3 family analysis

[Bryan M.]

Hi Everyone, This is my first post so we will see how it goes. I would like some thought and analysis of a deal I am looking at. The property is a 3 family in a mid size city in Ma. The seller is offering financing so that is attractive. I am looking to get it for 165,000, he is asking 175,000. The numbers are below.

165,000 purchase price
10,000 down
2800 taxes
2200 insurance, I should be able to get lower rate
1680 water/sewer
2400 rent(3 x 800 per unit)

I am looking to pay 900 a month for financing. This area has been hit hard by market and this property would have sold 4 years ago for 260,000. Anyone have any thoughts on this deal? I figured cap rate at 13%. It looks attractive for me but am taking my time analyzing this one.

Also the seller said he took a mortgage out on the propety last year, to take out equity, how does this work with seller financing? What if I buy the house from him with seller financing and he defaults on his mortgage, the bank would forclose on the house right? Not quite sure how seller financing works if the seller has a mortgage on the property and transfers the deed to the new buyer. Any insught would be greatly appreciated. Look forward to hearing from everyone, thanks.

[Jon Holdman]

Standard simple analysis:

Rent: $2400
Expenses: $1200 (50% rule, see sticky threads in Rental Property forum)
NOI: $1200
Payment: $989 ($165K, 6%, 30 years)
Cash flow: $211
Cash flow per unit: $70

With your down payment:
Payment: $929 ($155K)
Cash flow: $271
Cash on cash return: $32%

I'd be a little concerned the guy just re-mortgaged the property. What is the mortgage amount compared to what you're paying? You should make his mortgage payments directly to his bank. Otherwise, he has little incentive to not just pocket your $10K and the payments for the 8-12 months it will take to foreclose.

The risk in seller financing with an existing mortgage is that it triggers the due on sale clause. The lender has the right to call the loan. As long as the payments are being made and interest rates are relatively low, there's probably minimal risk. Though who really knows. Just be prepared to refinance if that happens.

Do find out what other properties are selling for. The price four years ago is pretty irrelevant. What are similar properties bring right now? If they're not bringing at least $235K (i.e., you're into it for no more than 70% of its real value), this isn't much of a deal.