your financing is Money Mortgage from the trust.
If you get serious, engage a CPA / Attorney / Real Estate Broker to help set everything up. You don't need them to negotiate / put together a deal outline. Deals are fun, good luck :)
Investor · Kansas City, MO · Member since 2016 · 130 posts · 64 votes
9y
Very good stuff @Dan Bryskin. Could you expand on :
6. If you help her set this transaction up, spare her an expanse and hassle of dealing with broker and 7 different transactions - here is your value, ask for a discount. If you need to negotiate, look at individual values, tell her I think 3 a priced fair and two are overpriced of something ...
I don't understand how I add value and the basis of a discount very well.
8. If you end up buying property, pay your friendly real estate broker a $500- $1000 or so per property and have transaction go under his license. He has insurance, there is a value to that.
I don't mind paying it at all but what's the value of their insurance? What stage of the process would this be in the varied purchase options?
It's america man. People pay for convenience, and expertise.
Convenience: If you are not buying duplexes as a package, she would have a hassle of dealing with number of different buyers, time on the market, showings, inconvenience to the tenants, 5 different negotiations. She may sell 4 of them quick, and for whatever reason sit on one for 18 months. She may have any number of clowns wasting her time. You? You do what you say, she won't have any problems with you, you will make it easy. It will be the 2nd easiest transaction in her life :) I'd say that's alone worth 5 -15%.
Expertise: if you can assist a seller to structure the transaction there her needs and concerns are addressed - where is a value to that. Say she did not think of trust, or setting up an llc. If you do all leg work and all she has to do is sign - that's a service, and should be reflected in price or terms.
Ask a seller about how she arrived to 900k number- get to individual value. That can be further help in negotiations. Say she prices for 4 at 100k and one at 500k. Pretend to be interested in 4, and tell her the only way you will get 5th is if price is 250k.
Negotiating tactics are endless. To negotiate well you got to understand sellers motivation, thinking, reasoning and decision making process. Ask her what she wants out of the transaction, what are the most important things to her, why, why is she considering contract for deed, what is the duration. Ask her every question you can think off. Every answer gives you a bit more inside and prospective. For example: Say she trust you with her property, and she expect an income stream for years, to pass to her children - great, here is where i'd negotiate low payments for the first year or two, because I plan a major capital improvements and they would be easier with a little help.
Along other things broker should have Errors and Omissions coverage. for example if someone says they will file an easement but never do, you can come back and sue brokers insurance company. Figure out the outline of the structure for this deal and then ask questions :) It can play 15 different ways and you will be getting vague answers till questions are specific. PM me if you think I can help. Thank you, Dan
Investor · Kansas City, MO · Member since 2016 · 130 posts · 64 votes
9y
I met with the owner again yesterday. I had proposed some sample offers to her where each one would provide her a million dollars at least in 5 years.
$800,000 purchase price, $80,000 down, 6% interest.
$850,000 purchase price, $65,000 down, 5% interest.
$900,000 purchase price, $50,000 down, 4.5% interest rate.
She's not 100% yet but she's mentioned multiple times and things to me why I should have the 5 duplexes. She likes me a lot. Crossing fingers and toes.
She has a realtor that is ready to put on the market at $1,200,000.
Investor · Kansas City, MO · Member since 2016 · 130 posts · 64 votes
9y
@Cody BarrettI am still working on this deal. The seller and I were in a small stale mate as she didn't want to sign the real estate contract and I wasn't going to get the appraisal until she signed it. We had a meeting and she signed an agreement for me to get exclusive rights to purchase the property for 30 days if I got them appraised.
The offer I made to her was this.
$925,000 for five duplexes, 5% interest, 30 year amortization, with $50,000 down (5.5%) and for me to refinance and payoff in five years.
The appraised value came back @ $844,000 for an $81,000 lower value. $50,000 of that is condition of "average/good" compared to comps of "good". I really was surprised by this because beyond a little paint and carpet there isn't much to do. Most of the units have new furnace/AC/water heaters too. All five buildings have a roof less than 6 years old. Additionally, all 10 units are three bedrooms and the appraiser deducted $20,000 and marked them two bedrooms.
I have a call and email to the appraiser for clarification on the bedroom deductions. I purchased a report on Cozy for rents and it said rents could be $1100 a unit. The seller currently averages $800 a unit. The appraiser told me he thought Zillow was amazingly close on rents and agreed that they are horrible on sales. Zillow also says $1100+ a unit. Rent-meter is even higher. He came back with $800 a unit.
I have a lot of experience in remodeling and done a couple flips. I can do all the work on these units. I'm not looking for a lot of cash flow but a long term investment as the tenants will be paying the debt down for me with only $50,000 in. My calculations show there to be $170,000 in equity after five years and $47,000 in vacancy, management, and capex.
I plan on going to the seller and showing her the appraised value of $844,000 and seeing what she says. I am confident she will not sell to me at that price. With $50,000 difference in conditions and $20,000 in possible errors in bedrooms deductions don't think I have a problem of paying more $875,000 or more.
So I come to the professionals for your input. @Mindy Jensen
Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes
9y
The data NEVER lies (at least in negotiations) No bank will give that loan...so...I would tell her that you couldn't promise that you could get out in 5 years. You have negative equity and could REALLY be putting yourself in a pickle if the market turns. I like to be aggressively risk averse.
If I were her realtor I'd be happy to put it on the market at 1.2M also...its no skin off the realtor's nose if it doesn't sell. If I were you I would try and offer EXACTLY what the appraisal says, but perhaps bump up the % on the loan. Even through this is a long play in your strategy IT IS ALWAYS SMART to have multiple exit strategies...and financing out of the deal with her in a year might be one you want in your back pocket. I sure would.
1. Deal. You make your money on the way in. Appraiser gives you number, but doesn't determine how good the deal is. You do. Make sure you are getting a good deal.
2. Appraisals. Appraisers are trained professionals, but they are not gods. They make mistakes. I had them miss hundreds of finished square feet, bathroom and bedrooms before. Go through appraisal with the fine comb. Pick it up line by line, pull the comps they pulled, look at every one of them. Talk to the appraiser. Get questions about bedrooms, rents and what not answered. Determine if he is conservative / unfamiliar with the area or if you are in fantasy land.
3. This is not the conventional deal, it's not only about sale price. If you do conventional financing, you are pulling 5 loans with 20% down on each. You are paying 5 origination fees (1-2%), 5 closing costs and what not. Or you are pulling a portfolio loan and paying 25% - 30% percent down, 20-25 year amortization and you rate is higher and fixed for a few years. Let's consider cost of 5 loans for 844k purchase. 20% down = 169k. Cost of obtaining the loan, say 1.5% of 675k = 10k, 5 closing costs = 10k. So, you are looking at 189k in cash or 169k in cash and 20k financed, financing 695k. Can you realistically obtain 5 loans to close in 30-60 days? If you can't - you do portfolio or commercial, and it costs you more $$$. So, go conventional route and that deal @844k costs 865k closed and it took 170k cash. What's a value of borrowing 120k cash at 5.5? What can you do with 120k in your pocket?
4. I am sure you heard, your price my terms. What it means is, if you want 925k for a package, but i give it to you in x years, numbers may not matter. As in i can do 950k and x years +1 or 975 and x + 2 and so on.
5. Negotiate. There is no harm in negotiating. Even if you don't get the price all the way down, you may be able to knock 25k off or 1% -2% on rate or get your self an extra year or two on the balloon. Would it be a smoking deal at 925k and 1 or two years of no interest on payments? You do realize, at this point you got a motivated seller. She could have listed her places months ago but she is still talking to you ...
6. Exit strategy. How fool proof are you? What happens if there is a market crash a year from now? Or two, or 5? Can you bang one or two of them off, sell it off and reduce your risk? Can you sell off 4 next spring and be left with the free duplex? What happens if it doesn't happen?
It is all nuanced ... good luck and call me if you have questions.
Phoenix, AZ · Member since 2015 · 345 posts · 138 votes
9y
I agree with Mindy, definitely risky given that appraisal compared to your offer price and you having a balloon. Plus the markets are kind of interesting right now so I'd prefer all the safety I could get. Maybe chat with some local property managers to pinpoint those rents and average expenses to operate 5 duplexes in the area. Capex really chunks down those returns on long term holds too so try and get really specific on the lifespan of those mechanicals so you can budget down to the penny every month for replacement. On top of costs to get the units rent ready, incorporate that into the offer from the appraised amount. Go to a few banks with your new numbers and see how they feel about the deal.
