MFH with owner financing
Hey y’all. We are scheduled to close on our first duplex in about a month and it’ll be a complete rehab using my heloc funds (tried to get a rehab loan but no joy since I’m not yet with a local bank. Yes, I’m working on it. Valuable Lesson learned 😁).
But prior to this duplex, we were looking at another deal on a MFH that fell thru. Long story short it came back up on the market, and the seller is willing to come back to the table. As of now he’s offering seller financing with 40K down. 8% amortized over 20 with a 91k balloon payment after 5 years. Here’s the catch. The homes currently can’t get financed because they’re separate structures on one plat map. However I do have a plan in place to get it to be able to be financed. There are current tenants that pay approx $1700 total (paying below market rate), so by my calcs it’s cash flowing approx $245 with an 8.5 cap rate. Should this be something we look at taking on since it’s financed differently? Will I be leveraging myself more than I should (I’d be using more of my heloc $ for the DP)? Or should I wait and reattack it post duplex closing if it’s available? Advice greatly appreciated. Thanks.
Thank you. I started working with the city on a variance prior to the deal falling thru the first time. But it sounded like it wasn’t going to be an issue. But after looking at the inspection report again it does have some structural issues that could be too costly to fix. I’ll reevaluate in Aug if it’s still available.
Kerry makes a good point that financing a multi-dwelling, single parcel property can be challenging. I ran into this same issue with a property I bought that had 4 dwelling units on the parcel. First, check the zoning for the parcel. Is it conforming, meaning the multi-dwelling units are allowed. This can be done by checking with your local government's planning dept. (city, town or county). If it is an allowable use, you will need to hunt for a local bank that is willing to lend on the property. This is the tough part but not insurmountable. I went through 5 or 6 banks before finding one that was willing to do a portfolio loan on my parcel.
One other item to consider is the value of the property. You mention a cap rate, but with the parcel having 2 units, the appraised value will be determined based on the sales price of similar properties in your area, not the net operating income (NOI) the property can generate. The bank will be looking at the NOI for purposes of debt coverage, but the appraiser will not take this into account since the property is <5 units.
Kerry's counter for better owner financing is the best way to go. I'd do further due diligence because when the balloon term arrives, if the owner is not willing to continue, you will need a backup lending solution. Another way to counter the owner is to ask how much he/she wants to make each month on the payment. You can back into this figure with terms which could avoid getting hung up on single components of the lending calculation (rate, DP, amortization, etc.).
Quote from @Christopher Reeder:
Kerry makes a good point that financing a multi-dwelling, single parcel property can be challenging. I ran into this same issue with a property I bought that had 4 dwelling units on the parcel. First, check the zoning for the parcel. Is it conforming, meaning the multi-dwelling units are allowed. This can be done by checking with your local government's planning dept. (city, town or county). If it is an allowable use, you will need to hunt for a local bank that is willing to lend on the property. This is the tough part but not insurmountable. I went through 5 or 6 banks before finding one that was willing to do a portfolio loan on my parcel.
One other item to consider is the value of the property. You mention a cap rate, but with the parcel having 2 units, the appraised value will be determined based on the sales price of similar properties in your area, not the net operating income (NOI) the property can generate. The bank will be looking at the NOI for purposes of debt coverage, but the appraiser will not take this into account since the property is <5 units.
Kerry's counter for better owner financing is the best way to go. I'd do further due diligence because when the balloon term arrives, if the owner is not willing to continue, you will need a backup lending solution. Another way to counter the owner is to ask how much he/she wants to make each month on the payment. You can back into this figure with terms which could avoid getting hung up on single components of the lending calculation (rate, DP, amortization, etc.).
Thank you. Prior to the deal falling thru I had spoke to the city. It’s zoned commercial now but it would revert to residential.
Now for those of you that have dealt with structural issues, at what price point or issues found would you walk away? The inspection report noted some bowing in the foundation. We were going to get a structural engineer to assess and put in approx 15K structural repair contingency. Thoughts? Thx
My experience with foundation issues has been limited. I bought a 1920 SFH that had a chimney foundation that was failing. A structural engineer recommended piers to provide a rigid support. The company I used put three 25-30' piers into the ground under the chimney to correct the problem. Cost was certainly less then your estimate.
I’ve also dealt with sagging subfloors which required new joists due to termite damage. This is more extensive because the crawl space was too narrow so we had to go from the inside of the home.
It is all manageable with the correct trades and adequate planning. Be aware sometimes these indicators could lead to more extensive repairs as you open the walls/floors up.