Contract for Deed Offer on a Duplex

[Mariquita De Mira]

I live in the Twin Cities and have been looking at duplexes to move into and house-hack to get started with real estate investing. I made a 6-Month Contract for Deed offer on a duplex located in a B/C area with 3 bedrooms and 1 bath in each unit priced at $290k. It appears it is in solid condition and move-in ready. The bottom unit has been occupied for 6 years by the same tenant who gets some assistance to help cover her rent at $1600/month which about covers the monthly mortgage. She just recently signed a new lease and is a good tenant. When I move out, I could potentially collect $3200/month in rent from both units. 

The reason my agent and I arrived at a Contract for Deed offer is because I still need to sell my house before I can buy my next property due to my DTI ratio and I need more time to prep my house for sale. However, the seller of said duplex already has an FHA offer but was willing to consider mine. Our offer was $290k, $20k down, 4.25% for 6 months. He countered with $295k. But after my agent and I started to review what I need to bring to the table, it appears I need another $5k for closing costs, inspection, etc. I have exactly $20k and no more unless I want to move some money from my brokerage account or borrow it. However, if I were to do the former, I will have no money for reserves or emergency funds and I keep thinking how the worst can happen like a furnace going out, I get laid off, etc. and now I have no net to fall on or umbrella to cover me.

As much as the numbers seem to work I don't have all the money on hand to do this deal. However, I'm wondering in this hot market with most rents not meeting 1% rule and in this case it is more than 1%, am I letting a good deal pass me by or will there be more deals down the road, I just need to be patient. This is a huge financial decision and I'm terrified of making a mistake: spending money I don't have to buy an investment or passing up a great investment opportunity, hence it's worth moving heaven and earth for an extra $5,000. 

Sorry for the long post and appreciate any guidance on this major decision. Thank you very much in advance!

[Noah Chappell]

Originally posted by @Mariquita De Mira:

I live in the Twin Cities and have been looking at duplexes to move into and house-hack to get started with real estate investing. I made a 6-Month Contract for Deed offer on a duplex located in a B/C area with 3 bedrooms and 1 bath in each unit priced at $290k. It appears it is in solid condition and move-in ready. The bottom unit has been occupied for 6 years by the same tenant who gets some assistance to help cover her rent at $1600/month which about covers the monthly mortgage. She just recently signed a new lease and is a good tenant. When I move out, I could potentially collect $3200/month in rent from both units. 

The reason my agent and I arrived at a Contract for Deed offer is because I still need to sell my house before I can buy my next property due to my DTI ratio and I need more time to prep my house for sale. However, the seller of said duplex already has an FHA offer but was willing to consider mine. Our offer was $290k, $20k down, 4.25% for 6 months. He countered with $295k. But after my agent and I started to review what I need to bring to the table, it appears I need another $5k for closing costs, inspection, etc. I have exactly $20k and no more unless I want to move some money from my brokerage account or borrow it. However, if I were to do the former, I will have no money for reserves or emergency funds and I keep thinking how the worst can happen like a furnace going out, I get laid off, etc. and now I have no net to fall on or umbrella to cover me.

As much as the numbers seem to work I don't have all the money on hand to do this deal. However, I'm wondering in this hot market with most rents not meeting 1% rule and in this case it is more than 1%, am I letting a good deal pass me by or will there be more deals down the road, I just need to be patient. This is a huge financial decision and I'm terrified of making a mistake: spending money I don't have to buy an investment or passing up a great investment opportunity, hence it's worth moving heaven and earth for an extra $5,000. 

Sorry for the long post and appreciate any guidance on this major decision. Thank you very much in advance!

Hi Mariquita. This is a decent deal, but nothing earth shattering. I'd say that's market price based on your description of the duplex, area, etc. Before jumping into this, I'd get together at least a decent emergency fund for the property, maybe 10k. Imaging if your furnace went out, then your water heater 3 weeks later - you'd need 8k fast and could lose your house to the seller if you aren't able to make your payments. Another thing, if selling your other house is all that separates you from, say, a low down payment Minnesota housing or FHA loan, I'd definitely wait the month or 2 until you do that instead of using a contract for deed, which is basically like a hard money loan from the seller. Just think, you'll have to close twice (1x initially, and a 2nd time to refinance out of the CFD), that means 8-12k of closing costs. Also, you'll likely pay interest only monthly payments on the CFD that are at a high interest rate. In summary, the deal is not bad, but not stupendous, nothing worth putting yourself at financial risk for. I'd wait and find a similar or better deal in a month or 2. You might take advantage of the winter months and anticipated end of several aid programs to swipe a great deal up in Jan or Feb when you're ready. Feel free to reach out and run any deals by me!