Not too scary, except that it is the first seller that has agreed to discuss seller financing and I have made ZERO deals in my life, and my numbers are quite possibly horribly wrong, and it is blasted HALLOWEEN!
Ok, skinny on the home:
Vacant 1940s craftsman two story 2/2 in an UBER family-saturated (literally two blocks from on of the nicest middle schools in town) neighborhood that pulls ft per square footage numbers down from the heavens.
In need of major renovation:
-Kitchen (all but possibly cabinets to be replaced)
-Needs HVAC installed
-Lower level bathroom needs to be completely redone
-Majority of floors in remainder of house are good solid wood, just need refinishing
-Need to add a closet to an upstairs room to make it a 3/2
-Great deck outside has retreating and slitted boards from water standing on fallen leaves over the years
-Old one car garage most likely needs tear down
-Basic landscaping and fencing
This property is listed in the MLS and has 100 DOM, dropping from 190k to 172k. On the high end, these houses sell for 400k within these blocks. On the low end, low 200s, Given the style, amenities, and presumed upgrade to 3/2, I expect a worst case ARV of 250k.
- Seller would sell the home at a purchase price of $130,000 with no money down. I would pay my closing costs (I am a licensed agent, so would expect 3% back from the sale as well)
- Seller would offer an interest only purchase money mortgage of $130,000 to myself at a fixed interest rate of 6% for a term of 6 years.
=$7,800 interest annually
$7,800x 6 years
=$46,800 interest over the term
$46,800+ $130,000 loan balance
=$176,800 total compensation (higher than the asking price)
- This would allow me to have a low monthly interest payment of $640, which would free up my funds for the rehabilitation process, and it would allow Mr Lewis to obtain more than his listing price in the course of six years. In the case that I default on my payments as we set up in our agreement, he would have the opportunity to foreclose on me and re-obtain the property.
- I would also obtain a loan for rehab (ballparking 50k but have not walked through with a contractor), which has not even entered the picture yet.
- I expect the home to rent for 1400-1500
This is where I am at the moment and am trying to get a meeting with the seller and his agent.
Thoughts? Oh-no-don't-do-its? Better options?
This has flip written all over it.
Buy for $130K
Sell for $275K or more
Net $70K or more.
@Matthew Harper Is there a bigger issue in hiding? What is motivating the owner to offer you the loan? Why is he moving?
Just questions that popped into my mind. It looks good in numbers but what are you missing? Could be nothing....
Agree with Arlan - looks like a flip to me
The home is vacant and he lives across town in a million dollar house. Not sure how long this has been vacant or the story behind it. He has owned it since 1986, so he could have moved from it and rented it for years? Trying to get more information from the agent or better yet, to talk with the seller. May knock on some doors as well. Not tonight though because I don't have a costume.
Sorry @Dan Perrott , I meant to tag you.
@Arlan Potter - I do think it has great potential for flip, though I guess I was tailoring my low bid on the premise that seller would benefit as well from the six years of interest. Otherwise, I don't see him ready to jump on a $43k discount in price. If he wants to raise the sale price, I would change the terms, or vice versa.
This is a very sought after area with high rent prices, but now that you mention it, it may be more beneficial in the long run to treat this as a flip and turn that profit into a few smaller properties that would most likely each have the same cash flow as this would after a refinance. Just babbling.
Other thoughts welcomed!
I think it's an interesting project, and the cash flow sounds great. A few things :
1.) That's a big price drop, especially for seller financing. I'm not saying they won't take it, but typically sellers either choose price OR seller financing but not usually both. But who knows until you ask!
2.) I would get several opinions on the repair costs. That can really hurt your numbers if you are off on that.
You are a Pro member, so I would run those numbers through the Rental Property Calculator and see how it pencils out! Maybe post the "PDF" here ?
Let us know how this turns out!
Unlikely a seller is going to agree to 100% financing, at any price. It's just not a smart thing to do, and you're expecting him to come out of pocket for a RE commission and closing costs, And you have no investment in the property, And no money to fix it up. No one's going to loan you money on a second mortgage on this deal. Sounds good on paper, but not likely to happen. Do you have any idea if there's a mtg on the property?
@Wayne Brooks On hindsight, I think you're absolutely correct. Why would anyone take that deal? Which makes sense because while I was talking with them another investor offered cash and they accepted. There was no mortgage on the property.
@Brandon Turner I definitely ran numbers (and do often) through you wonderful calculators, found exclusively at BiggerPockets.com. One area that I am still extremely uncertain about are repair estimates. I may be jumping the gun a bit on going after projects, but it never hurts to fail! I plan to devour J Scott's books and find some more investors and contractors to shadow in the area to get a better feel for it.
Thanks for the comments guys.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing