Rental Property Investor · Phoenix, AZ · Member since 2015 · 222 posts · 126 votes
Good Evening BP members!
I've got a quandary and I'm hoping to get some clarity. We've got an opportunity that sits as following:
Seller wants to unload his four properties. He's getting older and no longer wants to be a landlord.
Two duplexes, two houses. They are all on the same street. Gross rent a month is $4,150
All tenants are fresh on new leases, no repairs needed, they pay on time, they're happy, all is good there.
The property/homes are worth $380k, according to the tax assessor. How accurate is that? Not sure yet.
He's willing to seller finance 10% down on 285k, 6% interest only payment, with a balloon payment in five years. I see the numbers work out to be $9,510 yearly NOI. (Gross Rent of $49,800 - 50% net rent for expenses/taxes, etc. + debt service to him = above NOI).
If all the numbers are correct/everything is correct and accurate, the quandary is that I live 1,600 miles from the properties and have never owned properties before.
I have a goal to start owning rentals in 2016, but would you keep/jump in head first or attempt to just sell the contract and walk?
Just wanted to add that 5 year interest only with a balloon is as toxic as it gets. That is tantamount to hard money. Think 2005 and remember what happened just a few years later. Pretty much the same terms on all those loans and 5 years goes by fast. If the market goes stale or worse yet, takes a dive, you'll be hard pressed to come up with the funds to pay that loan off or refinance it. I would never consider doing a deal like that. All my private seller carry deals are no less than 10 years, but typically longer and I always try to write an extension clause in the note.
Without a team in place where the properties are, I would wholesale. Too much to long-distance LL. There are good PMs out there, but you have to vet and find them. Without an outstanding PM on the ground I wouldn't do it. And I love B&H rentals! What town/area are these located @Matt McConkey?
I don't think the terms are very favorable for you so you should buy at a discount and wholesale. It might even be more profitable to find a very experienced investor in the market where the houses are located and negotiate the seller financing in a way you can wholesale the properties to that investor.
An important; what people want and what people get (think settle for or more politely, accept) are 2 very different things. Just look at the house/car/spouse/body/bank account balance/hair line/etc of any random person. Wants and gets rarely coincide. I had a wholesaler call me with a "seller financed" deal that was very beneficial to the seller, but not much of a deal for any buyer. I asked for permission to contact that seller directly so I could renegotiate the terms where it made sense for me and not cents. After a few brief conversations, I closed on that transaction and the seller got what he needed, but not necessarily what he originally wanted. Regardless, the deal worked for all three parties involved; wholesaler, end buyer (me), and seller and was closed. So, keep the seller talking until you find out what he needs which may be much different than what he actually wants. Again, just take a look at the house/car/spouse/body/bank account balance/hair line/etc of any particular person and you'll see that we all settle for what we need or are comfortable with and not what we think we want or wanted before we closed the deal.
One last thing; Are you talking to a local seller who owns these properties out of state or are you talking to an out of state seller who owns the property locally to him? If it is the later, just think of all the potential similar deals you're missing right in your own backyard! If it is the former, maybe find an investor in that market (BP marketplace might be a good start!) and partner up with him/her. Depending on the market, it might be a good place if there is strong appreciation with little or no sign of economic collapse. I would hold for a short term period and do an equity appreciation play. Regardless, make sure you're still getting at least a 10% discount so all that upside in appreciation doesn't get lost to sales expenses. Good luck!
Just wanted to add that 5 year interest only with a balloon is as toxic as it gets. That is tantamount to hard money. Think 2005 and remember what happened just a few years later. Pretty much the same terms on all those loans and 5 years goes by fast. If the market goes stale or worse yet, takes a dive, you'll be hard pressed to come up with the funds to pay that loan off or refinance it. I would never consider doing a deal like that. All my private seller carry deals are no less than 10 years, but typically longer and I always try to write an extension clause in the note.
@Steve Vaughn Thank you for the advice on this matter. I had a feeling I was getting the cart before the horse. I'm ready to own my first rental so bad, but I know that patience will be key. Not in finding the perfect rental, but a rental that will fit my standards/needs.
These properties are in The Dallas Fort Worth metroplex.
Wow. Thank you so very much for the contribution. The owner is 87, so trying to extend a balloon out any longer won't work for him, so I will need to get this under contract and wholesale.
This particular set of properties is from a local owner, who has owned these properties for years. He lives locally in the Dallas Fort Worth area, actually not far from these properties at all.
So a minimum balloon payment for you would be 10+ years? Now that you put it in the 2005-2010 context, that absolutely makes sense. Something like that would definitely hurt!
Again, Aaron, thank you so much for the information, I truly appreciate it!
Reminder folks, a wholesaler can't set loan terms and "assign" the note it's a different type of contract than a sale contract. The buyer and owner need to get together.
Also, at 87, you had better get an attorney involved, 3 areas of concern, financing, medical issues and the owner qualifying for benefits for care, elder laws, but the last may no be a big issue with an old crusty landlord type, he knows what he's doing more than you might think, except for the medical issue side.
I'd also suggest you invest in your own backyard, especially staring out. Don't get in a hurry! :)
Hey guys, I just messaged you and can provide more information.
@Bill Gulley Thank you for the heads up. I had planned on selling these as a straight up sle contract, but that is great to know that the seller and buyer must negotiate terms.
Those three concerns are a great point as well. He's definitely sharp, which is great to see from someone at his age.
I agree, Bill, patience is needed. Best regards, MM.
In Texas, the owner financing addendum used as part of the TREC purchase contract is fully assignable. With that said, getting the buyer and seller together would be the most prudent course of action :)
Feel free to call me or PM me if you have any questions on how to make this deal work for you. I can pull a CMA to make sure you are paying a fair price!