Would you Overpay for 0% interest & Cash flow?

Question

I've got another small mobile home park on my hands. 24 spaces.

Seller has an asking price way too high. BUT he's willing to take $3K/mo payments "until $600K has been paid." This translates to owner financing at 0% interest.

The park is worth $450K-$550K, but if I financed those numbers, I'd pay WELL more than $600K in total payments.

At $3K/mo payments, it cash flows $1K/mo. If I sold all the park owned homes, it cash flows $7K/mo (for about 7 years until they're paid off). Then my pro forma with market lot rent & efficiencies has it back at about $2K/mo cash flow.

I'd have it paid off in under 17 years and cash flow in the mean time. BUT I'd be overpaying based on commercial value. Would you do the deal?

Greg H. · Answer

My 2 cents:

I know you are a young guy and not planning on selling. However, market cycles and life tend to change over time

Approaching 30 years in the business, I have never bought a property that I didn't think I could sell the next day and be free of it with out absorbing a loss. Being chained to a negative equity situation brings some sleepless nights when life happens

If you still want to do the deal, back out the interest and offer $450k at 12% and present the total $$$ he would receive over time

JD Martin · Answer

This is the exact thing I would do. In your (the original poster) scenario, you are going to be married to this seller because you don't have any viable options for refinance. If the guy's worried that you could do this deal with him and then cash him out 12 months later with a refinance, you can always build in a pre-payment penalty either with a de-escalator or just a flat figure (try to avoid it if possible).

Brent Shields · Answer

I just tell them I calculated the offer based on the interest rate, if they want a higher interest rate then we need to adjust the price down to compensate.

Brent Shields · Answer

I have done this a bunch of times. The only thing about overpaying is that it limits your ability to sell which is not a big deal if you want to hold on to the property.

If you are happy with the cash flow and don't plan on selling anytime soon I would do it.

Austin Hughes · Answer

Sounds good! Thanks Brent.

Austin Hughes · Answer

@Brent Shields Good deal. I don't plan on selling. What kind of a pitch do you make to sellers who push back on the interest? I can only imagine he will talk to his friends and then last minute want to charge interest.

Would you Overpay for 0% interest & Cash flow?

Would you Overpay for 0% interest & Cash flow?

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