Purposely overpay for seller-financed rental?

[Rick Park]

Duplex next to good college that rents 8 rooms to varsity athletes. since 2007 there have been no vacancies and no serious issues with tennants. Year lease, quarterly collection. house was purchased for $170,000 in 2007. Seller has significantly improved property. new appliances, roof, pole barn, bathrooms. Im in Northeast PA where house prices don't really improve much.

Income - $440/student x 8 students = $3,520/mo

Expenses - $500/mo for taxes and other expenditures. Tennants pay utilities.

Net income $3,020/mo

seller told me to take a look at the rent and make him an offer.

My offer:

$250,000 purchase price

$20,000 down

4.5% interest

20yr ammoratization

5yr balloon

His response:

$269,900 price

$20,000 down

4.89%

20yr amm./5yr ballon

I'm having it appraised today. I'm worried that it's going to come in below what my payout would be at the 5yr balloon payment, which means i would have to come up with the difference, as well as the 25% down for the 2nd mortgage. OR, what also has me concerned is if i create terms that would put my 5yr payout at whatever the appraisal comes back with, but then what happens if theres a downturn in the market and the house is no longer worth what my payout amount is?

Am i totally nuts for thinking its ok to overpay for this house? The way i see it, i am treating the property as a business, which is what i'm purchasing.. the structure is just a piece of it.

Anyone been in a similar situation?

Thank you!

[John Warren]

@Rick Park long term as long as you have strong cash flow then it shouldn't matter if you over pay for a property in theory. The issue of course is that you have a balloon payment to worry about. If you can get longer term financing then it shouldn't matter too much. Maybe see if you can build in an option at the five year mark to do another five years with the seller? Can you go to a local bank that will give you a portfolio loan? In my area I have found a lender that will do a 30 year term/30 year amortization portfolio loan even on commercial properties.