Would you do this deal?

[Zach Davis]

I was recently contacted by the owner of the duplex across the street from mine, he's sick of it and wants to sell it to me owner contract. The asking price is about 15k under market and the terms are 10% down payment and 5.25% interest amortized over 30 years with a 7 year balloon. I don't currently have quite enough cash to put a full 20% down otherwise I would just buy it through a bank and take the lower interest rate. My thought was that I could buy it owner contract and refi it in a year or two. Obviously, other than not knowing what interest rates or property values will do in the next 7 years, the property will barely cash flow until updates are made and rents increased. It has the potential to net around 15% cash on cash IF I can refi it at around current market rates in a year or two, if not, it’ll be more like 6% (which, sadly, is pretty standard for the area) until inflation pushes rents up.

Would you bet on this thing?

[Jesse Waters]

Depends.  Sounds like the ball is in your court on this one, the seller wants out.  Perhaps its to my disadvantage, but I don't deals that don't cash flow, however, I also like deals that have potential upside, like poorly managed and under preforming properties.  If it were me, I would look at how much work it needs to be fixed up/updated, are there any major concerns (old HVAC or an old roof).  How much would it be worth fixed up, and could you negotiate a better deal with this seller?  Also, how long until you can increase the rents?  If the tenants are on month to month, then increases can be more immediate, if they just signed a new year long lease, not so much.

If I were in your shoes, I would take a look at what it would cost, worst case.  What is it worth on conservative estimate & can you get a better deal from the seller? Lower price, 6 months no interest, higher rate, lower down payment, you are really only limited by your creativity & ability to negotiate a deal that works for you.

[Brent Coombs]

@Zach Davis "$15k under market" doesn't really tell us enough - what price are you looking at in the first place? Overall, it looks like you are answering your own question throughout your post ie. you recognise that it appears to be quite a gamble, not REALLY what you want! Cheers...

[Crystal Smith]

@Zach Davis Let is sit.  Other opportunities will come up.  This opportunity may come back around @ a lower price.

[Joe Villeneuve]

Too many "ifs", and not enough of a cushion (15%) to protect your cash in it.  I would need to see the exact numbers but, when an investors tells me:

1 - the seller is "sick of it and wants to sell it"
2 - "the property will barely cash flow", and it doesn't matter over what time period this applies
3 - and is depending on things like inflation, TBD rehab, and rent increases to get only 15% CoC Return, and...
4 - if all of the above fails, the fallback is only 6% CoC, I say...

Not in this or any other lifetime.

[Jesse T.]

At what price would it cash flow for you?

Would the current tenants have passed your screening?  What is their status in terms of leases?

Is moving into one of the units an option?  This could make you eligible for low down payment financing.

[Zach Davis]

Thanks for the responses everyone. 

Those that are looking for more info: The FMV is around 240k, asking is 225k. Owner finance, 10% down, 5.25% interest at 30 years with a 7 year balloon. Its in decent shape but has not had substantial updating since new. Rents are below market by about $100 each per month and the tenants are on expired leases that have been rolled over to month to month, 6 and 2 year tenants. Rents can realistically be raised about $20-$25 each right off the bat with a few fixes to justify it, which would put me in the 5-6% cash on cash realm. Full rent increases would take about 2-3 years unless someone moves out and I turn the unit over. A small benefit is that if I buy the property I can save around $1000 a year in utilities ($500 on this one and $500 on my other plex) because it allows me to open up a gate to another complex and use that properties' under-utilized dumpster. Yes, that's above board, I'm a partner in the complex. That savings would put me in the 8% range and 2-3 years down the road when I've been able to bring rents up to market, assuming current market rents don't rise, I'd be in the 12-15% range. IF interest rates stayed low and I could refi around 4-4.5% I would net around 18% COC. These are self managed properties and assume 6% vacancy, 10% of gross rents in maintenance costs, taxes, insurance, CAP EX and all that good stuff. I could also get an owner occupied loan if I needed to but PMI would kill any cash flow gained by the lower interest rate.

Keep in mind, I don't need the property itself analyzed, I know the numbers because I have access to the financials from 3 other properties in the immediate area. I'm asking if you would be willing to make little initially and bet on semi-static interest rates and property values not plummeting in order to refi some time in the next 7 years. I know this is pretty standard for commercial loans with 10 year balloons but since small multi is valued like SFH you have less control over the value of the property and its a little more risky.

[Joe Villeneuve]

No.  I don't bank on anything the I have no control over.  If it is bleeding from the start, I pass...or negotiate a better deal.

[Jay Hinrichs]

@Zach Davis 

 I just in a transaction in Gresham 40 units ... my buyer has been able to raise rents upon lease renewals from 735 to 895 per unit.. he bought it at a 5 cap based on the 735 number. But he also does what you probably need to do he upgrades the units.. he like's his property to be very well maintained and attract best tenants other than other landlords that just do the minimum and usually attract lessor tenants.. So if your rents are under market you may be surprised were the new rental rates are at.

And to get into an PDX metro property owner finance with 10% down is pretty unheard of.. I would jump all over this deal if your in the market and live right there.. you will have no management fee's placement fee's get the tax write off ext. And if rents can be pushed up which they probably can then your return will get better.

[Zach Davis]

Problem solved, I didn't really want to buy the thing myself because it wasn't a good deal but some slum lord buying it wouldn't do me any good either. I turned it over to a partner at the large complex next door. He's going to buy it just to have more control of the neighborhood so I should have most of the benefits but not have to pick up a bad deal.