[Calc Review] How to make this deal work?

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*This link comes directly from our calculators, based on information input by the member who posted.

Hey BP! 

I'm working on my first entirely REI focused deal and could use advice on a couple of points.

There are two separate duplexes owned by the same couple up for sell. They are immediately adjacent to each other (they actually share a well). They are asking $215K for each, but we're offering $188K & $192K ($380K together). For ease and speed, I've combined the two purchases together in the BP Calculator linked here - all maintenance, taxes, lawn care, etc. are combined.

My biggest challenge is that we have enough for a 25% down payment to meet the necessary requirements for a 30yr Fannie / Freddie loan, but it will bring the reserves down a lot. My Mortgage Broker is saying the lenders we're working with want ~$14K after down payment and closing costs as a reserve, which is going to make things tight, and they are worried it won't get approved. I haven't been able to find this, but I was also told you can't use Gift Funds for an investment property through FanFred, so I couldn't ask for temporary help from family to show better reserves. 

Edited to add:

We have $127K in cash and stocks as liquid resources. Down payment of $95K, then reserves of $14K, plus estimated closing costs of $15K leave <$3K of a buffer, so if the seller counters or anything else changes, it's razor thin.

I think the cashflow on the purchase looks good; I plan on self managing for now, but have factored in Property Management in case that changes. I also think they are priced under market, there are similar properties on the same street renting for $1250 - $1375 /mos, while these units are currently $1000x3 and $1100x1. I'm not betting on it, but I also think this area is growing as it's close to a lot of business and tourist investment and Florida just approved $$ to renovate local state parks (walking distance to a tourist attraction).

Last, my W2 pay is solid and ~ $8300 a month, but I get stock vestments 2x a year, so in November I'm set to receive ~$40-45K more after taxes which will alleviate any reserves concerns.

My biggest questions is what to do if I run into problems with the loan, if they are worried about the reserves post DP and closing costs. I have thought of a couple ideas, but would love feedback based on your experiences. 

1) Offer slightly more on the purchase price, but ask seller to cover closing costs which would free up reserves

2) Ask someone (most likely family) to go in on the loan itself only to show reserve funds, as we should have enough, as gift funds apparently won't work.

3) I can go with a portfolio loan with 20% down and no need for a reserve, but the rate would be 7.5% or higher. 5/1 ARM.

- If I go with #3, do you think that would be worth it to gain control, and then in November I could start refinancing into a 30yr FanFred for a better rate? I know this will cost additional refi origination costs, but would save a few $K a year in interest.

4) Any other ideas on how to get around concerns with too low of reserve if it comes to it?

5) Last ditch, I thought about trying to find another buyer who would buy one of the duplexes and I would buy the other at the same time for the seller's 1031 obligations, but this is not my ideal solution.

Thanks in advance for any ideas!


@Andrew Varney

Hi Andrew

Might be a great deal but I see a few problems and possible solutions:

If you use your savings to finance the downpayment you will have A LOT of cash stuck in deal that you cannot refi out. As you mention, this will also leave you vulnerable if things go south.

I would recommend you talk to the owners. Find out:

- why they are selling?

- where are they going from here (what do they need the cash for?)

They might be willing to do owner financing for 80, 90 or even 100% depending on their plans.

Best of luck :)

@Niels Bjørn Toppenberg

Thanks! I thought about buying one and asking for seller financing on the 2nd until I could refi out in November and take it over wholly, but the answer to you other questions prevent it.

The owner is a long term investor and has moved 3-4 hours away. He self manages, so he wants to sell these in a 1031 exchange and buy a multifamily property closer to him. So he has to sell them both at the same time, and can't carry the note long term.

Do the portfolio loan for 20% down, then when you get your 40k later this year, re-fi with the lender you want. If it is indeed a good deal, it's worth paying a bit more in interest for a few months to get it.