Seller financing on 6 unit apartment in PHX East Valley

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Seller financing on 6 unit apartment in PHX East Valley

Johnny McKeonPro Member
Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes

Hey 馃憢  guys,

I'm currently under contract on a 6-unit apartment building in the East Valley of the Phoenix MSA and the seller's are willing to carry the debt with 18% down at 6% interest only for 12 months. This is a value-add play. I'm buying this building for the potential of what it can do in the future after I Implement my business plan and by maximizing the NOI thereby increasing the value of this asset and then going back to the bank to refinance to harvest out the equity that I put into it.


This is my first off-Market, seller-financed  deal and I would love to hear your stories or any wisdom or advice that you can pass along as I go through this process That  would not only benefit me but others contemplating to go the off market, seller financed route.

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Doug McVinuaPro Member
Property Manager 路 Queen Creek, AZ 路 Member since 2016 路 609 posts 路 426 votes
6y

@Johnny McKeon Congratulations on the new investment, pretty exciting!

One thought on the remodels if you could get one unit vacant, remodel that one, and then move an existing tenant over to the remodeled unit, repeat the process until you are done.

I have done that before and it's worked out well for everyone, the tenant gets a fresh place to live and the disruption is minimal. The rents really should increase at that point as you are delivering a better unit for them to live in. I agree to be sensitive to the situation with the long term tenants but also don't forget this is an investment.

I manage a number of doors in Apache Junction and have good luck with them overall, the demand is always high and rents continue to climb.

[email protected]602-751-7577
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  • Derrick Grahn
    Specialist 路 85018 路 Member since 2019 路 8 posts 路 4 votes
    6y

    Sounds like a sweet deal! Well done. Do you have any specific doubts or questions? I mean it sounds like you have this deal done no?

    0Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    6y

    @Derrick Grahn Thxs man! I think this will be a great value-add deal.

    Purchase price is $385,000 (64k) per unit for 6units (all 1bed/1bath 504 sqft) 1953 vintage Apartment building with last renovations in the year 2000 such as electrical, plumbing, roof, HVAC etc.

    Down payment $70,000 at 6% with 12 month loan term with 1yr I/O, no pre-payment penalty,

    Current monthly income is $2,685 (avg rent is $447). Gross potential gross income is $4,200 ($700)

    The cool thing about this purchase is it comes with 2 parcels. 1 parcel is 15k sqft and has the 6 unit apartment on it and the other parcel is 42k sqft of vacant land (possible potential to build additional units)

    2Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    6y

    @Derrick Grahn

    Today was the Inspection day part of due diligence.

    I used Chad Cooper from AZ property inspections, the Inspector came out this morning and we walked the inside of the units inspecting under sinks, closets, A/C for cold air, Bathroom, water heaters, attic space, roof, main on/off outside water valves, washer & dryer rooms.

    Inspector recommended that I have the sewer lines scoped and because of the age and the property is on a septic system so it must have the system inspected by an ADEQ certified and qualified Inspector.

    none of the water heaters have on/off valves or Temperature/pressure-relief (TPR) valves which he said they should. 

    he found some mold in two of the units because of 2 water heaters. Some of the outside on/off shut off valves for the water supply were "frozen"

    The roof has some missing shingles from wind damage and missing rubber gaskets around piping that protrudes through the roof which allows water to get inside the attic.



    This is a question for anybody who wants to chime in.

    What other due diligence should I be conducting for an off-market seller financed 6 unit apartment building that comes with an adjacent vacant parcel? 

    Any advice would be appreciated. Thank you, guys!

    1Reply
  • Jason Crittenden
    Real Estate Agent 路 Gilbert, AZ 路 Member since 2020 路 36 posts 路 29 votes
    6y

    @Johnny McKeon Hey, no updates to this thread for 30 days, how is/did this sale go? I鈥檓 a local, would love to see what you got!

    1Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    6y

    HI @Jason Crittenden! 

    I was able to close this off-market deal. seller financing on the total purchase price of $385,000 with a 70k down payment at 6% I/O (interest only) with a 12 month term. No prepayment penalty. The 6-unit sits on 15,682 sq ft lot with an adjoining vacant piece of land that is 42,689 sq ft (0.98) acres zoned for multifamily. Not too familiar with new construction but I like to learn and have already reached out to the city of Apache Junction and a general contractor that has built small multi's in this area.


    with this building four out of the six tenants are on fixed incomes and they are elderly. I'm going to be gentle and gradual with rent increases and renovating the interiors. this is one of the reasons why the owners decided to sell to me instead of a larger investor/ developer that was going to be aggressive and displace all the tenants right away. several of these tenants are Legacy tenants. Living here for 20, 16, 6yrs
    I've already sat down and spoken with all the tenants and everybody wants to stay. A couple of tenants are open to placing their belongings in storage for a month or 2 while the unit gets renovated. Then they'll move back in. And repeat that process unit all units are renovated. The only issue I see with that is after Renovations I'm going to be placing new tenant screening procedures in place. Most importantly, my concern is I want to make sure that they can afford this place with the new rent.


    2Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    6y
    3Reply
  • Doug McVinuaPro Member
    Property Manager 路 Queen Creek, AZ 路 Member since 2016 路 609 posts 路 426 votes
    6y

    @Johnny McKeon Congratulations on the new investment, pretty exciting!

    One thought on the remodels if you could get one unit vacant, remodel that one, and then move an existing tenant over to the remodeled unit, repeat the process until you are done.

    I have done that before and it's worked out well for everyone, the tenant gets a fresh place to live and the disruption is minimal. The rents really should increase at that point as you are delivering a better unit for them to live in. I agree to be sensitive to the situation with the long term tenants but also don't forget this is an investment.

    I manage a number of doors in Apache Junction and have good luck with them overall, the demand is always high and rents continue to climb.

    [email protected]602-751-7577
    4Reply
  • Justin Tomsic
    Member since 2019 路 9 posts 路 1 vote
    5y

    @Johnny McKeon

    Congrats man that鈥檚 gotta be really exciting!! Especially having the empty lot to potentially build on as well. I鈥檓 also in AZ but way in the west valley. You mentioned you found this off market? Do you mind me asking how? I鈥檓 a complete rookie at the moment just saving money hoping to close on a deal this next year I鈥檝e saved roughly 30k but that鈥檚 not much of a down payment for anything out here.

    1Reply
  • Frank Mendez
    New to Real Estate 路 Phoenix, AZ 路 Member since 2020 路 2 posts 路 1 vote
    5y

    @Justin Tomsic following

    0Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y

    @Doug McVinua Thxs Doug! it is exciting. I just love this stuff! This 6-unit is already proving to be a great stepping stone to acquire larger multi-family assests and begin bringing other investors along board to take part in the ownership with the cash flow and equity upside. and Great idea about moving an existing tenant over to the remodeled unit, repeat the process until you are done. I'm doing that right now with Apt #2. and you're right about not forgetting it's an investment. even the non-renovated units should be $650-700 and not $430-$460 range. Yeah, I've seen you around the forums a lot. do you specifically manage smaller apartments or single family?

    0Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y

    (UPDATE)

    Before closing on this property I conducted a lease audit and everybody was on a month to month leases so Upon immediately taking ownership on 10/01/20 I posted rent increases to $535 per month from the previous avg $447.

    Early 11/2020 as I was beginning to have the exterior of the property painted the tenant in apt#1 was actively vacating and had her family helping her move. They didn't look happy towards me and you could feel the animosity. Fortunately it gave me an apartment to start with and get this business plan moving. I immediately began demo and then started the renovation. It took a month and half to complete, listed it online and had quite a few requests and had it rented by Jan. 1st at $899 per month which was above my rent projections.

    and then apt#2 moved out end of Nov2020 but this time gave me a notice. 2 vacancies at the same time was stressful as hell because before hand everybody was saying

    they want to stay but I had to stop and realize this is actually part of the plan and a great thing because
    if I only buy value-add Apartments because it creates equity and if value add is a function of improving the income then I can only buy a property if i can improve the income. Therefore I need to get into those units and renovate to earn those premium rents and the faster I can execute my business plan and double the NOI of this asset the faster I can force the appreciation of this property and increase the valuation and complete a cash-out refinance and get my capital back ( 70k down payment and 80k of repairs) which will then allow me to re-deploy into a larger multi-family asset.

    Apt#2 will be complete on 1/15 and i have that already pre-rented to an existing tenant and when they move I will start renovations on their old apartment.

    0Reply
  • Doug McVinuaPro Member
    Property Manager 路 Queen Creek, AZ 路 Member since 2016 路 609 posts 路 426 votes
    5y

    @Johnny McKeon Congratulations on all of your success! It's fun to read about your progress on the units.

    My Portfolio is a mixture, ranging from condos, single families, and multi-families. It's a nice mixture that allows me to maintain a good feel for the Arizona market. Most of them are in the east valley, Chandler, Gilbert, Mesa, Tempe, Apache Junction, Queen Creek, San Tan Valley, Florence, Maricopa, etc.

    [email protected]602-751-7577
    1Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y
    3Reply
  • Cameron Carter
    Real Estate Attorney and Investor 路 Scottsdale, AZ 路 Member since 2011 路 23 posts 路 15 votes
    5y

    @Johnny McKeon Nice project - your renovations looks great. What is the demographic of your new tenants? Do you expect that they will stay long term or have you adjusted the pro forma for higher vacancy rates?

    1Reply
  • Angel Ginnett
    Real Estate Agent 路 Queen Creek, AZ 路 Member since 2018 路 64 posts 路 35 votes
    5y

    it looks great!  keep up the good work

    1Reply
  • Brandon Beren
    Member since 2021 路 5 posts 路 3 votes
    5y

    @Johnny McKeon I'm a Phoenix native, now living in England. I'm putting my core 4 for the Phoenix area back together after moving several years ago. I just saw you post about Chad Cooper inspecting your property. I used to work with him in Gilbert and he inspected my Tempe home a couple years ago. Small world out there. Are you managing the property yourself or using a company? Congrats on this deal, albeit a little late to the party on the congratulations.  

    1Reply
  • Colleen F.Pro Member
    Investor 路 Narragansett, RI 路 Member since 2013 路 8k+ posts 路 4k+ votes
    5y

    @Johnny McKeon nice job on that kitchen layout, so much better.  Currently living in apache Junction but don't invest here, want to get more passive on investing. Nice job on the rehab though and even the best tenants when moving out don't really like you, they have already moved on to the next thing. 

    1Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y

    @Justin Tomsic What's up Justin! The West Valley has been blowing up and expanding! How far west are you? What type of properties are you interested in? $30k is a great start for a owner-occupied house hack of a 2-4 unit. take advantage of FHA 3.5% down. Say you purchased a 4plex for $600k. your down payment would only be $21k. I've used FHA and VA on 4plexs. Great way to acquire assets w/ little down.

    Yeah, this 6-unit was acquired off-market. wasn't listed on the MLS, LOOPNET or anywhere else. no agents. just me and the seller. I needed a washer and dryer for one of my 4plexs a couple of yrs ago and I actually bought a washer & dryer off of this older man (70's yr old) from a Facebook marketplace listing on 11/18/2018
    . Met him at one of his other rental properties and was friendly and chatted about his different properties. asked him what his plans are for the properties and if he ever thought of selling. he Said "No" not at the moment. a year went by....

    and then After my finding my father deceased from committing suicide from hanging on 12/27/2019 and taking a month off work from my job at the prison to arrange his affairs and spending time with family I knew I needed to stay committed to my plan and goals of acquiring multifamily assets that produce cash flow and equity so I will never HAVE to work in a prison again asking for time off & just for a pay check trading time for dollars ( I still needed the paycheck though). I bought @michael Blank's syndicated deal analyzer spreadsheet and several books on Multi-family and Syndication and decided to get back in the game and find a property. was contemplating just quitting my job and holding off on Real estate. but you Can't just dwell on the negative and be a victim. and I thank the U.S. Army for instilling intestinal fortitude in me to embrace the suck and continue the mission!

    There's a lot of crazy external things that can happen in the world. don't let them detour you from your path of building wealth from rentals!!

    on 03/20/2020 I sent the owner a text to touch base about his apartments Saying

    Hi mr.......,

    my name is Johnny McKeon and I purchased a washer and dryer from you a while back and picked it up from your property.

    I doubt you remember me but you gave me a tour of your building and some of the units. At that time I believe you did say you were playing with the idea of selling one of your properties in the future.

    Here's a little info about me. I'm 28 years old and work full time at the prison in Florence, Az. My credit score is 797. I'm qualified to obtain a mortgage and I also have quite a bit of cash saved

    I would love to chat with you again about your story and how you got started in real estate and talk about your properties.

    -Johnny 

    Thank you!!

    We spoke on the phone afterwards and they weren't ready to sell at the moment him and his wife.

    on 05/05/2020 I received a text saying "Johnny, Still interested? Give me a call." I was PUMPED!! great beginning before working a shift with dangerous inmates haha Gave him a call in the parking lot of the prison in Florence, Arizona. They were getting one of the properties ready to sell. 

    we ended up meeting on 06/17/2020 to go over his financials for a different property. I ended up thanking him for his time to show me the numbers but i said "I'm afraid I have to pass" and told him " I'm actually more interested in his 6-unit. and "if you were to exit what would be the "RIGHT" price for you to cashout?

    NO reply.

    It's now The Fourth of July 2020 and I send a text saying Happy Independence Day! No reply.

    on 07/07/2020 I receive a text saying "Stop by when you get a chance. thanks.


    we set up a meeting at their house and they told me they were ordering an appraisal and they were willing to sell their 6-unit and adjacent 0.98 acres that happens to be zoned for Multi-family (which I didn't know at the time was zoned that and had no knowledge it would be for sale)

    on 08/02/2020 I followed up asking about the appraisal they ordered.


    on08/19/2020 we met again to go over the appraisal and negotiate. the opinion of value was in the low $400'sk

    on 08/30/2020 we met again to negotiate some more. The seller was nice and suggested he wanted to lower the price because no agents were involved. now, we were at $385k. I then decided to ask what their opinions were of seller financing. I offered I could pay them up to 10% interest but he actually said 6% was enough
    They thought it could work but wanted to know how that would affect them with taxes. They also wanted me to put down $100k. I showed them proof of funds prior to this meeting and I have the capital available however, leverage is powerful and can magnify returns. I explained I was going to be putting a lot of money into the property and it would really help if i could put less money down so i have enough working capital to complete this project and pay him back. he asked what i could put down. I said $70k. approx 18% down. it makes me wonder if I could have asked to put less down.

    Awesome! we agreed on $385k for a 6-unit and 0.98 acres at 6% interest only for a 12 mo term. I asked if they had any extra paper laying around. I didn't think we were going to come to any agreements and sign anything. 1st time doing an off-market property so I was unprepared. we ended up writing everything out and signed and dated it. pretty simple contract.

    4Reply
  • Rob Sawyer
    Rental Property Investor 路 Syracuse, NY 路 Member since 2017 路 156 posts 路 72 votes
    5y

    @Johnny McKeon BZ and nicely done! Thanks for posting your deal progression! Great to see a fellow Vet get started off on his journey in REI. Loved the simple contract you wrote up. Best of luck with your progress!

    1Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y
    Originally posted by @Cameron Carter:

    @Johnny McKeon Nice project - your renovations looks great. What is the demographic of your new tenants? Do you expect that they will stay long term or have you adjusted the pro forma for higher vacancy rates?

    The original inherited 4 out 6 residents were older single ladies that lived at this property for 20yrs, 16, 6 & 3 yrs & living on fixed incomes like on social security. the other 2 inherited residents was a single lady in her 20's that managed a local convenience store & the other was a 50yrold couple that is a mechanic & i can't remember what she does for work.

    for the new residents. i was able to help one of the elderly single ladies get a local housing voucher so she could stay living at this apartment & afford a nice place to live. (she has no family here), i was also able to keep the 50yr old couple that has been living here. they passed the qualifications for the new tenant screening procedures. 1 of the new residents is in late 40s work at a grocery chain store and then the other 3 new residents are in early 20's & couples and just starting out in life working construction, local valley school, grocery store, dentist office.

    I honestly don't know how long-term they will stay but i expect the younger residents are going to want to move-up eventually. 

    however, i believe the older residents are going to want to stay put. they've made comments about not liking moving. again, i honestly don't know and can just make assumptions. I have this property at a 5% ($3,409yr) vacancy Factor based on the GPI (gross potential Income) which is $68,184 yr) .

    i think this property will do better now that it is fully renovated. easier to rent. there was a lot of demand & interest when i had the listing up.

    what's your honest opinion/thoughts on adjusting for vacancy?

    0Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y
    Originally posted by @Brandon Beren:

    @Johnny McKeon I'm a Phoenix native, now living in England. I'm putting my core 4 for the Phoenix area back together after moving several years ago. I just saw you post about Chad Cooper inspecting your property. I used to work with him in Gilbert and he inspected my Tempe home a couple years ago. Small world out there. Are you managing the property yourself or using a company? Congrats on this deal, albeit a little late to the party on the congratulations.  

     Hey Brandon 馃憢

    what the heck are you doing across the pond in The 馃嚞馃嚙UK?

    you should jump back into the Phoenix real estate market. Lots of population growth and job growth in the Phoenix MSA

    at the moment I'm self managing 18 apartment units that i bought through foreclosure then BRRRR'ing then house hacking & seller financing

    however, i believe I'm close to a point where i need to find a competent PM 

    so i can focus on finding larger apartment buildings & partnering with others so we all can level up & participate in the upside in equity, cash-flow & other benefits of owning MF. 

    I'm actually looking for a 10-15 unit in the Phx MSA for the next value-add project.

    if Anybody comes across something let me know. I'm more than happy to pay finder's fee, a commission or partner on it

    0Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y
    Originally posted by @Rob Sawyer:

    @Johnny McKeon BZ and nicely done! Thanks for posting your deal progression! Great to see a fellow Vet get started off on his journey in REI. Loved the simple contract you wrote up. Best of luck with your progress!

    thxs Rob! what branch were you in? and are you also investing in Phx Az?

    i was a 11B Infantry with the Army stationed with 2nd Infantry Division at Fort Lewis Washington 

    honestly, if I was to do it over again i should always be prepared. I should have brought a contract over haha but we live and learn.

    0Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y

    After 9 months ALL 6 units are fully renovated & rented.

    Before & AFTER'S of the last #Winchester6unit remodel. 

    original Apt avg rent = $447

    just leased Renovated Apt = $1,015

    Time to start the Cash-out 馃捀 refinance process to get my $70k down payment back and $60k rehab capital back out allowing me to own this asset with $0 dollars tied up but still maintaining all the upside of owning Rental real estate like..

    1锔忊儯. monthly Cashflow

    2锔忊儯. appreciation

    3锔忊儯. loan paydown

    4锔忊儯 tax benefits

    5锔忊儯. hedge against inflation

    I'll keep everybody posted on the Cash out refinance process.

    any Questions? Ask away. no question is a dumb question. 

    2Reply
  • Johnny McKeonPro Member
    OP
    Rental Property Investor 路 Mesa, AZ 路 Member since 2016 路 103 posts 路 72 votes
    5y
    Originally posted by @Colleen F.:

    @Johnny McKeon nice job on that kitchen layout, so much better.  Currently living in apache Junction but don't invest here, want to get more passive on investing. Nice job on the rehab though and even the best tenants when moving out don't really like you, they have already moved on to the next thing. 

     thxs Colleen! and you're probably super close to my properties..why do you want to do more passive investing? 

    and I'm starting to realize that. when you take over a property you come off as the bad guy because of all the changes which i can fully understand how it could be stressful for a tenant but I have a responsibility & duty to execute this business plan & make sure everything stays on track.

    1Reply
  • Brett Tvenge
    Flipper/Rehabber 路 Phoenix, AZ 路 Member since 2018 路 269 posts 路 152 votes
    5y

    @Johnny McKeon love this deal! Love your story! Keep up the great work!

    1Reply
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