Help Me Analyze This Owner Finance Deal Please

22 Replies

Hey Y'all,

Have this bond for deed (same as land contract in other states) deal on the table that I'm analyzing. I like the terms and this is my first owner financed deal as well as my first potential rental property so I don't want those factors to cloud my judgement. Would appreciate any thoughts or input. Thanks!

Property(s): Two separate 1 bed, 1 bath cottage style houses on four shared lots in a desirable neighborhood for rentals. One is slightly larger in size than the other with an added office room. Non-flood zone. Central to town. Has two long term tenants in there for the last 12, 14 years. Decent condition.

Owner Financing Terms:

$120K Purchase Price
$3K Down
$117K Balance - Paid Over 25 Years
$400/month note
0% Interest
No Pre-Payment Penalty - Actually 10% Deduction of Balance to Pay Off at 15years

Unit A:
Current Rent - $650

Monthly Expenses:
Note: 200
Taxes: 28.71
Escrow Services: 35
Insurance: 100
Property Management- 10%: 65
Maintenance - 12%: 78
Vacancy - 8%: 52
Garbage: 13

Total monthly expenses day 1: 571.71
-65 while self-managed = 506.71


Unit A Current Cashflow: 143.29

Notes:
Market Rents - Around 700-750
Considering making tenants pay for garbage
Insurance may go up as I have yet to review the policy
Escrow services may be $35 for each property or $35 for both

Unit B:
Current Rent - $475

Monthly Expenses:

Note: 200
Taxes: 28.71
Escrow Services: 35
Insurance: 100
Property Management- 10%: 47.50
Maintenance - 12%: 57
Vacancy - 8%: 38
Garbage: 13

Total monthly expenses day 1: 519.21
-47.50 while self-managed = 471.71


Unit B Current Cashflow: 3.29

Notes:
Market Rents - Around 650-675
Considering making tenants pay for garbage
Insurance may go up as I have yet to review the policy
Escrow services may be $35 for each property or $35 for both

Thoughts? Would you do this deal?

I’d do it assuming 120k is in the ballpark of the value for these.

-you’ve got a low payment locked in long term
-you’ve got room to raise rents and increase income.
-you can get into it for less than 3% down.

These are all great terms to me. I’d do it for sure.

Originally posted by @Rob Drum :

I’d do it assuming 120k is in the ballpark of the value for these.

-you’ve got a low payment locked in long term
-you’ve got room to raise rents and increase income.
-you can get into it for less than 3% down.

These are all great terms to me. I’d do it for sure.

 PLus ZERO % financing.. if you do not have use for the extra money a month  LIke bills or something I would continue to pay this down you can own it free and clear pretty quick with zero interest.. and when its free and clear you have your self one great asset and all the cash flow.

@Jay Hinrichs This may be a little off topic, but I am surprised to hear you say that paying the property off is a good course of action... especially at 0% financing. I know you're a big presence on BP but I haven't read a lot of your posts (great podcast by the way), so I don't know your stance on leverage. However, I see a lot of people suggest leveraging, especially in the early stages of an investment career. Why do you think it would be a good idea to pay the property off early instead of using that extra cash to remodel/renovate the cottages and get them closer to market rents?

@Courtney Fricke , that deal sounds almost too good to be true. Have you done due diligence on the property? I am not trying to talk you out of it but one thing I have learned is that if something seems too good to be true, it probably is. 

You mentioned that there are 4 lots; is there a possibility to get the other two lots at some point? Or am I reading that wrong?

Originally posted by @Marshall Easlick :

@Jay Hinrichs This may be a little off topic, but I am surprised to hear you say that paying the property off is a good course of action... especially at 0% financing. I know you're a big presence on BP but I haven't read a lot of your posts (great podcast by the way), so I don't know your stance on leverage. However, I see a lot of people suggest leveraging, especially in the early stages of an investment career. Why do you think it would be a good idea to pay the property off early instead of using that extra cash to remodel/renovate the cottages and get them closer to market rents?

@Courtney Fricke , that deal sounds almost too good to be true. Have you done due diligence on the property? I am not trying to talk you out of it but one thing I have learned is that if something seems too good to be true, it probably is. 

You mentioned that there are 4 lots; is there a possibility to get the other two lots at some point? Or am I reading that wrong?

 I would only pay the mortgage off with excess cash flow that was not needed for the running of the asset.. if your making a few hundred a month positive whats that going to do for you mine as well pay it down so you don't just spend the money on dinner closes starbucks etc.  if she can duplicate this and get another property for 3 to 5k down then for sure save the dough and do it again.

but to clarify I am NOT a proponent of max debt refi to you die.. I believe you need some paid for assets in your portfolio to fall back if necessary... but I do agree you need leverage at the beginning to scale no doubt.. 

Duplexes in the area go for around $120K. Not worried about the purchase price or terms, more so just the cashflow.

The cottages are in decent shape with average wear. Recent work had been done to the property too. I did thorough walk thrus and asked about the properties history. The two properties each sit on two lots right next to each other. Basically meaning, they're right next door and on one rent roll.

Rents are currently under market value as the owner has had some injuries and didn't want to rock the boat with the long term tenants.

@Courtney Fricke , it sounds like you know what you're doing. I am jealous of that deal and I would pull the trigger, too. How does the price per square foot look compared to the duplexes that you're using as comps? I am curious since the cottages sound like smaller dwellings. I am not suggesting that would be a deal breaker for me since the payment is so low and there sounds like a TON of potential- I am just curious. Another separate thing to consider would be depreciation. It sounds like the cottages might take up less land than a duplex, so I think you would not be able to depreciate as much. I bet Jay knows more about than me.

@Jay Hinrichs , sounds good to me! I am just starting out and leverage makes sense for me right now.

@Marshall Easlick they will be harder to depreciate but that's just one piece of the puzzle to consider. They're also smaller than some duplex comps. One is under 900sqft and the other is around 750sqft. Would have to look at comps again to see the direct comparison.

Wow 0% interest? Sounds like a solid deal to me. I would save up the couple hundred a month and use it to improve both units in a year or 2. Then rents could be increased. 

Courtney,
I agree with everyone else here, this is a great deal. Congrats!

However, just wanted to share an experience of mine. I’ve had a seller financed deal where we agreed upon interest at 0% - I discovered after doing my taxes the first year that it’s actually illegal to have 0% interest on a loan (even to your family) and had to write a check to the seller and redo the entire contract. I’m not a CPA, so I’d check with yours to make sure I’m correct before you go adding an unnecessary interest rate to your deal (if you don’t have to), but when I make all of my seller financing deals I use this link to see what the minimum interest rate is for the time period of my contract agreement (https://apps.irs.gov/app/picklist/list/federalRates.html)

Let me know if you have any other questions. Best of luck, and I hope this helps!

@William Nelson I will check that link out and send it to my CPA. I've spoken with both my CPA and the seller's CPA. But since it isn't finalized, I'll ask again. I know imputed interest was a question of concern in the beginning too.

Hi Courtney.  The terms seem great! Hard to beat 0% financing not withstanding William Nelson's comment.   I was wondering if you considered big ticket fixes (e.g capital expenditures) as part of the analysis?  Given your interested in the cashflow, that would be something that could have a significant impact. 

Update: Both of our CPA's have challenged this deal. Working on final negotiations today. Last offer submitted this morning was:
Purchase Price: $85K ($120K comps)
Down Deposit: $3K
$82K financed - 25 years term, 5 years balloone
3.25% Int (no interest causes issues with IRS)
Monthly note: $387.61
Early 2023 REFI to pay off principal ~ $69,400.

@Courtney Fricke , it looks like the balloon payment and the interest rate are the two new developments. The interest rate is good, so that's probably not a big deal. Does it still cashflow enough for your criterion? Would it still cashflow after you refinance in 5 years if interest rates at that time are 7%? Did you work the cahsflow numbers with $69,000 balance, 7% interest (not likely this high but it's possible), at market rate rents (or close to them)?

A lot can change in 5 years. Even if these numbers all look peachy, do you think the seller would be interested in re-negotiating and carrying the note for an additional term?

Again, this sounds like a solid deal and it will probably cashflow in 5 years after the refinance. I am just asking questions to invoke thought processes that might not have occurred yet.

@Marshall Easlick Yes, I talked with two friends who are lenders and we were discussing the possibility of 6.5/7% for the refinance. It still cashflows day on the refinance. The new interest rate and the balloon are the two new developments. Also, the insurance policy shouldn't be increasing. Talked to this insurance agent. He thought he just had a liability policy but he has a decent full landlord policy in place. So that's not going to increase on me from day one. Overall, I'm still hoping we can sign on the dotted line. Just waiting on his CPA to return my call to advise him on the deal. 

Thanks, @Chris Verdigets ! If anything, whether I can close this deal for my own portfolio, wholesale to another investor as a cash purchase or at worst, if I lose it, still a ton of lessons learned from starting to offer for owner financing. Talked to CPA today. Will contact seller about.