How To Make This Deal Work?

Question

Hey all,

I'm trying to figure out how to make this deal work for us and the seller. He's pretty firm on a purchase price of 40k. It needs about 20k in repairs and the ARV is about 65k-70k (conservative).

He's open to seller financing, but we've never done a SF deal, so I'm looking for some advice on how to make a deal like this work, if possible. I know it's tight after repairs, but I also know that you can make these types of deals profitable if you're creative enough.

What do you think the best piece to go after would be (low downpayment, low interest, low monthly payment, longer term)? I thought about a 30 year amortization with a 10 year balloon or something like that.

He also would want a prepayment clause where we can't cash him out right away to avoid the interest, so this would eliminate a refi as well.

Much appreciated!

Joe Villeneuve · Answer

IO don't care about the MIRR.  You are buying a cash flow property...sometimes called a rental.  Any future profit, based on future events you have NO control over, isn't investing...it's speculating.  I don't speculate.

I see the numbers as getting you $4860/year based on his numbers and you putting in $25k ($5k down, $20k rehab) you get a CoCR of about 18%....based on his numbers you gt about 16%($10k down, $20k rehab).  Either way works, but If you give him your 5% down, and 5.5% interest over 30 years amort.  you end up with a 17% CoCR.

Depending on what your overall REI/Business plan dictates you need for cash flow per month (no any kind of useless % of return), you can pick your poison.

Ryan York · Answer

@Joe Villeneuve Interested to hear the rest of your thoughts... the taxes and insurance per month is about $234.

I believe his biggest priority is his final "sale" price, with interest included, thus his fear of early payment.

My biggest concerns are MIRR and not having any money tied up. I don't really care whether the MIRR comes from cash flow or back end resale. Likely, it'll be on the back end resale, otherwise, it would have to be cash flowing like mad to make a huge difference over time.

Rolanda Eldridge · Answer

@Ryan York...Depends on the numbers.  After the $20,000 in repairs, what are the market rents?  If at least $800 and you can get mortg payments at $400...Find a way to make it work..Offer less down payment, so you can use that for repairs.  If sellers is not flexible, walk away.  Check back in 30 days..I'm ok with losing a "good deal".  Another will come along...Patience pays...GL

Joe Villeneuve · Answer

My initial prediction, based on getting the rest of the numbers I mentioned above , is this.

His hot buttons are the 10 year NPP, your's is the low pmt/month, so:

1 - Give him the 10 year NO PP.  If you are holding this as a rental, what difference does it make, as long as...

2 - You get the 30 years at 5%, with only $5k down

When I know the tax/insur per month, I can tell you why I think this works for both, and how you can get all your cash in (DP) and more back right away, without needing a REFI.

Joe Villeneuve · Answer

Before anyone can comment on your initial question, we need to know what your limits are.  Based on your goals, what is the minimum cash flow per month you need, and what is the minimum equity left in the deal you need.

and, what is the taxes and insur. per month on this property?

Ryan York · Answer

Thanks @Arthur Lyons!

Some more details: Market rent for the place is let's say 900/mo (very conservative).

My first offer to him was 40k purchase price with a 5k downpayment. 35k loan balance paid back over 30 years at 5% interest.

He countered with 40k pp with 10k down over 10 years with the no prepayment.

Arthur Lyons · Answer

Hi Ryan, Congrats! sounds like you have at least a seller who will work with you.  I cant really give specific numbers without knowing what the market rents are in the area?  But to answer the question of which is the best piece to go after. I say go after all of them and negotiate from there... it all depends on what type of rapport you have developed with the seller. If you have a good relationship and can throw out numbers without being offensive go for low or NO downpayment, 3% interest, low payment AND longer term.  Just look at your amortization and your debt service and ensure he can be paid off while you are cash flowing for 30 years.    Make sure to build in a clause that no prepayment penalty after 5 years OR beat whatever his definition of right away is.  Maybe he wouldn't mind a refi after 2 years even.

How To Make This Deal Work?

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