Possible Owner Carry

[Jonah Slove]

Found a FSBO SFR that the owner is selling 100k, or so, below market value. He sent me the appraisal from 6 months ago for $370k and CMA's are around $350k. He is asking $270k with the agreement that he can continue to live in his camper trailer on the back portion of the lot for 10 years. If I sell the property before 10 years I own him $10k per year.

The property currently rents for $1700 with a long term tenant who wants to stay, and he hasn't raised rent in 2-3 years. How does this sound?

I have cash and HELOC available to make this a cash deal and was pre-approved with 20% down. What other options make sense? I would like to pull most of my cash out ASAP. Would a hard money lender loan 75% of the appraised value? If bought with cash either mine or HML is there a seasoning period or could I cash out refi ASAP? What other options are out there?

[Dan H.]

The $100K discount comes at the expense of 120 months of free rent.  Is his camper trailer on utilities?  If so who pays for those utilities?

I suspect getting $100k for the land use for 10 years is good IF it does not include any utilities.  But if you try to sell, the buyer has to get similar discount to keep free tenant or you pay the $10k/year.  So for there to be any value here, you have to hold for at least 10 years.  

With the current rates, 1% rent ratio is cash negative at high LTV in most markets. This implies you require rent above $2700 to be cash neutral. If you keep the current tenant at anywhere close to current rent, this will have large negative cash flow. You did not indicate what market rent is. Can you get more than $2700/month rent? If not, where are you expecting the return? Note $100k discount over a 10 year hold is not a great return even if you could achieve cash neutral.

I recommend in this market everyone do conservative underwriting.  I am confident that conservative underwriting will show this is not a good purchase.  I do not make purchases unless they are good purchases.  The goal is not to own properties. The goal is to make money.  

Good luck