Is this a good deal?

Question

Hi everyone! needing opinions regarding my first investment property. I currently own one side of a duplex and an investor purchased the other side and is willing to do seller financing. Here are the details:

my conventional mortgage

Balance remaining: $23,000

term of loan: 38 years

interest: 3.25%

Monthly payment $300

(investor) seller financing side

Asking $110k

Down payment of $10k

interest rate of 9%

25 year term

payment $840 estimated.

Market comps in the area would be $850 a door, resulting in $1700 gross profit. Would you take this deal? If this the wrong group please let me know!

Thank you for your time,

Luis

Luis Munoz · Answer

Thank you Randy!

County appraisal is $96K

my reason behind owner financing is knowing that I won't get a approved for a conventional loan, so in theory would be able to rent both out/ airbnb where my side would necessarily keep both loans afloat and make some profit.

I appreciate the insight! I have applied the numbers to online rental property calculator's and the numbers on that said keep showing a negative return on the investors side including taxes, insurance, maintenance and other costs. Adding my side of the duplex into the equation results in a cash flow of $45 bucks for both properties.i will pass on this deal.

Caden Wakim · Answer

@Luis Munoz really listen to what @Randall Alan said, he said it well!

Randall Alan · Answer

There is a lot we don't know here... like "is there property worth $110,000?" from looking at other rental properties in your area.  That is a market analysis question.

Looking at the obvious... his interest rate is really high... and that is looking at it from today's rates - which are already high!  In comparison, 12-18 months  ago rates were in the 3-4% range.  My first question is why wouldn't you buy it with conventional financing at a lower rate?  Since you would be living in the building, you might be able to put 3.5% down on the property and even refinance your house back into it to have a single loan if the property was considered one duplex, versus 2 single sides.  That might be a question for your local property appraiser.  They can reunite 2 adjacent parcels into one.  The timing might be the issue there... but it could be a big win for you from being able to get one new loan across both properties.

If you went with his financing,  I would want to know about pre-payment penalties... because as soon as rates came back down I would refinance out of his loan and get your rate down to something in the 5's or less hopefully with a 30 year loan.  It looks like  your payment figure of $840 only includes Principle & interest.  Are you accounting for taxes, property insurance, and a reserve for repairs?  If not, this is really a bad deal the way it looks to me at present.  You would definitely be upside down each month.  Once at a rate like 5.5% interest on 30 years it gets better.... it looks like the P&I would be $568.  If I guessed at $100 for insurance and $100 in taxes a month... that would put you at $768/month before a maintenance reserve.  I wouldn't be buying it if the best I could rent it for was $850/month even at that rate.  I want at least $300/door profit on a rental after PITI and a maintenance reserve... but that is a personal number.. yours may be different.

To me it isn't a great deal as currently described... but does get better at a lower interest rate.  But keep in mind that none of this is evaluating the $110,000 figure.  We can't know if that is a good number or not.  You would want to look at other recent sales for similar properties in the same area and see what they are selling for.  If other like properties were selling for $70,000, the seller is trying to rip you off.  So be sure to check that side of it as well.  You can also look up what he paid for the property on your local property appraiser's website (at least where I'm at).  This would give you a good idea of what your negotiating range could be.  If he paid $40,000, for instance, he is just trying to really score off of you. If you are not up to speed on all of this, you might want to have a realtor get involved and give you some advice.  Even if you had to pay for their services, it might be worth it to make sure you are in a good position if you decide to proceed.

All the best!

Randy

@Luis Munoz