Opinions on this deal?

Question

I found an owner of a 4-unit bldg, who is currently in jeopardy of losing the property (March 2011) due to back taxes.  They paid $5500 for the property last year, and put a lot of work into it, and must've been new because they neglected to pay the taxes.  All units are rented - grossing $1500/mo in rent.  The owner is asking $42k for the property.  I offered $33k, and told them that out of the 33k, $9k has to go to the back taxes; so they'll only be getting $24k.  What do you guys think?

Account Closed · Answer

how much is owed?  is the owner expecting a downpayment if the finance??

Account Closed · Answer

just so you know, i average between 40-50 bucks per unit when i pay the water bill for tenants...this is when the apartments have laundry also, but it's also after i've had a plumber go through all faucets, changing valves, washers, etc.  leaky faucets can really add on to a water bill!!  when i bought the property from the old owners, their bills were about 80 bucks an apartment...spend the money to have a plumber fix all leaks--it pays for itself very quick

Account Closed · Answer

whenever i sold a contract for deed, we signed the deed at the closing attorney's office, and it was put in escrow, not to be recorded until 30 years from now when the buyer's met their financial obligations..this was in casei skipped town...talk to a good RE attorney and he should be able to handle those objections...why put down money or get a loan if they will finance...use that

Katrina P. · Answer

It's about $9k owed in back taxes.  They would be expecting a downpayment...however, the closer they get to losing it, I'm sure they'll be flexible with that.

Katrina P. · Answer

I'm still in the due diligence period...so I'm not for sure if there's any repairs needed (although the roof, etc. looks good physically).  I will have to get an inspector in there, though to look more thoroughly.  The units are (2) 2/1 and (2) 1/1... I still have to find out the demand for the area, as well as look at some comps.  However, I can tell you that currently, I'm seeing duplexes in the area listed for around $85k (I know that I can't use those figures for comps, though).

Yes, it's in compliance with codes and zoning, as the county has issued a rental permit.

There is no laundry facility.

Regarding the seller financing...the issue is the back taxes.  How do we get around that?

Jon Holdman · Answer

Your average rents are only $375 per unit.  The 2% rule is too optimistic at those levels.  Even at $425 its still too optimistic.  You need more like 2.5% or even 3% for those rents.

Nevertheless, for $8,250 per unit, your probably OK.

You didn't mention repairs.  Is anything significant needed?

What size are the units?  Is there strong demand for that type of units in that location?

What have similar building sold for recently?  $33K won't be a good deal if other buildings are selling for $25K.

Is it in compliance with codes and zoning?

You say you pay water.  Is there any space for laundry?  Where you get bit if you're paying water is if the tenants decide to set up a in-home laundry.  I see this a LOT.

Katrina P. · Answer

Renters pay most utilities...Landlord pays water only.  It doesn't need any rehab currently...roof, etc. looks good.  They are willing to finance the deal, but honestly, I don't trust them to do that because they appear to be trying to move to Texas, and possibly back to Mexico, and I don't want to look up after paying off a land contract, and not be able to locate them for my deed.  I would feel more comfortable going through the bank on this one.  I am thinking of financing for 5 years only to pay off the note fast.  That would make my PITI right around $800/mo.  So initially, we wouldn't be seeing too much of a profit, I guess, if I go with the 50% rule.  BUT, we're blowing the 2% rule out of the water!  Also, I could raise the rents a bit because they are currently rented out for below market IMO; with that said, I could probably rent it out for $1700/mo....$1500 is very conservative.

Rich Schroeder · Answer

Need more info in order to analyze this deal. What about the utilities?  Do the renters pay those?  How about rehab money...does it need any rehab (roof, furnace, etc)?

It could be a good deal, just need some more info. Also, maybe ask if he'll finance some of the deal.