Would you do this deal? Seller Financing

Question

I have an 8 unit, off market property under contract. The property is located in Portage mi. A nice area located in Kalamazoo county. The seller is financing it through a Land Contract at a price of $495,000, 6% interest with 17.5% down. Pay off no earlier than 5 years, but no later than 10. Current rents bring in $5400 a month, but pushing them up to market rent, at 875-950 a month, can bring in roughly 7k a month. Monthly expenses is 2750 a month including management, very low vacancy history. Owner pays for water and sewer, plus lawn/snow care.

Part one of my question is: Would you do this deal.

Part two is, what are your thoughts on finishing basements. Cost vs long term benefits/ forced appreciation. 6 out of 8 of the units have an unfinished basement and I’ve thought about finishing them and turning the 2/1.5 into a 3/2 bath.

Any feedback is well appreciated.

David Edwards · Answer

@Solomon,I didn't know rents were that high in Portage, ill have to start looking that way. if the numbers are what you are saying I'd strongly consider that one. What's your plan for getting the financing down the road? As far as the basements are concerned, make sure you can put bedrooms down there first. You will need egress from the room which typically means a window well from my experience with Michigan basements. If they aren't already set up for that it could be a little more costly.

Solomon Hikssa · Answer

Account Closed when you say, “you don’t get title” what are the complications associated with that? I’m reading lein issues, but I am getting title insurance. Also, I am working with a RE lawyer within the area and with proper documentation, he shouldn't be able to take a lien or sell the property. Please let me know if you’ve heard of any other issues that have come about due to land contract and not holding on to title.

Solomon Hikssa · Answer

@Michael Lee Thanks for the reply. Some gems in your comment that I had not thought about, such as travel expenses. My thought was to see the progression of one of the properties during the remodeling period, then duplicate it. I also have family in the area that will be a look out. As far as the deferred maintenance, we just performed a full inspection on all of the units and the property was in good condition. I do see your point though and will put some money aside for such situation. We were thinking of keeping the same property manager that has been managing the units for 30+ years. What are your thoughts on this? We have met with her and she seems to be very good at what she does.

Solomon Hikssa · Answer

@Christopher M Silva Thanks for the breakdown. I have done the math hundreds of times and came up with the same numbers you did. My focus is that rents are below market and bringing them up slowly should not cause any issues. So a value add is what I am seeing here. With that being said, getting 10% COC should be attainable with a 10% increase in rent. Another aspect is the terms of the loan and being able to place a low down payment on a commercial property with a fair interest rate. 6% might not be so bad with in the next few years.

Christopher M. · Answer

@Solomon Hikssa Is the loan amortized over 30 years with a down payment of $86,625? If it is your monthly payment will be $2,448.41My Math:$2,448.41 + $2750 = $5198.41$5,400-$5,198.41=$201.59 $201.59*12=$2,419.08$2,419.08/$86,625=.0279You would make 2.79% on your money.

Michael Lee · Answer

Hello Solomon! You came to the right place to get various questions answered and get various answers on it. My first concern is where it is. Expanding that likability by adding more bedrooms or baths could be a good investment but does it increase your travel expense? One of the biggest question is the cap expense value factor if you can do that by not adding any foundation. One of the best things with Owner Financing is its negotiable terms can that may be made very much easier than a conventional loan. The only negative I can think of is that the current Owner possibly may be deferring maintenance expenses or any repairs or replacements to make his/hers expenses look better along with the bottom line. Also, make sure that you are judging based on actual expenses and not proforma numbers I would demand that all units be inspected to see if all future expenses will be uncovered. I would also check to see that the increase of the expense of changing one of the bathrooms would truly pay before doing that. In other words, will any of your assumptions not hold true as far as the extra income you might see? I apologize if any of my statements have already been done. I would be careful about the owner utility paying. It is a good thing for you to include the property management expense in your expenses. Having a good property manager or company should reduce your travel expenses and the time it takes. Good luck to you!

Solomon Hikssa · Answer

@David Edwards Yea, demand is very high in that area right now. My plan is to refinance within the 10 years. The way interest rates are going, I might prefer this loan because of how favorable it is. Otherwise, I would refinance. If I refinance in 10 years, the loan amount should be around 330k and should appraise. I shouldn't have an issue refinancing, other than the property not appraising, or, if we have a major down turn at that time. In regards to the basement, I'm going to ask the inspector if it is a possibility to put in an egrass window. Your input is well appreciated.