We may have a great deal on the line but we need help analyzing.

[Rene Cruz]

Hello BP community. My wife and I are new to investing and we have what we think may be a great seller financing deal on our hands.  It is a friend of the family and it all seems great but since we are new to this and have only purchased smaller properties through traditional financing we are nervous. We would love any feedback/help anyone can offer in analyzing this deal, below are the details:

Seller financing with a 5-year balloon payment

Price the family friend is listing the home: $495,000

Downpayment she is asking for: $45,000

Interest rate during the next 5 years: 3%

Monthly installment to the family friend: the balloon payment calculator is spitting out something like 2k a month

Renovations: We think we will need at least $100,000 to make the house livable (its a complete gut but good bones in a great neighborhood)

Current comps: somewhere between $600k - $630k (we've seen as high as $700k for something completely redone which this house would be when we finish)

The downpayment and the interest rate seem like a no-brainer but what makes us the most nervous is:

Will we be able to borrow the 100k for renovation and if so what will the monthly payment on something like that be? I know you cant answer that because of the variables but we are afraid the loan payment plus the 2k to the seller monthly plus taxes and insurance will be too much for us.

What happens if we can't get traditional financing when the balloon payment is due. We feel hopeful that interest rates will be lower by then, we feel confident that the value of the property (especially after all the reno) will be more than what we owe (including the reno loan) but what happens if for some reason we simply can't get financed? Do we lose all of our investment and hard work?

As you can see, we are struggling with this decision. Does anyone have any experience with this type of financing and can shed some light on this? We would really appreciate any little bit of info or even a point in the right direction. Thank you for reading and thanks in advance for any help!

Rene and Erica

[Ray Hage]

Hi Rene. Not to be a downer. IMO there are too many risks there even with the low interest and low downpayment in a family-friend type of deal. The market is a bit wobbly at the moment. A 100k construction loan, you're probably looking at around 10% interest or more. My advice to you is don't take this risk unless you are financially able to deal with the consequences if the market goes bad. Assuming you have good credit and stable documented income, you should be able to refi out of it, but there are still a lot of variables to contend with for you as a new investor. I am a seasoned investor but I am generally risk averse in a situation like this.