All Forum Posts by: John Stevenson

Before you pursue the deal too far, you may want to make sure that he is not upside down in his mortgage. In other words, that the house is now worth less than the combined mortgage amount.

Even if the bank allows a short sale for less than the mortgage amount, you said that the property needed some rehab work. Carefully figure out how much you think that will cost you.

Now, once the house is fixed, how much do you thing it will be worth? Okay subtract out the repair costs. Now take out the mortgage amount. Is there anything left over? If not then you have a problem. The difference will represent your profit or loss. Just make sure that at the end, there is some financial benefit for all your hard work.

Investing is about leverage. Leverage is about stability. If the rate on the loan adjusts annually, you can be pretty sure the rate will adjust up. Take a look at how just two percentage points can change your payment:

Loan $165,000 Rate: 3.5% Term: 30 years PAYMENT: $740.92
Loan $165,000 Rate: 4.0% Term: 30 years PAYMENT: $787.74
Loan $165,000 Rate: 5.5% Term: 30 years PAYMENT: $936.85

You would be better off locking in a rate on a 15 or 30 year mortgage rather than having the worries that as interest rates increase your return decreases.

To see if a HELOC will be better, make sure you calculate how much interest your will pay on this loan (higher interest rate + fluctuating) over lets say 5 years compared with a traditional 15 or 30 year mortgage.

@Joel Owens makes some good points.

Occupancy/vacancy rates are just one of the factors to "back" into a purchase price. If you are basing a purchase price mainly on the income approach, then having access to a couple of years of P & L statements are absolutely critical.

The gross rental income will include your vacancy rate. ((Total Rent at 100% occupancy x 12 months) - (actual gross rent))/(Total Rent at 100% occupancy x 12 months) = vacancy rate.

But the big question is how much do I offer? Determine that by calculating the average net income over a 12 month period from the financial statements. Remember net will include all expenses including property taxes, insurance property management, repairs etc. Now, from that number you will take out your mortgage payment and your profit or ROI. If there isn't enough left over for both, then the property is not presently profitable. Don't buy it unless you know how to fix the problem quick.

Working a mortgage payment backwards based on what you expect the loan rate to be will give you your loan amount. Add in your down payment and you have your purchase price. Easy as that!

Speaking of .02, there has been some talk of "adjusting" the price by adding in the commission. Yes, this will kill your deal I would guess about 95%+ of the time. Here is why you do not need to adjust your price:

If you are using comps from listed sales to determine your sales price, the price for the commission is already factored into the price. The commission paid to the agent came out of the recorded sales price.

My advice to FSBOs is do you comp research and pocket the "commission" as a bonus for selling the house yourself. You earned it. If a realtor brings a buyer to your front door, then split your commission with him. It is only fair, he did do half the work.

Sounds like you have weighed your options. If you are looking to unload the monstrosity when things are good, then now is the time while you have a good solid lease. The rental income will add value.

As to how much, I am not familiar with your market. My best advice is to get a hold of a good commercial realtor in your area and see what they have to say. If the best use of the property is in fact for office use and not residential, then you should go the commercial listing route to get the best price. You can always market it both ways, but a commercial realtor will most likely get you the best price.

Look for sites that have lots of active listings. You do not want to be wading through old stale listings that have been on the market for months.

You should also be prepared to pay a reasonable membership fee. These sites are going to have newer active listings. A lot of times the free sites are slow to catch new MLS listings. Hope that helps.

Diversification in real estate is always a good idea. I think you are on the right track. Great move with the conversion of the monster to commercial! Your lease agreement sounds very well written and the cash flow looks great. My question is why sell? Sounds like a cash cow. Commercial tenants are much easier than residential ones. They rarely trash the place and are much more likely to pay their rent on time. I might advise holding onto this in your portfolio.

It is not simply a matter of loan calculations but rather seller motivation and discounting. Think of it this way. Let's say you have a property listed for $100,000. Two buyers submit offers for $100,000 each on the same day. One is cash payment and the other is owner financing. Which would you choose?

If you need cash up front, then the cash offer. Now here is where the hard part comes in. As the buyer, if they really want the property, how much will they have to either increase the interest rate or the purchase price to make their offer more appealing?

This answer differs from market to market and from investor to investor. It is also impacted by the length of the owner financing. To understand these, you could contact a Certified General Real Estate Appraiser and ask about discounting rates or better yet, get a hold of someone who buys land contracts. They will be in a good position to advise you.

I agree. Youths today do not understand risk vs. rewards. If only we could help to educate them on the benefits of home ownership, not ARM, home equity loans and refinancing. The younger generation looks as these as methods to get spending cash, not as a long-term wealth creation.

Would the property owner consider a one year land contract with a minimum amount down? You make payments to the property owner for a year. Try your best to make only bare minimum repairs to keep as much cash flow as possible. Then you take the cash flow and create a hefty down payment to improve your bank finance options at the end of the year.