Potential first deal advice

3 Replies

Good Morning BP,

I wanted to take a minute to lay out the details of a deal I am considering in Bowling Green, KY. I bought my primary residence a year ago and sunk a good portion of my free cash into the down payment. I came across a 3/1.5 SF with a 1/1 apartment in a converted garage up for sale that I am interested in purchasing. The deal was initially interesting to me because it as being offered as owner financed. The terms were a little aggressive for me, $89,000 with a $12,000 down payment. 6% interest amortized over 20 years with a five year balloon payment. The house is valued around 85,000. Both the three bed house and one bed apartment are rented by the same family. They just signed their second one-year lease for $1270/month. Landlord pays $125/month in utilities. I do not have the cash for a down payment right now, but I am thinking about going to a bank for a short term loan on the down payment amount, holding the house as seller financed for a year or so and then going back to the bank for a conventional loan to cover the remaining amount and refinancing that way. The house has had some minor upgrades (flooring, interior paint, new windows) and is already occupied, so I wouldn't have much going out in the way of initial repairs or expense. The house is located less than half a mile from the university campus in a neighborhood that is rough around the edges but is seeing some signs of growth. Three houses on the street are currently being gutted or have been bulldozed in preparation for new home construction.

Am i making this too complicated? I don't think I can realistically offer to buy the house from the seller outright since I don’t have the down payment money that a bank would require for a full loan. What's your opinion BP, am I making this too complicated or is it worth a shot?

I'd ask the seller to negoiate with you! I'm sure the seller put those numbers out there as a starting point. One of the best things about real esate deals is everything's negoiable.  The house is valued at $85K but he wants you to pay $89K that doesn't add up for an investor like me.

Don't pay more than a house is worth, that's never a good deal. Also you need some more figures to figure out if this will work for you.

Income: 15,240/year.
Subtract 6% for vacancy (or whatever number is common for your area)= 14,325

Insurance
Property taxes
Lawn/snow
Annual repairs
Call the city to make sure there are no upcoming sidewalk/sewer/road upgrades that will come from your pocket.

Also get a home inspection, it has been my personal experience that owners who are willing to finance them selves sometimes know the building is traditionally not finance able due to strange building/code issues. Better to pay the $200 for an inspection than being stuck unable to get a loan to pay the 5 year balloon.

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Thanks for the advice @Erin Margaret and @Mike Hanneman .  I did a little digging in the PVA files and found out that the last appraisal was 10 years ago and the house appraised for $45,000. At that time it was a SF residence with a detached garage. A bathroom was added and the garage was converted to an efficiency apartment. It was sold to the current owner two years ago for $85,000. I'm not 100% sure that the addition of the garage apartment was approved by the planning commission as the taxable value of the house and lot didn't change even with the increase in recorded sale price. 

@Erin Margaret, I don't have an insurance quote yet but have an agent I've known for years working on one for me. This part of the city got new sidewalks four years ago when it got a new elementary school and the roads in this area are not included in the five year overlay plan, so i should be ok on than. The house comes with a lawn-mower and the current tenants seem to keep on top of upkeep, at least for now. I budgeted about $1,000 for annual repairs, and have the skills to take care of everything with the exception of electrical or major plumbing. The tax bill, if the house is appraised at 85,000 would be about $290.

I don't really like the idea of having a balloon payment and need to see if the owner is interested in selling outright. I'm working on setting up a meeting with a local lender who contacted me through BP a few days ago, so hopefully he will have some ideas on a good way to move forward.