100% owner financed. Should I rent or sell with a wrap?

Question

I was talking to an agent friend on the phone today and she mentioned that she needed to do something about a property.  It has been sitting vacant for a little over a month and she doesn't to fool with it any more.

The property is 3.5 acres with a 3 bedroom 1 bath 1000 sf 1974 trailer that has been recently remodeled and could be rent ready with less than $500.  The septic tank is about 5 years old and it was previously rented for $650/month.

The trailer has little to no value, but the market value of the property is about $35,000.

The property was listed for rent and for sale about a year ago, originally for $64,900, then dropped to $38,000.  They had a contract for $31,000 cash, but the seller had a delay in getting a title for the trailer, which killed the deal.  They did end up getting clear title.

I asked her if she would sell to me carrying all the financing and she agreed.  This is what she offers:

$30,000 sales price

100% owner financed with 10 year amortization @ 5% interest: $318.20/month PI

My closing costs out of pocket will be about $500 and repairs are $500, so my total out of pocket is $1000 (theoretically).

If I rent the property for $650, this is what I have:

Expenses:

$20/month hazard insurance on the trailer.

$42.83/month taxes

$65/month vacancy

$65/month repairs

$65/month capital expenditures

$65/month management (I will pay myself to manage).

$322.83/month Principle and Interest

Monthly Cash Flow: $8.97

I know This isn't a great cash flow deal, but I would essentially break-even until the property is paid off in 10 years if I held it as a rental.

The other scenario, which I am leaning towards is to sell to an owner occupant with a wraparound mortgage.

I could increase my cash-flow substantially, get a decent down payment, sell for a higher financed price, charge a much higher interest rate, and enjoy less management headaches.

If I sold on a wrap I could sell for

$39,900

$5,000 down (tax refund time soon :)

$34,900 amortized for 15 years @ 12.75% Interest = $435.84/month PI

This would allow me to make money on the front end ~$4,000 and make $133/month cash-flow.

I could also play with the numbers a bit to make a higher IRR, but this seems like a doable scenario.

Would you buy this?

If so, would you keep it as a rental or sell on a wrap?

Chris Majors · Answer

Thanks everyone for your responses.  I've decided to pass on this one.  If it was a stick built house it would work, but the fact that the trailer is already at or near the end of its useful life is a deal killer.

Bill Gulley · Answer

And, you may be in violation of federal law. As a dealer, don't provide consumer financing to an owner occupant.

And, at a glance, what did you do the the property to make worth 10K more, just touched the closing docs?

With a trailer, my first thought is that it's probably overpriced with 100% financing, just the way old investors think. You're stacking another 10K simply from a profit angle becomes predatory dealing at that point and you're probably stealing future equity, if any, from your buyer.

Buy it, rent it, if you're happy with the income, if not, don't think you have to make a deal just because the seller will finance it!  :)

Chris Majors · Answer

@Jay Hinrichs  On paper the trailer is beyond its useful life, but the owner has done a good job rehabbing it.  I suppose if I were to keep it as a rental I should budget for more capital expenditures than I would for a stick built house.

@Charlie Fitzgerald Thank you for bringing up the high cost loan regs.  For GA I believe the interest rate cannot exceed 10 points higher than the US Treasury yields for mobile homes?  That would put me around 12%.

I have come up with another possible scenario:  Lease option with the agreement that I will owner finance if the tenant buyer pays on time for 24 months.  $2,500 option consideration for $39,900 and a monthly rental of $695.  The buyer handles all the maintenance during this period.

After 24 months if the buyer exercises the option I will finance $37,400 amortized for 15 years @ 11.99% interest. PMT of $448.62

The seller also indicated to me that she would give me a couple months to get it rented before I would have to make monthly payments to her.  I'm not super excited about this deal, but I think we can make a "win-win" for all of us.  I take over a property the seller doesn't want to fool with, I hopefully make a profit with little money out of pocket, and give someone affordable home ownership who may not otherwise be able to.

Jay Hinrichs · Answer

@Charlie Fitzgerald  plus qm requirements

@Chris Majors   In 10 years time trailer could be   Past functional life.

Charlie Fitzgerald · Answer

You might look into the high cost loan regs for GA...at 12.75% on a 15 year loan of 34,900...you'll likely violate them.