Is there a Seller Financing option to turn this into a deal?

Question

I am looking for a little strategy on this situation. I live in a nice neighborhood in Las Vegas. My next door neighbor (older couple looking to relocate to Kentucky) is selling their home, which is the exact model of home I am in and appraised for about $400k. He is looking to sell for $400k but so far hasn't had much interest. His home is in great condition, but looks exactly as you would expect an older person's home to look.

I havent talk to him about buying his home, but I know it is paid off. I know the expenses of maintaining these homes very well obviously and estimates maintenance, vacancy, HOA, cap ex, taxes, insurance, etc at about $600 a month. I am sure we could rent these homes out for $1700-$2000 right now, which I would have to price on the lower side based on this market.

So, getting to the point, I am just learning about options for seller financing. Is there any way to make this deal profitable for both of us? Buying it outright with a bank is not going to cash flow anything enough to be worth it. But what type of seller financing options would you consider to make this cashflow but also a win for him?

Mitch Messer · Answer

@Jacoby Atako Congratulations on your first face-to-face with a real live seller! It sounds like it went very well, considering how much information you were able to gather about the seller's motivation and mindset. (For more details on this indirect, Aikido-style approach to talking to sellers, take a look at https://www.biggerpockets.com/...) However...If your intention is to fix and then flip this property, you'll need a much bigger discount. The general rehab formula is "70% of ARV Minus Repairs." That would put you at a purchase price of around $261K or less (0.7 * $385K - $8K).You'll probably have to season this seller a bit. Over time he may come to appreciate that his asking price is unreasonable for the market. Or, perhaps his agent will successfully locate an owner-occupant able to overlook the required repairs.Either way, I encourage you to stay very close to this seller every step of the way and see how you can help him get to Kentucky as quickly as possible.Deals are created in the followup!

Jacoby Atako · Answer

@Mitch Messer, yeah I was looking for a 15-20% overall return. I had hoped for a 7-8% cash on cash return, which at current, this will not do. But getting the house for $.80 on the dollar, and being able to manage it easily since it's next door seemed like good concessions. Also, if I got creative and did a 5 or 10 year arm, I could get the cash flow to breaking even and earning the return in the pay down. I may just be too excited to do a deal lol.

Mitch Messer · Answer

@Jacoby Atako I'll answer your question if you'll tell me this first: What's your projected cash-on-cash return on this deal, given the assumptions you mentioned above?Also, by "down about $200 a month" are you saying you'd be negatively cash-flowing? If so, why would you voluntarily do that?

Jacoby Atako · Answer

@Mitch Messer, thanks. I actually wanted to use it as a rental. But even then the margins are a little slim. Rents for about $1700 on the low side, about $1900 would the high side (if I add a bedroom). But my numbers when I calculate cash flow after repairs, cap ex, taxes, insurance and mortgage, I would down about $200 a month. But holding for 5 years should net a large profit with the equity and pay down. I am hoping, I can steadily increase rents to the $1900 range, but it would obviously be an appreciation play. Have you ever taken a deal like that?

Jacoby Atako · Answer

@Mitch MesserSo I was finally able to have a discussion with him this morning. My first real negotiation and it went pretty well considering. I didn't talk numbers in too much detail, just tried to gather info, but I ruled out seller financing. He is planning on using the money he gets here to purchase a property in Kentucky for about $400k. He mentioned upfront that he wasn't going to take a big hit on the price (initially) because he got burned years ago on the previous home where he came down $150k. But I pressed on. He has a contract with his realtor for about 3-4 months. He said he would be willing to stay in the house another 2 years until he can get the price he wants, but I know he and his wife really want to move and he may not survive another 2 years (older guy). Plus, I casually talked about a decline in the market coming, which he agreed with. I also got him to admit that he was going to have to spend another $25k paying his realtor, so I know he's easily willing to come down that amount. I also happened to get an appraisal on my home next door (which is the same model with a slightly larger lot) and appraised for $385k). When I mentioned that he said, "thats about what we are looking to get."So I am pretty confident I can get him down to at least $360k. My plan is to put an offer to him of about $315-325k. Letting him know that I would not need an inspection, I can close on his time table with an option to buy with a $2k earnest deposit on it) so he can find the Kentucky home and not have to worry about renting in the meantime. Maybe even help with moving costs. I think the home will need about $6k-8k as I would want to add a wall to convert it to a 4 bedroom (which I did to my home) and paint and/or upgrade the flooring. I left off with telling him I would make an offer that he could plan for in case his home doesnt sell with the realtor. But if prices continue to drop I may have to adjust it accordingly, so that could work in my benefit.THoughts?

Jacoby Atako · Answer

@Mitch Messer that makes sense. I will open up the dialogue and give an update.

Mitch Messer · Answer

Hi @Jacoby Atako.I believe you need more information from the seller, and curiosity is the way to start that dialogue. Consider leading questions like:"How soon did you want to relocate to Kentucky?""How are things working out with your agent?""Is speed important to you, or are you prepared to wait to get your price?""Will you take all the proceeds from the sale of this house to buy in Kentucky?Also, you'll need to run your numbers carefully to ensure that your deal makes sense. Cash flow is certainly one important factor, but cash-on-cash return is also worthy of consideration.Once you have more exact numbers, we can give you more guidance on the next steps.