Help! with Purchase Offer using Seller Financing

[Troy Hardister]

Hello BP! I wanted to reach out to the REI community at large and run an opportunity by you in hopes to obtain some feedback on the following: overall deal (good/bad), deal structure, and offers). I'll provide some background on my experience. Got started learning over a year ago, first purchase 6 months ago (apartment building) and looking to reach roughly $750k portfolio size before holding off a while and snowballing portfolio dept before adding more properties. Currently I have a 5-unit commercial apartment building and a multi-use commercial property under my belt that I also self-manage. Both have been acquired with traditional commercial financing (6% @ 25yr amm.). apartment with no moneydown (actually walked way with $40k and <10% money down on the multi-use property. I'm a buy and hold investor typically looking for value you add commercial multi-family properties.

About the deal. I came across a property on my drive from home from work. The small SFR had a for rent sign out so I called and introduced myself and explained I was a local investor and that if they were to become interested in selling I'd consider buying. I typically don't look at SFR as it is out of my relm and strategy but with the close proximity so I asked myself, why not. Coincidentally he wasn't actively looking to sell but would entertain the sale due to the fact that he self manages and lives ~50 minutes away (1 way). I do my online investigative work to find out about the sellers, taxes, portfolio, age, social media, courts, etc. What I later found out from the seller is that this house is part of a bigger lot with a total of 6 units (Yes! Now were talking). Fast forward a bit, we meet, we talk (him and his wife), we tour, we get to know each other better (investor experience, and personally). Seller later provides details about the opportunity. Purchased ~15 years ago at $360k, own free and clear, C+/B building in B/B+ neighborhood, currently paying themselves from property about $1200 a month, some capX items updated, clean, good screening criteria, painting and touch ups after each turnover. Seller later discloses that they would like to get $400k out of the deal. Based on the condition and what i'm used to looking at, It would be hard to argue his ask.

Initial Numbers (combination of actuals predictive, waiting on prior actuals)

Asking Price: $400,000

Scheduled Rent: $3,900
Tax & Ins.: $850
Other Expenses (maint, capx, lawn, snow, etc.) $411
NOI $2,639 monthly
NOI: $31,668 year

I inform the seller that is a little out of my budget with traditional financing as I was looking at that SFR only but asked if they would be willing to provide seller financing. After educating the seller (they have some knowledge of OWF but slim), found out they were burned on a land contract with a Condo years ago but said they are interested in being creative with the deal. I ask them to provide some numbers and I'll review. Before the end of the meeting we schedule a follow-up meeting for us to sit down and discuss the details and we'll exchange some options trying to work something out.

I've constructed the following 4 offers. These offers have a purpose to outlay the following circumstances: Offer 1 – asking price with traditional financing, offer 2- offer based on NOI and local cap (what would prob be norm if they took to market), offer 3 – lower purchase price (higher than NOI/cap offer but below asking), using 97% seller financing & preferred terms (don't know what they will say unless you ask :)).

Buyer Performa used for all offers:

Scheduled Rent: $3,900
Tax & Ins.: $850
8% Vacancy Rate (average is 7-8%)
4% Management Expenses
10% Capx/Maintenance (I’d prefer 15% but I’m ok with this giving value add opportunities I've identified)

Offer 1 – I want to show the seller what their ideal deal looks like with their asking price and how it doesn’t work with traditional financing that creates negative cashflow for buyer.

Purchase Price: $400,000
Down Payment: $80,000
Loan Amount: $320,000
Loan Payment: $2,292 monthly (bank with 6% and 25year amm.)
Cashflow: -$55
CashOnCash Return: -1%
DSCR: .98 (Difficult for a bank to loan on this)

Offer 2 – This offer shows what an offer would look like if he went to market with bids based on NOI/Cap. It is not preferred as it doesn't meet my min return or cashflow (~$100 per door) but doable knowing the value add opportunities. Confident with value adds I can meet my preferred returns < 1 year.

Using 10%cap

Purchase Price: $320,000
Down Payment: $64,000
Loan Amount: $256,000
Loan Payment: $1,834 monthly (bank with 6% and 25year amm.)
Cashflow: $403
CashOnCash Return: 6.5%
DSCR: 1.22

Offer 3 – This offer shows my preferred offer. Gives them more than what they purchased for, more than what a potential market offer would be, more cashflow to them per month with no management headache and travel while providing good terms to me. Win Win! (less their asking price)

Purchase Price: $370,000
Down Payment: $11,100 (3%)
Loan Amount: $358,900
Loan Payment: $1,713 monthly (OWF with 4% and 30year amm, option call loan due at 5/10 years.)
Cashflow: $523
CashOnCash Return: 27%
DSCR: 1.31

I’m coming up blank with a 4th offer that gets the seller their asking price but I understand that with OWF there are two things up for grab, Terms and Price. If I want my terms I give them their price and vica versa but I’m coming up blank with an offer that works for me (longer term, low rate, sufficient cashflow (~$450), low cash outlay). Maybe the answer is lower cashflow for a while until I get the value add opportunities implemented.

I understand that the sellers are looking to retire soon, they don't necessarily need the monthly income as they are only drawing $1200/$2600, they also have a >10 unit apartment they might also be interested in selling down the road. Since they are looking to retire, I doubt think they want to go through the trouble to buy a new RE property to invest these proceeds in (assuming, need to ask). Maybe at our meeting next week we will craft the perfect deal that works for both but right now I'm trying to go in with something that might work better for them.

I appreciate any feedback, suggestions, info, etc and thanks for taking the time to read this lengthy post.

* Disclosure and Notes: 2 parcels adjacent owned by same owner. 1 has 2 SFR the other is 4plex. I'd be purchasing as 6 and underwriting traditionally at 6 for an NOI appraisal down the road. A creative option may be buy the 4plex first and develop a relationship and purchase the other parcel later once every goes well, but then I would need to refi with traditional loan to have all 6 under 1 loan at the 5/10 year option. I'd like to keep the 6 together initially.