So I tripped on to a great deal... i think

Glenn Lovelace · 2016-03-03T19:02:18-08:00

Hello BP,It's been a very long while since I posted here on the forums, but I never stopped working towards my second buy and hold. I've been studying up and absorbing everything I can from this site and from listening to the podcasts while I'm supposed to be working :).So this week while running the numbers on multi-families (I do that in my spare time) I came across a potential life changing property. I came across a seller who is retiring that wanted to cash out his empire and ride off into the sunset. He's pushing 80 and didn't want to wait 7 years for the balloon. So from my studies here in Bigger Pockets Land I new that the seller could still decide to carry the loan then turn around and sell the note the next day. Win win for both of us.From back and forth with the buyer we were able to settle on these terms for seller financing:Asking Price: 625KOffer Price: 625KRate: 0%7 Year Balloon 30 year Loan35K DownStats on the Units:Neighborhood: Baltimore City Great Neighborhood - Bolton Hill - Walk to MICA6 Units2Units rented at $12004units rented at $895Yearly Taxes :$8K per yrYearly Repairs:$4K per yrWater:$2300 per yrHeat:$3500 per yrFrom my calculation I will cash flow 2335 per month after I plan on 10% for management saving 10% for Vacancy and Maint and 200 for Insurance. Everything looks good to this point but I wanted to run it by the best REI site in the world. What do you all think?Glenn

Stacy E.

Investor · Norfolk, VA · Member since 2014 · 125 posts · 19 votes

10y

Hi Glenn,

A couple clarifying questions: What do you mean by 7 year Ballon 30 year Loan? Is your heating costs you listed including the electricity? What about garbage and sewer costs? You should also add in Cap Ex. On the surface, it does look like it will cash flow very well for you.

1 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Thank you Stacy for taking the time to look it over. The terms are that the 625k will be financed over 30 years with a balloon occurring at the 7 year mark.

Yeah the heating is for both.

I'm pretty sure trash is included in the taxes here in the city.

What would you set aside for CAP/EX?

My hope is that at that time the property will have enough equity to make refinancing a breeze. From my calculations the principal remaining at that time will be 479k. Thanks again!!!!

0 Reply

Jeffrey H.

Houston, TX · Member since 2015 · 512 posts · 338 votes

10y

Make sure you have a contingency plan for when the old man dies. The terms of your contract need to carry over to his benefactors, or alternatively an escape provision for you to go get a conventional loan.

What's your strategy? Are you going to buy and hold long term (e.g. 7+ years) or exit. How are you going to do either of those?

2 Reply

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

10y

If you mean a 0% loan, principle payments only, the owner would be a fool. He maybe could sell the note for $200-250k.

3 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Hey Jeff,

So with the first part the owner plans on selling the note shortly after the transfer but you're correct. I need to request that there is a transfer in the event this happens before he sells the note. Would you do this in the contract? Is there something special I need to do to make sure this happens?

My strategy is long term buy and hold. I plan on refinancing as close to the balloon as possible with a new conventional 30 or 20 year note.

Glenn

0 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @Wayne Brooks:

If you mean a 0% loan, principle payments only, the owner would be a fool. He maybe could sell the note for $200-250k.

Hi Wayne,

I was kinda worried about that. Would the low rate affect how well he can pass along the note? Is there any better structure that would help his case? This is what he agreed to but I'd hate to leave him stuck.

Glenn

1 Reply

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

10y

To expand on what @Wayne Brooks said if the seller sells the note the next day he will have to sell it at a discount to the going rate. That is because this note has not been "seasoned" or received any payments yet. So the seller has two strikes against him, and unseasoned note and a note below the going rate.

1 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

Full disclosure: I don't have much experience with Baltimore or multi-family, but I do have experience as a buy-and-hold investor.

Is there any equity in the deal, above and beyond the $35k you put down? Is there any way to force further equity in a way that is on par with the market and costs you less to create than the equity added? Are you in a financial position where you could carry the property or bring money to the closing table if you need to get out?

I like to have both positive cash flow AND significant equity ... one is for plan A and one is for plan B. Upside is great to consider, but always watch that downside too ...

2 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @Ned Carey:

To expand on what @Wayne Brooks said if the seller sells the note the next day he will have to sell it at a discount to the going rate. That is because this note has not been "seasoned" or received any payments yet. So the seller has two strikes against him, and unseasoned note and a note below the going rate.

Hi Ned,

Thanks for the reply. I was hoping the seller would let it season for two years before he tried to sell it but I guess it's up to him. Do you thing after two years of on time payments the seller would still take a huge hit?

Glenn

0 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @David Faulkner:

Full disclosure: I don't have much experience with Baltimore or multi-family, but I do have experience as a buy-and-hold investor.

Is there any equity in the deal, above and beyond the $35k you put down? Is there any way to force further equity in a way that is on par with the market and costs you less to create than the equity added? Are you in a financial position where you could carry the property or bring money to the closing table if you need to get out?

I like to have both positive cash flow AND significant equity ... one is for plan A and one is for plan B. Upside is great to consider, but always watch that downside too ...

Hi David,

This is my greatest barrier on the property. I barely have the capitol for the down payment.Closing may have to go on credit cards. I think it's a great deal but I'm wondering if it's worth the risk? If it works out this would be a property I could pass down over generations. If not it could get ugly quick. What would all of you do?

Glenn

0 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

Only you can say if it is worth the risks to you ... all I'm saying is to go in with eyes wide open. It is often the risks you don't see or consider that bite you the hardest. To minimize that, consider the ways it can go wrong, assess the probability of that thing happening, if possible have a plan B to combat against it, or hedge against it in another way, insure against it, mitigate it, or otherwise figure out how to actively avoid the risk and still get into the investment, and after all that then decide if the total risk is worth it balanced out against the reward. Just going through this exercise will help you to better structure your plan and deal if you choose to pull the trigger, or it might talk you out of it; either way, you will likely be better off for going through the exercise. In my opinion, the better you get at risk management like this, the more risks you will be able to intelligently assess and take on (if you choose to) and the higher your rewards will get. Good luck!

3 Reply

Eric Munson

Rocky Hill, CT · Member since 2014 · 200 posts · 56 votes

10y

@Glenn Lovelace- Is there rent control in that area? Would the sale trigger city inspections that could cost you up front for code compliance? Maybe he could take a lump sum(say $100k) second mortgage ballon(no payments) payable in 5years. This will help cash flow and give you more monthly income to cover unexpected expenses.

Without reserves or access to credit I would pass. You would be putting yourself and the seller at risk.

2 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @David Faulkner:

Only you can say if it is worth the risks to you ... all I'm saying is to go in with eyes wide open. It is often the risks you don't see or consider that bite you the hardest. To minimize that, consider the ways it can go wrong, assess the probability of that thing happening, if possible have a plan B to combat against it, or hedge against it in another way, insure against it, mitigate it, or otherwise figure out how to actively avoid the risk and still get into the investment, and after all that then decide if the total risk is worth it balanced out against the reward. Just going through this exercise will help you to better structure your plan and deal if you choose to pull the trigger, or it might talk you out of it; either way, you will likely be better off for going through the exercise. In my opinion, the better you get at risk management like this, the more risks you will be able to intelligently assess and take on (if you choose to) and the higher your rewards will get. Good luck!

Thank you so much David. This is phenomenal advice. I think I need to find a way to reduce the risk for both the seller and myself. Maybe I can round up a partner or two to take on some of the burden.

Glenn

0 Reply

William Jenkins

Real Estate Broker · St. Louis, MO · Member since 2014 · 206 posts · 194 votes

10y

Without knowing your market I would suggest you do the following:

1. Estimate your own income and expenses based on your knowledge and determine the current cap rate. Don't always go by what the owner tells you. I would then research the comps regarding the cap rate and see how it compares.

2. Review the rents and comp it out to similar units. Any room for upside, which would increase value? Are they high for the area, and is there a possibility that you may have to reduce them to attract tenants? What is the outlook for the area in general?

3. Sounds like the $35k is most if not all of what you have. Nothing wrong with that, but you need to be prepared for things that could cost serious money with this property. I would hate to see you close, and then not be able to do a repair 6 months down the line that would render some if not all of the units un-rentable. DO NOT USE CREDIT CARDS

Owner financing is a great way to buy but a deal still needs to be a deal. The owner financing terms look attractive but you need to make sure the purchase price is attractive as well.

1 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @Eric Munson:

@Glenn Lovelace- Is there rent control in that area? Would the sale trigger city inspections that could cost you up front for code compliance? Maybe he could take a lump sum(say $100k) second mortgage ballon(no payments) payable in 5years. This will help cash flow and give you more monthly income to cover unexpected expenses.

Without reserves or access to credit I would pass. You would be putting yourself and the seller at risk.

Hey Eric,

I'm not sure how the City would see the change of owner. Maybe someone with this knowledge will be able comment. I think he was pretty reluctant to agree to the terms as they are now. Not sure how the lump sum idea would go over.

The more I think about it the more I think I need to find a partner with more experience and capitol to split the deal.

Glenn

0 Reply

John CasmonPro Member

Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes

10y

Want to make sure I'm following. The seller agreed to sell the property at $625k with seller financing of $595k after your $35k down payment. He's charging 0% interest on a 7 year note amortized over 30 years, correct? If so, monthly payments should be $1,652.78 or roughly $20k a year.

For your analysis, I think you are underestimating expenses and potential CapEx items, so you should revisit these projections.

What's the upside with the property? Is it fully rented? Are rents below market? If $35k is all you have, I would be hesitant to go all in especially if there is deferred maintenance. Also, is the property paid off? If not, why the 0% interest rate? Doesn't seem to help him much and is less than appealing to someone buying the note. Not to be morbid, but at 80 years old, you can't plan for him to hold it for two years to sell, you better operate as if he may be gone the moment he signs his name on the contract.

2 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @William Jenkins:

Without knowing your market I would suggest you do the following:

1. Estimate your own income and expenses based on your knowledge and determine the current cap rate. Don't always go by what the owner tells you. I would then research the comps regarding the cap rate and see how it compares.

2. Review the rents and comp it out to similar units. Any room for upside, which would increase value? Are they high for the area, and is there a possibility that you may have to reduce them to attract tenants? What is the outlook for the area in general?

3. Sounds like the $35k is most if not all of what you have. Nothing wrong with that, but you need to be prepared for things that could cost serious money with this property. I would hate to see you close, and then not be able to do a repair 6 months down the line that would render some if not all of the units un-rentable. DO NOT USE CREDIT CARDS

Owner financing is a great way to buy but a deal still needs to be a deal. The owner financing terms look attractive but you need to make sure the purchase price is attractive as well.

1 CAP comes out to around 6.8%

Income 6138 - (Ins 200/mo + VACMaint 10% (613) + Utilities 480 + Tax 666 + Mgmt 613) * 12 / 650 Value = 6.842% CAP Val

2 I believe the unit itself is under priced. Comps for 4br in the area come in around 620. I'm not a pro at this though

3.I'm with you. I'm leaning towards finding a way to lessen the risk for both myself and the seller

Glenn

0 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @John Casmon:

Want to make sure I'm following. The seller agreed to sell the property at $625k with seller financing of $595k after your $35k down payment. He's charging 0% interest on a 7 year note amortized over 30 years, correct? If so, monthly payments should be $1,652.78 or roughly $20k a year.

For your analysis, I think you are underestimating expenses and potential CapEx items, so you should revisit these projections.

What's the upside with the property? Is it fully rented? Are rents below market? If $35k is all you have, I would be hesitant to go all in especially if there is deferred maintenance. Also, is the property paid off? If not, why the 0% interest rate? Doesn't seem to help him much and is less than appealing to someone buying the note. Not to be morbid, but at 80 years old, you can't plan for him to hold it for two years to sell, you better operate as if he may be gone the moment he signs his name on the contract.

You are exactly right on the terms. All units are rented with long term/young professional tenants. Police officers and so on.The property owner is retiring and has the property paid off.

I think it's for the age reason that he's willing to do this deal. He's trying to get liquid asap.

How would you deal with a financier that is close to the "End"?

0 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @John Casmon:

Want to make sure I'm following. The seller agreed to sell the property at $625k with seller financing of $595k after your $35k down payment. He's charging 0% interest on a 7 year note amortized over 30 years, correct? If so, monthly payments should be $1,652.78 or roughly $20k a year.

For your analysis, I think you are underestimating expenses and potential CapEx items, so you should revisit these projections.

What's the upside with the property? Is it fully rented? Are rents below market? If $35k is all you have, I would be hesitant to go all in especially if there is deferred maintenance. Also, is the property paid off? If not, why the 0% interest rate? Doesn't seem to help him much and is less than appealing to someone buying the note. Not to be morbid, but at 80 years old, you can't plan for him to hold it for two years to sell, you better operate as if he may be gone the moment he signs his name on the contract.

For the expenses I've budgeted the following

$200 Insurance

$666 for taxes

$613 for Management (10%)

$480 for Utilities

$613 For Vacancy and CapEx (10%)

What am I missing?

Glenn

0 Reply

Nick Harrington

Investor · New Midway, MD · Member since 2015 · 36 posts · 20 votes

10y

I know the property you speak of, I spoke with the seller about financing too and considered it and I passed on it. Have you asked yourself why it hasn't sold yet, especially since the seller would consider financing it? It's not as if it's a off market deal that only you knew about or anything and yet it hasn't sold in quite a while. I could go into more detail but that's all I'm going to say.. Oh, and there would be no equity in the deal either, at $625k, which is pretty much what it's worth, probably a bit less, though.

2 Reply

Tom S.

Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes

10y

@Glenn Lovelace For the expenses I've budgeted the following

$200 Insurance

$666 for taxes

$613 for Management (10%)

$480 for Utilities

$613 For Vacancy and CapEx (10%)

What am I missing?

Glenn

Glenn - repairs is the major item. I own a few multi units and things can go all the time. Just last month I had a slowly leaking toilet that rotted out the floor - $1,000 just like that! Or code updates - new smoke / CO2 detectors for example.

Also budget some for electric. Most multi units will have hallways or outside security lights that are on your dime.

As others have mentioned, the most important thing is to look at the numbers regardless of owner financing and if they make sense. If proceeding, definitely get it appraised to make sure it's worth $625k.

Good luck!

- Tom

1 Reply

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

10y

Originally posted by @Glenn Lovelace:

Hi Ned,

Thanks for the reply. I was hoping the seller would let it season for two years before he tried to sell it but I guess it's up to him. Do you thing after two years of on time payments the seller would still take a huge hit?

Glenn

The seller would not likely take a hit for being a new loan but would still take a hit for the zero interest rate.

1 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @Nick Harrington:

I know the property you speak of, I spoke with the seller about financing too and considered it and I passed on it. Have you asked yourself why it hasn't sold yet, especially since the seller would consider financing it? It's not as if it's a off market deal that only you knew about or anything and yet it hasn't sold in quite a while. I could go into more detail but that's all I'm going to say.. Oh, and there would be no equity in the deal either, at $625k, which is pretty much what it's worth, probably a bit less, though.

Hi Nick,

Thanks for the insight. I have yet to see the inside. When all is said and done, all of this could be nothing more that a study in due diligence which I'm greatful to all the great investors for their input on this thread.

My thought for this property is to do a long term hold. But to make it past the balloon it'll need to have at least 20%-25% equity. I was banking that after 7 years I'll have right in that ballpark.

Is this the wrong way to look at it?

0 Reply

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

10y

@Glenn Lovelace and any one else reading Please Please Please use consistent numbers. Don't use a percentage and a monthly amount and an annual amount in the same post. And frankly I hate monthly numbers. Professionals use annual numbers not monthly ones.

Now back off my soap box to answer your questions. This works out to about a 6% cap rate. That may be about right for what the market is paying now in Bolton Hill. But I don't care. I think the market is grossly overpaying for the risk the multifamily represents right now.

The reason this might still be a viable deal is the potential zero percent loan. That makes your debt coverage ratio about 185, that is very good. You are building equity at about $20K a year, that is very good. The spread between your interest rate and the cap rate is 6%, which is also very good.

You will need about $450 to refinance in 7 years. At 80% LTV that means you need an appraisal of $562. Will it appraise for that (or more if you can only get a 75%LTV) What will cap and interest rates be in 7 years? The odds are they will both be higher. this is a longer term risk to you.

The shorter term risk as pointed out is the lack of reserves. This will in part depend on the condition of the property. Are components of the building new with modest risk of replacement or repairs needed or are the systems dated.

2 Reply

Glenn Lovelace

OP

Baltimore, MD · Member since 2013 · 24 posts · 3 votes

10y

Originally posted by @Ned Carey:

@Glenn Lovelace and any one else reading Please Please Please use consistent numbers. Don't use a percentage and a monthly amount and an annual amount in the same post. And frankly I hate monthly numbers. Professionals use annual numbers not monthly ones.

Now back off my soap box to answer your questions. This works out to about a 6% cap rate. That may be about right for what the market is paying now in Bolton Hill. But I don't care. I think the market is grossly overpaying for the risk the multifamily represents right now.

The reason this might still be a viable deal is the potential zero percent loan. That makes your debt coverage ratio about 185, that is very good. You are building equity at about $20K a year, that is very good. The spread between your interest rate and the cap rate is 6%, which is also very good.

You will need about $450 to refinance in 7 years. At 80% LTV that means you need an appraisal of $562. Will it appraise for that (or more if you can only get a 75%LTV) What will cap and interest rates be in 7 years? The odds are they will both be higher. this is a longer term risk to you.

The shorter term risk as pointed out is the lack of reserves. This will in part depend on the condition of the property. Are components of the building new with modest risk of replacement or repairs needed or are the systems dated.

Apologizes for the unorthodox replies. I'll be the first to admit I'm not a professional. I'll keep this in mind when I'm posting from here on out.

Aside from that I'd like to thank you for putting everything in perspective. It all comes down to risk and if I have the experience cash and stomach to deal with it. I think I may pass on this one and continue to save until I find a deal that is a little more my speed. Big thanks to everyone who had some great advice on this thread!

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So I tripped on to a great deal... i think

So I tripped on to a great deal... i think

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