I have located a motivated seller that has a duplex she would like to sell. She has proposed the following terms without any negotiating thus far. I am a bit over my head at this point and seeking advice.
Purchase price $80,000
$5,000 down payment
5 year balloon
amortized over 15 years
She says payment would be $750 but I calculated $701?
Seller will take care of taxes and insurance till refinanced.
The property is likely worth about $90k in its current state. Upstairs unit rented for $795 and downstairs is vacant currently but needs about $3,000 to be rent ready. Down stairs should rent for $750-800 as well. After repairs duplex should be worth at least $100K. Good area with great upside.
I usually get normal 25% down mortgages on this type of property but I literally just closed on one last week and cash is a little short right now. I could make it happen but this $5,000 down looks tempting.
This doesn't sound like a motivated seller this sounds like an investor trying to make some money
If she wants to so think about doing a joint venture with her
Tell her you'll fix it up, with your cash, and then sell it and she'll get her equity in about three or four months after it sells
Looks like you've outlined a seller-carry, not a lease option. L/Os don't use terms like 'down payment', 'interest rate', or 'amortization'. Make sure it's not a Land Contract. Get ownership from day one. I wouldn't put a ton of money and time into something I don't own.
The numbers look great rent/value-wise. Wish I could see those kind of ratios in my area @Jake Thomas !
Also you paying almost 8%, not sure about this. Good luck on this. Rocco
@Steve Vaughan is correct. This isn't a Lease Option.
It looks like her calculation is based on a repayment in loan of the full 80k...and not the balance of 75k...like your 701 reflects.
If you are putting in 5k to start...and end up paying the 3k in rehab to get the bottom unit flowing, and you get both rents, you would be ahead 850/month...which would mean you wouldn't break even until the 10th month. Personally, I'm not waiting anywhere near that long to break even. Too much can happen during those 10 months.
Now, if you do nothing to the basement space, and just get the upper rent (so you're only putting the initial 5k in), it would take you 50 months to break even.
Here's what I would do:
1 - Agree to the $5k down, but say you'll pay 85k for it in 5 years if the seller pays for the repairs now. If the repairs are only 3k, then the seller makes an extra 2k on the sale...and you only have to recover 5k with both rents which the way you have it structured would only take 6 months...still not for me, but better. Also, only the first step...it gets better.
2 - Now, lease option the basement space to a "House Hacker". The house hacker will pay you the 100k (actually it should be higher...like 110k) in 2 years, pay the traditional 5% of his purchase price ($5500) for the option consideration...and lease the property from you for 800/month.
3 - You end up getting 500 more from the Hacker/buyer than your are paying to your seller, so there is no payback period. You get a rental spread of 850/month = 20,400 over a two year period, and...you make a profit when you sell of 25k on the spread from the 85 you're buying it for, and the 110 your selling it for. Total profit to you over a 2 year period of $45k
@Steve Vaughan I agree, this didn't look like a L/O to me. The seller has agreed to LC terms now. I am thinking of offering her $75K with $5K down and more like 5% interest with a 5 year balloon amortized 15 or 30 year. Doesn't matter I will likely Refi it next spring anyways.
@Joe Villeneuve you sir may have some very creative ideas that I appreciate you sharing. I don't mind investing a few bucks into the property. I am not looking to recoup my invested cash right away but more interested in getting myself to a larger monthly cash flow for the long-term. I have cash to invest but it doesn't make me any money in the savings account.
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