The Numbers

7 Replies

Hello - I am a wantrepreneur...I want to become a real estate investor. How do I structure a deal with 2 mortgages and owner financing when I only want to carry / pay for the first mortgage? 

Comps say the place I am looking at is worth 175 max when sold. The current owner has 155K outstanding on his 1st mortgage & 15K on a second. He's willing to do owner financing but wants me to pickup both mortgages. I estimate 15K are still need in repairs & upgrades to make it sellable. New windows, a second full-bath, some electrical, paint, washer/dryer, cleaning and a few other items. The house is in a good but not great neighborhood. I'd like to offer 155K and have him carry the second. Otherwise, the deal doesn't add up. As it is I'd be happy to make 5K on this flip. My first flip. 

Suggestions? Thank you!

@Scott T.  Pass on the deal.

First rule of REI...the numbers don't lie, so don't argue with them, you'll lose every time.

The numbers here tell me it's not a good deal.  Move onto the next one.

REI isn't a contest to see how many properties you can acquire. REI is scored based on the numbers with $$$ in front of them.

My best advice, is to pass.  Sometimes the best deals you make, are the ones you don't make.

Joe Villeneuve
REcapSystem
A2REIC

If its worth $175K and you pay the owner $155K and spend $15K you will suffer a significant loss.  There's nothing close to a $5K profit here.

If you sell the house for $175K you will pay 6% in RE commissions and about 2% in closing costs.  That leaves you about $161K.  Out of that you have to pay off the $155K loan and pay yourself back for the $15K in rehab costs.  So, you're $9K in the hole right here.  

Then you have purchase closing costs, the interest you pay on the $155K loan while you hold it, insurance (builders risk, not homeowners), utilities, etc.  Even neglecting the $15K second this is not a deal for a fix and flip.  Not even close.

The owner can't "carry" the $15K second.  It would HAVE to be paid off when you sell the property to an end buyer.  Now, that's not an impossible thing to do.  Sellers sometimes have to bring cash to closing to get the deal done.  So, if you want to pursue deals like this, the conversation with the seller is about paying off the second out of their pocket, not just continuing to make payments.

Jon Holdman, Flying Phoenix LLC

Wow Jon...that makes is crystal clear. At what number would you do this deal? Or, should I just move along & look for a better opportunity?

Thank you laying it out so clearly.

@Scott T.  

I don't see any number that will work.  As Jon stated, the existing debt that the seller has to pay off is $160k.  That means it is unlikely the seller will go for anything less (or much less) than that.  Add in the rest of the expenses you're going to incur, and I'm not sure there is a "middle" to meet at.

Like I said above, time to move on.  Don't force a deal that can't be forced.

Joe Villeneuve
REcapSystem
A2REIC

I hear you Joe. Thanks again!