Need Help With Owner Finance Deal

7 Replies

This contractor I met when he came to give me a quote on a new project, offered to sell me a 1BR condo he owns. I said I would only be interested if it is owner financed and he agreed.

Asking $55,000 which is close to market value. 

records show he paid $49,750 in 2012

condo fees: $136/ mo ( includes exterior maintenance and cold water)

taxes: $120.33/ mo ( $1443.82 annual)

Insurance: $12.08/ mo ( $145 annual)

He is asking 10% down and 10% interest rate

Condo is currently rented for $650 

Electric heat ( paid by tenant)

2 parking spaces

What do you guys think about these numbers? We are currently working on scheduling a showing of the property. And what's the next step if we agree on the terms ( I plan on negotiating the price and interest rate)?

Originally posted by @Victor N. :

This contractor I met when he came to give me a quote on a new project, offered to sell me a 1BR condo he owns. I said I would only be interested if it is owner financed and he agreed.

Asking $55,000 which is close to market value. 

records show he paid $49,750 in 2012

condo fees: $136/ mo ( includes exterior maintenance and cold water)

taxes: $120.33/ mo ( $1443.82 annual)

Insurance: $12.08/ mo ( $145 annual)

He is asking 10% down and 10% interest rate

Condo is currently rented for $650 

Electric heat ( paid by tenant)

2 parking spaces

What do you guys think about these numbers? We are currently working on scheduling a showing of the property. And what's the next step if we agree on the terms ( I plan on negotiating the price and interest rate)?

Gross Rent:    $650

vacancy (10%)       -65

expenses (40%)   -292.50

HOA -136

______________________

$156.50 NOI

$434.40     (monthly payment assuming fully amortized 10%, 30 yr term)

negative cash flow = -$277.90


What do you think about the numbers?  I know I don't like them.




Ellis San Jose, Real Estate Agent in CA (#BRE01855039)
(805) 852-7418

Hi @Victor N. ! Without the financing, I calculate your Rental Yield at 8.3%:

((650-136)*12 - 1444 - 145) / 55000

That's before repairs, maintenance, management, and vacancy. I'm assuming you will pay the condo fee.

With financing it could get better, depending on the term and the amortization period. You might, with skillful negotiation, be able to craft a good deal here.

But, I also see a bunch of unnecessary exposure:

  • The condo association controls all. They could decide tomorrow to levy a mandatory assessment of $2000 for roof repair. Or, they could vote to double that monthly fee. Or, they could severely restrict the rental of all units. I've seen condo associations do all of these and worse.
  • A 1-bedroom unit typically means lots of turnover. (It's probably got just one bath as well.) It usually doesn't take long for most tenants to decide they need more space. That drives up vacancy costs, eating into your cashflow.

Could these items be overcome? Absolutely! The real question is whether this is the best deal you can find out there.

Personally, I'd keep this one on the back burner while searching for something better. I have a hunch this "opportunity" will be right where you left it a month from now!

Originally posted by @Mitch Messer :

Personally, I'd keep this one on the back burner while searching for something better. I have a hunch this "opportunity" will be right where you left it a month from now!

I agree with Mitch. At those numbers he is going to find a hard time getting someone to take that on. If he has it financed, and the tenant doesn't pay the HOA fee, he is probably at negative cash flow himself.

I have bought 1 BR condos, and am continuing to do so.  Here is the latest we're finalizing details on:

Purchase price $25,000, with $5,000 down

Rent $550

Land contract $377 (5 year payoff, 5% interest rate)

HOA $125/mo

Property taxes $67/mo 

Maintenance/lost rent $41/mo.  This is much lower than typical, but unit was completely renovated after fire damage about 7 years ago.  

Cash flow -$60/mo during land contract. Total out of pocket contribution over 60 mo $3,455

ROI 47%1st year of land contract, from principal repayment

ROI over 5 yrs 239% from principal paydown, assuming no appreciation

Cash flow $320/mo after land contract

Cash on Cash 37% after land contract, assuming $5,000 down and closing expenses of $2,000 and total negative cash flow of $3,455

So, I do buy into negative cash flow situations, but at reasonable interest rates, with low cash burn and high rate of return after the land contract is paid off.  The unit you're looking at with those terms doesn't look attractive on any of those counts.

Originally posted by @Victor N. :

@Ellis San Jose @Mitch Messer  

@JD Martin . Thanks guys for your input. I see that this will not work at the current numbers which dont even include attorney fees / closing costs. 

 You should plug this into a spreadsheet and play with the numbers to see what can work out for you so you'll have positive cash flow. once you get to the numbers you like - present them to the seller and negotiate. 

The seller is dreaming on the 10% interest rate.  

Condos and HOAs can be rough because the fees change, especially as the units age or if there is a repair emergency. I owned a house in a nice HOA for 6 months while I worked on a title flaw and did a rehab. The fees went up TWICE during that period. From $175 to $200/mo. That included no exterior maintenance, just landscaping and maintaining the community spaces. I owned a condo last year for 3 months and the fee went from $200 to $215. The complex was built in the late 1980s and now needs everything: new asphalt, new roofs, exterior repairs and paint, new fencing, etc. I would never have kept that property. They'll never be able to raise the fees to pay for the necessary repairs. It's a ghetto waiting to happen.

Stay away from $650 rents unless the costs and debt service is low. A seller finance deal at ARV at 10% plus HOA fees is never going to be a deal.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.