I've been in discussion with the owner of the property next door to mine for a couple years, just letting him know I'm interested in buying when he's ready to sell. He's around 70 and willing to seller finance.
He finally gave me some numbers to start with last week. I think all of them are way in his court, but I know he's negotiable.
Four 2/1 units, renting for $600 right now. I own 2/1 units next door renting for $825. His rents are under market and his building is super ugly. (So are a couple of his tenants.)
He gave me these numbers:
3 year balloon at 6% 30 yr amortization
Comps in the area are $190-$289 for the last year.
I would like at least 5 year balloon at 5% 30 yr
I'm still working out down payment, but also want to keep some aside to make this ugly thing prettier (paint and some other stuff ~ $3000 plus sweat).
What do you think? Where would you go with this property?
I would start by knowing what your criteria are and then comparing his numbers to them.
- how much will you need to spend to get the rents up? (and it's great that opportunity is there)
- what kind of return will you see based on however you calculate ROI, and how does the purchase price fit with that?
- where is your market headed and how will you handle the balloon payment (especially if the rental or property market drops)?
Know your numbers and then you can explain to him what you're willing to pay and why. I generally expect to pay a premium for seller financing, and as long as I'm comfortable with the cash flow and the property value over time it works.
Start with the comps. You listed a $100k range in comps - you absolutely need to fine tune that. See exactly what fourplexes have sold for in the immediate area. If you're not sure, consider getting it appraised. If you're going to refinance in 3-5 years, you need to make sure you're not overpaying now, or else you're going to have to come to the closing table with a lot of cash to refinance.
@Denny Robert - I am willing to pay more when I get terms but exit strategy out of the 3year balloon can be an issue. Refinance for investment property is typically 75%LTV so your principal pay down won't get you there and you would most likely need to bring money to the table in 3 years.
Maybe you could offer 5% for years 1-3 and 6% for years 3-5. Try to get a right to renew clause in the note.
Of course it needs to have decent positive cashflow or it won't be worth it. Good luck.
l am working on buying 3 multi units and have found them all be be over priced. My sellers have been 70 or older as well. The problem is they are not collecting enough rent to merit the asking price. These buildings are their retirement. Sitting down and educating this type of seller is imperative if you want a win win situation. Also, patience is priceless.
Update on this deal:
We opened escrow today with COE on June 30th.
I've got a $30k down payment ready to go, and the agreed price is $270,000 owner financed.
Gross rents is $2400 right now, and that should cash flow about $400/mo after PITI.
Rents are under market, so I will be able to raise rents $150-$200/mo each unit, raising cash flow after PITI to $1000-$1200/mo.
Going through inspections next week. I've lived next to this property for over 3 years, so I don't expect anything surprising.
I'm excited to be acquiring my second property, putting me at 7 doors!
You'll need to pump in another 37,500 before your balloon payment, hope you got 5 years as suggested.
You don't buy a property based on what it could do, you buy based on what it is.
Sounds like this old RE guy shot a price to horse trade reducing his asking price by 10%, I'd bet he got what he was wanting. After two years of putting a bug in his ear, he really knew you wanted it. He may have come out better than if he had listed the place too.
That said, CONGRATS! You're picking up 4 more doors!
It's even better since they are next door! That is an intrinsic value to you, but not something you can assign as a value to the property. Just like seller financing doesn't make any property more valuable. Never pay more for seller financing than what conventional financing would cost you, going past that, you're giving up equity AND it's predatory dealing/lending! Those that pay more aren't investing as much as buying a job with ownership responsibilities, better make sure what you gave up can be made up before the seller lowers the boom with a balloon payment.
Looks like you'll have about 8% COC, not bad, hopefully paint and lipstick will improve the condition, value and rents. Assuming you didn't borrow the down payment.
Keep in mind the equity you need to refinance, 25+% of the future appraised value. All in all, you did good! Good luck :)
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