How to Purchase a Triplex with Owner Financing

Question

I found a Triplex that I was interested in, but passed on it initially because I didn't have enough capital to hit 25% + 6 month reserves for a conventional loan after another purchase I recently closed. Seller had an offer that was pending so I needed to move quick if I was going to offer. It turned out that it fell through and the property is still available. So after more than a month the seller's agent contacted me to see if I was still interested and ready to go.

Little closer, but still not there so I thought about how I might be able to make this happen... The current owner has been in the process of cashing out several Triplex's over the last couple year's and was getting out of managing rentals so I thought they might be open to owner financing. I'm a complete noob in this area, but I thought it was worth a try after reading Chad Carson's blog post on some creative financing options. It turns out the owner is totally open to it. But now I've gotta figure out all the details and make it happen! =)

Here are the loan terms:

• 15% Down (They Initially proposed 20%)
• 5-5.5% Interest
• 10 Year Balloon
• Purchase Price $170,000

I'm just having the offer drafted in writing tomorrow so I wanted to get your feedback to make sure I start out on the right path with this.

Questions:

• What should I have spelled out in an offer like this? For example - No early prepayment penalty? Additional/different contingencies? 
• Are there other items to pre-negotiate? 
• Should I pull in a lawyer at this point? 
• What do I look for in a lawyer
• Is the amortization schedule going to work out the same way as a conventional loan? 
• Do I expect points on the loan?

Ben Leybovich · Answer

So here I am -- in bed -- preparing a webinar for my students for this Friday. My wife, @Patrisha Leybovich is yelling in my year, and I mean quite literally YELLING - you need to comment on this!!! I've pinged you...

OK. I enjoy being "pinged" by tiny, little, gorgeous wife as much as the next guy, but damn...

I got one thing to tell all ya'all. Of all of the questions being asked, how come no one is talking about whether this is a deal worth having in the first place? Financing is just that, a means of closing the deal. But, if the deal is a piece of turd, then you're financing a piece of turd...you know what I'm sayin?

I'm not going to touch the financing/contract questions until someone convinces me that becoming the next owner of this thing is a good plan in the first place. Daniel - your turn. GO

Patrisha Leybovich · Answer

Hi! My husband, @Ben Leybovich would be an excellent resource for you in this. He's quite gifted in creative finance. I tagged him on this to see if I can provoke a responses... Hopefully it'll work!

Good luck!

Blake Wilkinson · Answer

Fantastic thank you!

Daniel Godbout · Answer

Poof. Just found out a higher offer came in and snagged it. Time to move on, but I did learn a few things and look forward to any follow-up advice here.

@Blake Wilkinson just to follow-up on this. My agent wrote the offer with the contract for deed addendum, but I consulted with RE Lawyer to make sure I wasn't about to step on a land mine. Agent had a template they were using, but there were some details that I had concerns about and wanted outside advice. For example, the owner had a small balance left on the mortgage which was concerning for me.

For next time, I will probably do the same until I feel very confident about these agreements. The lawyer I spoke to seemed to have a lot of experience and their own templates if I needed them. Most of my questions were answered over the phone in 10 minutes.

Daniel Godbout · Answer

Morning @Ben Leybovich ! Any feedback?

Daniel Godbout · Answer

OK! Here we go, Ben. Be gentle...

Let me start by providing the basics on this place.

Purchase:

Purchase Price - $170K

Down Payment - $25.5K

Initial short-term repairs/updating budget - $5K

ARV - $185K

Property Condition:

Major capital items seem OK so far and property has been maintained in general. Furnace, AC, roof replaced in recent years. Would expect the short-term repairs to be primarily cosmetic.

Location:

St Cloud, MN

Nearby University

Good Neighborhood

Units:

2X 3-1

1X 1-1

Current Monthly Income:

$2,500

Monthly Expenses:

P&I - $776

Property Management – 10% ($250)

Vacancy – 5% ($125)

Repairs & Capex – 15% ($375)

Insurance - $120

Taxes - $250

Utilities - $300

Total - $2,196

Monthly Cash flow: $304

NOI: $12,960

As far opportunities go, I think the utilities could potentially be further broken out. With some minor refreshing and better presentation I think the tri could also be sold/rented higher, but I didn't include these in my assumptions.

Thoughts?

Sam Shueh · Answer

Daniel Godbout,

Second loan=Owner financial loan

In northern CA a triplex will easily fetch $1.5M, I assume the seller will loan the rest you borrow a bigger loan. But if it is elsewhere outside CA I can imagine one can get one in triplex.  If that is the case I will later secure a lower interest mortgage as 5-5.5% sounds a bit high. Anything outside of CA in small town will have much lower appreciation than CA.

Good luck

Daniel Godbout · Answer

@Blake Wilkinson That's a great question! Glad you jumped in because I have no idea and was thinking the agent would write it with a 3rd party that I would bring in to review and then include an additional contingency with the offer as part of the closing process?

@Sam Shueh Thanks for the guidance. It would help if you could please elaborate on what you mean by utilizing a second mortgage for this scenario? What's the strategy there?

@Patrisha Leybovich You probably have a way better shot at provoking a response from Ben than I would! Of course I would appreciate Ben's perspective if he's got the time. Welcome to BP! Glad to have you here.

Sam Shueh · Answer

I think it should be a 10 year fixed or constant interest rate say 5 or 5.25% as second mortgage the second mortgage is to be amortized over 120 payments for $170,000 with no pre-payment penalty. The second mortgage should be recorded as second loan with a higher mortgage $$ being first.  Have this taken care of through the title & escrow company as part of the complete transaction. Get it notarized and recorded through the title company not by yourself. There should be stipulation that there is a 5%(as an example) late fee if not rec'd by Xth day. No points. Have your FICO score, fica etc information for the seller to review.

If I was lending a  $170K for 10 years I will be thrilled that the borrower can give me back earlier.  I suggest you can hint you wish to give them back sooner no penalty clause please.

In California it can be a plain addendum with the rest of contract.

Good luck,

Sam Shueh

How to Purchase a Triplex with Owner Financing

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