Help Evaluating Deal - What to propose?

Question

Hello BP!  I came across a possible deal I'm trying to work a proposal for the current homeowner and I need help presenting a win-win deal.

The owner is selling because his mother in-law lived in the home and has passed.  They purchased in 1999 for 75k and have a mortgage balance of 50k.  The current owner was thinking of putting in about 10k and trying to sell for 115k which is FMV based on comps of recent sales.

He is willing to do seller finance and sell directly to me without going through a realtor but I don't know the best way to structure an offer.  My ultimate goal is to buy it and rent it out, should fetch $950/month.

My question to the board is what type of offer is the best to present to him with seller financing.  I have about 20k cash I could put down.

Aaron Montague · Answer

@Joe Campbell

$58,400 :)

I'd try to sell him on the higher price point with the lower interest rate.  If that ARV of $115 is even close, you should be able to refi with a rate lower than 5% and get some extra cash out of the deal as well.

But that is a technique for another step in this process :)

Joe Campbell · Answer

Thanks for your analysis @Aaron Montague that helps alot.  I spoke with the client and it turns out he is wanting 6% on seller finance and min of 20% down so according to your calculations I would have to buy for less thank 60k....I'm sure he won't go for that but I'll at least give it a shot!

Aaron Montague · Answer

@Joe Campbell

That being said, this is how I would look at the property from a numbers perspective:

Mortgage - 296.59 (5% rate)

Taxes - 100

Sewer and Water 0

Trash 0

Heat/Utilities 0

HOA 0

Cap Ex and Ops 150

Insurance 75

Mgmt Fee - 95

Vacancy- 76 (back to 1 month vacant per year.  even this is probably high for a SFH)

Total - 792.59

This would allow me to hit my numbers at 65k

Aaron Montague · Answer

@Joe Campbell

Here is your monthly expense breakdown:

Mortgage - 365.04 (5% rate)

Taxes - 100

Sewer and Water 8.33

Trash 8.33

Heat/Utilities 8.33

HOA 0

Cap Ex and Ops 150

Insurance 75

Mgmt Fee - 95

Vacancy- 152 (this is REALLY high)

Total - 962.04

This is against $950 in rent.  I figured the deal at 80k purchase price, 15% down and $2200 in closing costs.  At 80k purchase, you'll lose about $12/month.

To get this to my numbers (15% Cash on Cash AND $150/month profit) I would need the purchase price to be 44k.  That would give me $152/month and 20.7% respectively.

Joe Campbell · Answer

@Aaron Montague

Taxes  $100/mo

Sewer and Water (assuming paid by tenant)  $100/yr, rest paid by tenant.

Trash (assuming paid by tenant)  $100/yr, rest paid by tenant

Heat/Utilities (assuming paid by tenant)  $100/year, rest paid by tenant

HOA (n/a?)  None

Cap Ex and Ops (my personal minimum is $150/roof/month)  Sounds about right.

Insurance  $75/month

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)  I would self manage but was still should figure in.

Vacancy- as a %. (8% represents 1 vacant month/unit/year)  I want to figure in 2 vacant months/year to be safe.

Aaron Montague · Answer

@Joe Campbell

Better.  What is the final purchase price?  How much do you intend to put down?

Lets look at the numbers.  What are the following items going to cost you each month?

Taxes

Sewer and Water (assuming paid by tenant)

Trash (assuming paid by tenant)

Heat/Utilities (assuming paid by tenant)

HOA (n/a?)

Cap Ex and Ops (my personal minimum is $150/roof/month)

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Joe Campbell · Answer

@Aaron Montague Sorry I may have not been clear.  I meant that that 115k would be his asking price if he listed on MLS with a realtor AFTER he spent 10k on repairs.  After comissions and his repair cost the most he would walk away with is around $93k.

My thought is to offer him 80k seller finance.  With rent at 950/80000, this puts me at 1.1%

Aaron Montague · Answer

@Joe Campbell

This is a bad rental deal, skip it and move on to the next one.

$950/month divided by $115,000 purchase price is 0.82%, which violates even the slimmest of "rules" the 1% one.

This bears repeating, this is not a good deal for you.

The type of financing is helpful, but secondary to the price in almost every RE deal in existence.

That being said, this homeowner is in a good position.  I'd offer them 10k cash and assume the mortgage (if possible) for 50k.  At 60k, $950/month in rent should be nicely profitable.

If that doesn't work out, call your Realtor and get them to give you a $250 referral fee when the place sells.  Get that in writing and make a fast friend.

Last time, at 115k this is a lousy, money losing rental property.