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

Creative Real Estate Financing

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

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

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: 625K

Offer Price: 625K

Rate: 0%

7 Year Balloon 30 year Loan

35K Down

Stats on the Units:

Neighborhood: Baltimore City Great Neighborhood - Bolton Hill - Walk to MICA

6 Units

2Units rented at $1200

4units rented at $895

Yearly Taxes :$8K per yr

Yearly Repairs:$4K per yr

Water:$2300 per yr

Heat:$3500 per yr

From 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

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

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

See this reply in the discussion

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Aaron Mazzrillo
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
10y
Originally posted by @Glenn Lovelace:

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"?
His math is wrong and you said he is "exactly right on the terms." Just so you don't beat yourself up trying to figure it out, $625-$35 is $590. At least on my calculator, but I did buy it at Staples, so you never know...
That 0% loan has a street value of $273K (6%) on the high side, but probably more in the $223K (8%) or less range. You're not doing this guy any favors, but he probably won't be around much longer to complain about it. The real discount will come when his heir gets that note and wants to be cashed out. You'll do real well that day.
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Glenn Lovelace
OP
Baltimore, MD · Member since 2013 · 24 posts · 3 votes
10y
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 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. We'll see.
0 Reply
Glenn Lovelace
OP
Baltimore, MD · Member since 2013 · 24 posts · 3 votes
10y
Originally posted by @Aaron Mazzrillo:

Originally posted by @Glenn Lovelace:
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"?
His math is wrong and you said he is "exactly right on the terms." Just so you don't beat yourself up trying to figure it out, $625-$35 is $590. At least on my calculator, but I did buy it at Staples, so you never know...
That 0% loan has a street value of $273K (6%) on the high side, but probably more in the $223K (8%) or less range. You're not doing this guy any favors, but he probably won't be around much longer to complain about it. The real discount will come when his heir gets that note and wants to be cashed out. You'll do real well that day.
Aaron,
I'm replying on my phone while two toddlers click to my legs. I won't be able to catch everything but that you for the clarification.
Do you think structuring the deal with a rate of 5% with a lower principal would bring the seller closer to where he would ultimately like to be?
Glenn
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Glenn Lovelace
OP
Baltimore, MD · Member since 2013 · 24 posts · 3 votes
10y
Originally posted by @Glenn Lovelace:

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 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. We'll see.
Sorry this was mentioned as a reply to @Ned Carey
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Zach KiddPro Member
Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
10y
Let me break this down properly.
The deal is potentially financially viable. It's not a home run, but it works.
You still need a few questions answered, and your strategy examined for anything you might have missed. No due diligence yet, but certainly worth a deeper look.
The deal would put you at the limits of your financial capability. No room for error or the unexpected.
And something smells fishy. @Nick Harrington covered that.
With those points in mind, I would go out of my way to buy Nick a very nice lunch.
Then if you still want to move forward, absolutely bring in a partner. Someone with a different set of eyes, perhaps some experience with how this would be handled if the seller kicks off, and with a credit card capable of handling the unexpected.
If you move forward, ignore the seller's age. Negotiate like he's 30 years old with 50 years of training.
Treat the whole deal as a learning experience, whether you pull the trigger or not.
1 Reply
Glenn Lovelace
OP
Baltimore, MD · Member since 2013 · 24 posts · 3 votes
10y
Originally posted by @Zach Kidd:

Let me break this down properly.
The deal is potentially financially viable. It's not a home run, but it works.
You still need a few questions answered, and your strategy examined for anything you might have missed. No due diligence yet, but certainly worth a deeper look.
The deal would put you at the limits of your financial capability. No room for error or the unexpected.
And something smells fishy. @Nick Harrington covered that.
With those points in mind, I would go out of my way to buy Nick a very nice lunch.
Then if you still want to move forward, absolutely bring in a partner. Someone with a different set of eyes, perhaps some experience with how this would be handled if the seller kicks off, and with a credit card capable of handling the unexpected.
If you move forward, ignore the seller's age. Negotiate like he's 30 years old with 50 years of training.
Treat the whole deal as a learning experience, whether you pull the trigger or not.
Hey Zach,
Your last statement is how I try to approach every property I see. I keep my spreadsheet handy for breaking down the numbers, and I'm getting a world of knowledge from the users on this site. Thanks everyone!
Glenn
1 Reply
Ronald PerichPro Member
Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
10y
Originally posted by @Glenn Lovelace:

How would you deal with a financier that is close to the "End"?
He's not going to be liquid if he's holding a note. The zero% interest note would be very illiquid in my opinion. He could certainly get more by just selling the property outright for a discount.
From an estate perspective, holding a note might be better. Not really sure on this one. The valuation of the note at zero percent might reduce the overall estate value which in turn reduces estate taxes. I'm not too familiar with estate tax laws to say for sure and don't really know his situation.
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Lesley Resnick
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
10y
The deal makes sense and is reasonable. The 0% for 7 years is great. As far as the legality of the owner passing, it is your place and you owe him a debt, or his estate. The estate will be under contract until the 7 years runs out.
The bigger issue is your financial stability. You need to consider your own viability. You have to plan for the worst case scenario. All the numbers above are estimates or historical. There is no way to predict what will happen.
How old are you?
How stable is your job?
Do you have a spouse that works? Kids?
ETC.
I would recommend finding a partner, friend, relative, so on. Taking this on by yourself could destroy you financially. The down side risk is huge. People on BP are sometime to aggressive in their approach and risk way to much for my taste. This is a long race and it is more important not to lose money or make a mistake then any individual deal.
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John CasmonPro Member
Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
10y
Originally posted by @Aaron Mazzrillo:

Originally posted by @Glenn Lovelace:
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"?
His math is wrong and you said he is "exactly right on the terms." Just so you don't beat yourself up trying to figure it out, $625-$35 is $590. At least on my calculator, but I did buy it at Staples, so you never know...
That 0% loan has a street value of $273K (6%) on the high side, but probably more in the $223K (8%) or less range. You're not doing this guy any favors, but he probably won't be around much longer to complain about it. The real discount will come when his heir gets that note and wants to be cashed out. You'll do real well that day.
Good catch on the math.

You'll have to keep us posted on what happens as you go through due diligence.
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