Owner Financing.....is it a good deal for my first investment??

Question

Hello everyone, I am brand spanking new in the real estate world. I don't own a single thing, but I'm looking to break into the market somewhere. I found a "for sale by owner" willing to work with me thru owner financing. The property is 3bd 1 bath about 1300sqft for $25,000.00. The comps in this area range from 60K-150K. I'm in the early stages of investigating this property. First question was "Is this home gutted? Or habitable?" to get a general idea of the inside of the home before I make the hour trip to view it. Any suggestions, tips, advice, don't-do lists that you all can offer would be greatly appreciated. I don't qualify for standard financing so this feels like it's my only option. I've really been digging for a deal like this.......and now that it's here I'm honestly nervous. FYI I'm in Massachusetts where everything is expensive.

Brian Gibbons · Answer

I'm from Arlington next door, I would first look at multi family in good public school districts where families want to rent and bring up kids, look at www.greatschools.org

Look at multi FHA financing where you live in one, rent out others

Get an agent, working for buyers, look for a CCIM designation

Read everything from

Www.justaskBen.com

Good luck!

Ann Bellamy · Answer

Kathleen, first it matters where it is.  In that price range, there are few options within an hour of Cambridge.  And if it's in Lawrence, you should know the market and neighborhoods REALLY REALLY well before you buy there.  Same with Worcester, although I like Worcester better than Lawrence.

At 25K, it sounds like it may be in a really bad neighborhood.   You may not want to publish the town, but it's hard to help without knowing.

Maybe you can PM me and I can see if I can find you someone who knows that neighborhood well.

Mike Hurney · Answer

@Kathleen Diaz and make sure you have a Real Estate Attorney draft your docs.

David Sohn · Answer

Hey @Kathleen Diaz - congrats on finding your first potential deal!

60-150k for ARV is a huge range for ARV.

First thing I would do here is narrow the ARV down as much as you can before you spend time really digging into the seller financing piece.

Next I would try to understand what the property needs for updates and what that's going to cost you.

At 25k purchase price I'm guessing (again...not knowing anything else about the property..) this is not a simple cosmetic flip.

Let's just assume it's a full cosmetic flip plus some systems updates and a roof.  It might need more...maybe less but let's just use this as a really simple example to help you estimate.  I'm also assuming you are hiring out the work (since it's an hour away..)

Let's use a really oversimplified estimate for repairs..

• $30/sq ft. * 1300 = 39k for cosmetic work 
• New Roof = 7-10k for new roof ($7500 as safe #)
• 10k for new HVAC systems & updates

you're at 56.5k on a really quick swag.

So, 25k + 56.5k = 81k just for purchase plus repairs.

You'll also need to take into account...

• other purchase costs, cost of money (seller financing plus rehab costs and financing), holding costs and selling costs.

In this example it feels like you could be all in close to $100k (assuming repairs are in the 50-60k range).  So you'd want to make sure the ARV was certainly in the higher end of that range 60k-150k range.

Hopefully this doesn't discourage you just wanted to offer some quick thoughts and other things to think about.  Happy to help analyze in more detail if you'd like...feel free to PM me more details and I'd be happy to give you some more thoughts.

Best of luck!

Tony R. Yagiela · Answer

Kathleen - Am I correct in assuming that you haven't seen photos of the property since you don't know its general condition? What did the seller respond with when you asked if it was habitable?  If it isn't habitable, then conventional financing for non-owner occupied wouldn't be an option regardless if you qualify or not.  And if you did do seller financing, you would still need funds for rehab.

To answer your question - seller financing can be beneficial for both parties if its done correctly.  It all depends on what terms he is offering (seller financing is usually amortized over a shorter period with a higher interest rate).  If you know the area, and the property is a great deal, AND the seller is reasonable with the terms and conditions, its worth talking to a real estate attorney to draft up a contract.  If you do go for it, keep talking to banks periodically and work towards getting a conventional mortgage.

But keep in mind, banks typically work with you if you come into hard times and miss a payment.  This seller might not.

Good luck!

Abel Curiel · Answer

Hello Kathleen,

Congrats on diving right in! You're doing the right thing by seeking advice from BP members.

First thing that stands out is the wide range for comps. I would find out more about this property to be able to get more accurate comps. Is there a: garage (how many cars); basement (finished or unfinished); attic, etc. Then you want to get into specifics about the condition of the home.. condition of the: roof, exterior, hvac, water heater, plumbing, floors, walls, etc. Pictures would definitely be helpful especially if you're looking at an hour trip.

There isn't enough information here to determine exactly how much upside there is in this deal but you're well on your way to finding out!

I'm hoping other BP members will chime  in and fill in some of the things I left out.

Best of luck to you!

- Abel

Owner Financing.....is it a good deal for my first investment??

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