Seller Financing overleveraged Deal on terms (Canada)

[Ram Srinivasan]

HI All,

I have a potential opportunity that I am considering quite seriously. Here is the skinny:

Single family house in Airdrie, Alberta, Canada (Nice B neighbourhood, close to schools, transit).

A little background on Alberta. We are a province heavily tied to the oil market, and the recent low stretch of oil prices have increased unemployment, increased inventory, increased rents. So far, 1 year later, the prices of homes have not seen a dramatic drop. Folks either seem happy to take it off the market if they are not getting their asking price and rent it out instead.

Here are the details of the deal

- Seller has a fixed, closed interest rate of 2.89%, 4 year term with a renewal option for another 5 years

- Whosesaler involved, asking for 23K.

- Amount seller financed is approximately $376K

- My PIT payment works out to $1700/month

- The basement is about 40% developed. Drywall, electrical has been completed, Paint partially and no carpet has been installed. Unsure if permits have been requested for

- Upstairs has been freshly painted, though there are some cosmetic repairs

- Contractor walked through the property and estimated about 15K-25K to finish the basement, and 5K-10K to finish the cosmetic work upstairs.

- Seller has agreed to replace the roof on the property

- Comps on this property suggest market value to be at $370K today and hence over leveraged as financing amount is 377K, PLUS wholesaler wants 23K to assign the deal.

- Benefits are, no qualifying, 23K is my cash in (excluding repairs), and I have two months to "market the property"

My strategy on this deal would be:

- Find a Rent to Own tenant and Rent to own it for $2130/mo (400 Cash flow/mo)

- 15K-20K downpayment (reduces my cash in)

- Sales price of $400K in 3 years (appreciation rate of 2.5% over 3 yrs)

- Charge 12K fee to borrower as fee for rent to own

- Tenant willing to put in sweat equity to finish basement and complete cosmetic repair

My numbers:

Assuming I can find a rent to own tenant, 15K down, and sell the house for a future value of 400K, and rent the property for $2200 a month (with Average $450 monthly credit back to purchaser), my net return on investment is $52400 over 4 years. With a $15000 deposit, my cash into the deal is $8000, so it works out to a 164% return on investment.

I feel like because this is an overleveraged scenario, the only way I can make money on this is to have a rent to own type of arrangment. Flip, buy and hold and so on, I don't seem to be making any money in the deal when I buy.

It would be great if you could assess this deal and give me your thoughts

Thanks