Owner Financing Deal - Just Because ?

Question

Hi folks!

A colleague of mine brought me an interesting question.  He's gotten a couple sellers to agree to finance him their rentals (details below).   I have my own opinion, but I told him I'd put out on BP and see what others thought.

Deal #1:

1-Bedroom Condo

Rent:  $850 / mth

Taxes:  1358.97 / yr

Condo Fee:  $114 - INCLUDES HEAT, tenant pays electric

Needs roughly $2K in cosmetic work

Owner Agreed to:

Purchase Price:  $85,000

4.5% interest rate

monthly payment of just under $413

downpayment of $3500

mortgage amount of $81500

Important to note here, there are no comps in the last 25 years for 1 bedrooms in complex.  2-bedrooms have been going for about the $85K... so take that into consideration.

Questions would include:  is this a deal?  Would you do it?  Why / why not?  What would make you do this deal?  What strategy would you use?

Deal #2:

Single Family Home - 4 beds + bonus room, 1.5 baths.  Approx 80 years old, though renovated 6 years prior.

Rented for $1550 / month, utils paid by tenant.

Agreement:

PP:  $160K - $180K (still being negotiated)

Down Payment:  $15-20K (still being negotiated)

Expenses:

Taxes

$    4,305.00

Insurance: Property

$  1,500.00

Insurance: Mortgage

$  -

Maintenance

Snow Removal (75 / storm * 10 storms)

$  750.00

Landscaping

$  250.00

Pest Control

$  -

Other Repairs

$  2,000.00

Marketing   / Leasing Fees

$  1,500.00

Legal

$  600.00

CPA

$  500.00

Utilities

$  -

Electric

$  -

Water / Sewer

$  1,200.00

Gas / Oil

$  -

HW

$  -

Waste Removal

Note:  Comps for 4-bedrooms homes in this area, are comping out right at $160-180K.

Questions:  What would make you do this deal, if so?  if not, why not?

Thanks for your feedback, peeps!

~ Nick

Nick Aalerud · Answer

Thanks @Chuck Drinnan .  In Manchester NH, I'd say normal / avg demand, avg vacancy is 5%.

In Chelmsford, demand is high - less than 5% vacancy.

Chuck Drinnan · Answer

Interesting.  The margins seem too low for the level of the investment.  How much demand for rental properties?

Nick Aalerud · Answer

Thanks  @Ann Bellamy - you're right, didn't adjust for single family expenses.  That's good news we can pass on almost everything to tenants, but I also agree with Shaun - not a GREAT deal, all in all.

I suppose I was just weighing what value the private financing holds for the deal itself, if we consider both as income plays only.

As it was, I gave him pretty much the same answers that Shaun came up with - Manchester NH doesn't excite me, but Chelmsford may be able to do something with - depending and confirming expense numbers on that one.

Thanks all.  Still taking more insight if anyone has it...

Ann Bellamy · Answer

For NH expenses, bear in mind I don't have any SFRs in NH, just multis.

Taxes $ 4,305.00

Insurance: Property $ 1,500.00  Too high probably, 1000-1200

Insurance: Mortgage $ -

Maintenance Snow Removal (75 / storm * 10 storms) $ 750.00 Too low by this year's standards, but as Shaun says, have them do their own

Landscaping $  250.00 same as above

Pest Control $ -

Other Repairs $ 2,000.00

Marketing / Leasing  Fees $ 1,500.00 Marketing is free unless you're paying an admin to run your CL ads, a rental agent is not usually a whole month, I don't think, even for a SFR

Legal $ 600.00 ok

CPA $ 500.00 You need economies of scale on this, one SFR shouldn't cost $50 per month in bookkeeping.

Utilities $ - Electric $ -  Water / Sewer $ 1,200.00 You can pass on to the tenant

Gas / Oil $ - HW $ - Waste Removal  same

Shaun Reilly · Answer

With the condo being a 30yr fixed I'd definitely work that one to see if I could tweak the details a little.  It isn't to far off from being a pretty interesting deal.

The NH one I would not touch with a 3 yr balloon unless there is a deep discount, not $160K on a $180K place.

Nick Aalerud · Answer

@Fred T.  - I actually just flew in to Pittsburgh, in the New Castle area, will be here until Tuesday.  I love the gyros on this side of the state!

Nick Aalerud · Answer

Thanks very much guys.

@Fred T.  - both would be income plays only, as purchase prices are, as the others have said, at market, not much or any discount.

@Shaun Reilly   - Agreed on lowering some of the costs in NH, but you know me and my super-conservative spreadsheets.  @Ann Bellamy could weigh in on the NH expenses being too high.  This particular "student" uses my spreadsheet which does budget for outside bookkeeping per property ($50 / month + tax prep) and 1 eviction per year, which ideally would not happen.

Whether it's purchased for $160 OR $180k (I'd say FMV right now is $180K), not much if any discount or value play. The NH property would most likely be a 3 yr balloon, Chelmsford property no balloon due.

For both deals - no added value really, the only benefits to investor - buyer would be:

1.  Private financing, debt stays off credit report

2.  Small cashflow on each.

Shaun Reilly · Answer

I'll start with #2 first.

Hard to evaluate fully since the financing isn't clear.  Besides the amount not being set don't know the rate or the term.  $160K @ 3% for 30yr will look a lot better than $180K @5% for 10yr.

Few questions about the expenses.  I have not done any rentals in NH yet but if it is a SFH I'd assume you can make the tenants responsible to landscaping and snow removal.  I'd also think you can either have them pay or bill them the water/sewer.  That would bring the expenses down a lot.

CPA and legal seem high too.  Are you thinking that the property will be in an LLC by itself or something?  If you are allocating the full burden of a partnership return for a single property I see the CPA, otherwise it looks high.  For legal that seems high.  Not sure how much a NH eviction costs, but I'd guess this is close to 1 a year?

Okay well for deal #1 that one is a little easier to look into.

I like a lot about the deal.  The financing at about the going rate for long term bank financing and if that is the payment then it is a 30 year amortization.  Is it a full 30yr loan or is there a balloon? Also the fairly low down is attractive since you would not get that kind of financing at those rates with a bank with only a ~4% DP.  Small amount of repairs is nice too.

Now I don't love the rents.  Assuming that is what they are currently getting that looks to be pretty much market.  So you aren't looking to get a big bump with those repairs and maybe better management.  You might be able to do a little bump, but maybe like $25 type.

Of course the price is an issue as well.  Now I am not sure exactly where it is to really value it.  However I don't see much in Chelmsford that is that low.  Over 100 condos and 1 sale less than $85K and one right at that.  Cheapest 1BR in town was $89K and there is one pending with a list of $99K.  I'd still want to get it a few grand less so if s@&t gets real it will be easier to sell and sell fast without taking a big hit.  I'd try to get it down to $80K or less.  This of course will lower the payment and help with cash flow as well.

Chelmsford is a nice town so going for some appreciation long term (I'd plan on holding 5-10 minimum to put any real weight on appreciation possibilities to be safe, probably plan on 10 and happily take it at 5 if it works).  Now not going to assume any crazy jumps in a 1BR condo but probably some bump especially if rents go up.

So I am not in love with the deal, but I don't hate it.  Probably would not do it as is right now, but it is close enough that I'd see if I could get the price down slightly more and maybe shave a few basis points of the rate to get the payment down a touch.

Fred T. · Answer

Risk Assessment tells me NO DEAL to either scenario. You're basically paying retail for investment property at close to market mortgage rates if I understand these scenarios...sooo.. where is the upside? Is this an Appreciation Play? Since it's not an income property can't use Value Add play if no supportive comps...so?

We all know we have a 5-7yr run before we go backwards again...so if the hedge is appreciation and they have a good feel for the crystal ball fall in that local market, then I guess if cashflow is positive they just may have to give some back down the road.

Have no idea what the Seller is doing on this deal either unless they own this free and clear and plan on selling off their note which is not all that attractive..lol

Simply speaking...NEXT!/