Duplex deal--thoughts?

Question

Would appreciate a review of this potential deal.

Duplex (2 on a lot) 3/1 House built in 1900 with large kitchen, finished basement

Back unit built 1998, modern 1/1 open floor plan with radiant heat, heated 2 car shop/garage

Asking price: $299k
Offer of $225k max, owner carry with $15-18k down, 3-4 year carry amortized over 30, refi into conventional.

Potential rents: $2300 mo (ballpark low market):  1400/900.  Tight market, so could go for $1550/975+

Separately metered for gas/electric

Master water meter (considering a submeter)

1 block to active, desirable downtown area & close to university. Current town vacancy rate 2%

Front house needs approx 15k work.  Could be phased.
Back unit needs some kitchen cab work, about 1k, maybe add a 1/2 bath upstairs where bedroom is located.

Owner has indicated they may be willing to carry (some?) for a short period.  Can't get any more details from the agent but I believe they own free and clear.

DOM:  45 +

Flaws/reason not under contract:  No outdoor/yard space due to construction of 2nd unit makes it unsuitable for nice owner occupy or family rental,  front house is old & scares those not comfortable with rehab, on a busy street (but 1/2 block to city park, pool, library, downtown).  Suitable for grad students, young couple, college students.  Easy curb appeal with basic exterior upgrades (deck, fencing, etc.)

Seems like a great buy & hold rental.  Exit strategy would be to sell as a turnkey investment or lease option if necessary.

Thoughts?

Bill Gulley · Answer

Well Page, just to the financing, less than 10% down and you'll need to get that to 70/75% to refi it on a short balloon, almost sounds like a take the down, take the payments, foreclose, rinse and repeat.

Hav no idea as to value, the olderhouse needs a really good inspection, lead, abestos? Verify rents? :)

Hav no idea as to value, the olderhouse needs a really good inspection, lead, abestos?  Verify rents? :)

Page Huyette · Answer

True, Ben.  Couldn't you say this about must duplexes?  Maybe this is where my personal exit strategy needs development.

Yowch, needed that wake up call.  Thanks.

Any thoughts on how to present this option for an MLS listed property so the seller will even consider it?  My feeling is that if they have listed with an agent, they aren't savvy about other options, which is where the opportunity to educate comes in.

This is my inexperience showing through on seller financing.  Still trying to develop an approach that makes the benefits obvious for both parties.

Ben Leybovich · Answer

Personally Page, I stay away from these only because the exit strategy is muddy.  Due to what this is, practically the only buyers are other investors, which limits the market more than I’d like since in this price range investors have other options which are more “conforming”.  Unless you plan to hold the thing for a long, long time, I don’t know that any amount of CF makes this a solid deal – just my opinion.

Page Huyette · Answer

I'm assuming less than 10% down with the owner not having a current mortgage.  Not as a wholesale property, just looking at exit strategies down the road if necessary, but the plan would be to hold.

Front house is in a historic district, so that's another constraint--thanks for mentioning.  Also didn't think about 60% including the water, but that makes sense.  I did account for that in my analysis, as well as snow/lawn, etc.

The primary reason for seller carry is the low down, so I can keep cash for repairs and other investments that may come available soon.  Deals are nearly impossible to come by in this area, so I tend to look at properties with potential that need work and will rent easily.

I'll also run the numbers with nothing down and higher rate.  Have also looked at conventional financing, as I may be able to get it for 20% down instead of 25% since its classified as a single family, but again, prefer to stay more liquid.

Thanks for the replies, I appreciate your experience and insight.

Joel Owens · Answer

Just to give an idea of someone that has 300k cash they can go triple net and get 8% cap and tax depreciation with yearly rent bumps, or be a lender on loans, or buy tax liens etc. and be passive and get better yield than the property mentioned above.

Joel Owens · Answer

So it sounds like you are a wholesaler on this and not a purchaser by your last statement.

" Seems like a great buy & hold rental. Exit strategy would be to sell as a turnkey investment or lease option if necessary"

OR

Are you talking after you have owned for it 3 or 4 years and the owner financed note comes due these would be your exit strategies??

You didn't mention how big the lot size is (acres)?? Is the house from 1900 in a historic district where it would be very hard tearing it down or adding modifications to it?? Does the owner own free and clear?? How much you put down on an owner financed deal will depend on if they own free and clear or this is a wrap etc.

Because of possible owner default of the underlying mortgage a buyer should not put a bunch of money down in case something bad happens. You would be safe if you bought so low that you could resell it fast and get your money back but this doesn't look like the case here.

if you are wrapping around an existing mortgage you have to watch out for due on sale clause, insurance issues for renewals, first mortgage default (you can get third party servicing companies to make sure the first mortgage is getting paid) etc.

On the owner finance if you get little to nothing down and get them to hold for a low debt service say 3% interest rate principal and interest instead of a 6 to 7% rate that is better.

Looking at this deal it looks very weak.

2,300 month X 12 = 27,600 potential gross rent
Back away 60% costs because of landlord paid water
27,600 X .40 = 11,040 NOI

At a 10 cap that is 111,040 purchase price NOT INCLUDING all the CAPEX needed you are talking about which is in the tens of thousands not including what you can't see in the walls etc.

Even at your 225k you are looking at a 4 to 5% cap rate before CAPEX. Unless this was sitting on a ton of prime land I could sell up and wrap up this deal putting little to nothing down I wouldn't touch it.

To be clear I am not interested in this property but just thinking like a buyer is how I would analyze it like I did above.

Duplex deal--thoughts?

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