Thoughts on my first owner-finance offer?

Question

Hi BP,

I am in contact with an owner in Kansas City (MO) who owns 3 duplexes free and clear (total rents for all 6 units are $2850/mo).

He owns these properties free & clear, and is willing to sell them at $175,000 with owner financing. He told me to make him an offer and he will look at it then decide.

This is what I am proposing:

• Sell Price: $175,000
• Downpayment: $10,000
• Owner: Carries a note for $165,000
• Interest: 6% 
• Amortization: 30 years
• Balloon Payment @ 5 years from now

• Using a calculator online, it looks like my monthly payment would be $989 and seller would make an additional $48,664 over the next 5 years.
• Using a calculator online, it looks like my balloon payment would be $153,318 in April 2022

Is this a good offer? Too high, too low? Am I missing anything? This is my first owner-finance offer so I'm super nervous.... would love any advice from all of the owner-finance pros on here :)

Andrew Syrios · Answer

That area is pretty rough. You can make it work, but I would be very cautious, particularly if you aren't experienced with lower end rentals. It's got pretty high crime and the schools aren't very good. You can get a lot of demographic info about zip codes and even subdivisions at CLRSearch.com and City-data.com and I'd recommend checking those out. But generally, I would be very cautious about that area.

Matthew Perry · Answer

A good negotiation in my eyes is like a rally in racquet or paddle sport- if it the current owner is willing to "give it away" then you either paid too much or could have gotten more. How complete of an inspection have you looked to? Are their liens on the property? At its face value that is a good deal and that always makes me a little cautious.

Adam Hays · Answer

rentometer has 2/1 in 64124 at $813median Property condition affects that obviously

Adam Hays · Answer

@Victoria Townsend I would suggest a lot of due diligence in this area. There is a reason the doctor is tired of dealing with the tenants. As current lease agreements, hopefully month to month on everything.

I would be concerned with condition of the properties in that area, and you are going to need a very good property manager to properly screen tenants or you will be turning over often and chasing rent.

And I wouldn't expect much appreciation.

But I'm pretty new so take that with a grain of salt. I'm not saying this property can't be a good one I'm just saying its most likely high risk so proceed with caution

Victoria Townsend · Answer

@Andrew Syrios @Adam Hays

Looks like quite a few people are commenting on making sure about property location since average rent is $475/month, so I figured I would post up the area.

I've attached an image of the 3 duplex locations below:

Owner mentioned he hasn't raised rents in years and that there is opportunity to do so.

Zip codes are 64123, 64124, and 64125. They're all 2/1 duplexes.Would love anyone's follow-up thoughts :)

Thomas S. · Answer

What I do is make multiple offers at the same time, include the one you suggest, and see what he counters. Your options would include higher or lower interest, higher DP, higher or lower purchase price. Each variable is interrelated.

Higher purchase price, lower interest. Lower purchase price higher interest, Higher DP lower interest, Zero down higher interest, longer/shorter terms, balloon/no balloon etc. Pick two or three of your best options to present to him and Include with each option a graph to show his returns

Andrew Syrios · Answer

Sellers won't give really high LTV seller financing unless you've built a lot of rapport and they trust you (unless they're extremely motivated).

Andrew Syrios · Answer

I can't tell you whether it's a good deal unless I know the condition, location and size of the units. Most owners would want a larger downpayment, but if you can get it for only $10,000 down, that's great. Some owners will definitely do that, especially if they're motivated. But I would feel him out and see if that sounds like something he would be interested in.

Jim Huish · Answer

@Victoria Townsend Yeah, balloons are common on owner-carry, but negotiate what is best for YOU.  The creativity that you get to exercise in negotiations  (especially on owner-financed deals) is one of my favorite parts of REI.  My deals were both asking $50,000.  I just offered asking price because the TERMS of the note were where I needed to do the negotiating (I just needed a low monthly payment).  One was $5,000 down.  The owner wanted higher monthly payments and a faster payoff than I could do.  For the deal to work for me, I needed $375/month payments, so he ended up agreeing to extend the loan a few years so I could be at my lower monthly payment.  10 or 12 year loan (can't remember).  Rents for $800/month.

My other owner-finance was asking $50,000 with $10,000 down.  I only had $7,000, so I talked them into letting me just pay an extra $200/month for the first 15 months.  So my payments were $510, and then dropped to $310/month after that, where they'll be for the remainder of the loan.  No balloon.  Just a 12-13 year full amortization schedule.  And it rents for $750/month.

I'm about 4 years in on both.

I think both were just negotiated over the phone.  A couple calls with each owner.

Thoughts on my first owner-finance offer?

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