First time commercial real estate deal, lots of questions

[Gregory Evans]

Hello All,

I'm fairly new to the website but have been listening to the podcasts for 6 months or so.  Anyways, between my fiance and I we own 4, 2 unit properties (live in one unit) and we're under contract to buy another one.  However I also have a lead on a two properties right next to each other.  They are both 5 unit buildings that are fully rented totally about $4300 a month in rent.  With initial conversations the owner currently wants 400K for both.  This is not in the best part of town although it's getting better.  I was informed by a neighbor that as recently as a couple years ago, the one house was basically a brothel, it's been cleaned up once the neighbors got the police involved but I imagine the tenants aren't the best.   From the outside they are fairly rough shape but guessing with about 10K they could look good on the outside.  I have not seen the inside yet, so this post may be premature.

Biggest issue I have. I don't currently have 25% to put down to finance these units through the bank.   However the owner owns the units outright.  What I was thinking is that I could ask him to hold the note on these with 5-10% down.  This would allow me to make initial repairs without being strapped for cash.   Another benefit would getting him to move down on price, letting him know that he would be making money on the interest.

I believe one of the units has a new roof on there but the other one is getting older.  From the outside both foundations seem decent.  Besides windows, I didn't see anything that yells out to me that would be a huge expense right away.

Between the two houses it's 5 2 bedrooms and 5 1 bedrooms, I don't have the numbers in front of me but he said he's getting between $300 and $600 per unit (most being closer to $300).  I think those are pretty low and could get rents closer to $500 on the singles and $700 on the doubles if not more.  

I guess my question is, how would this all work with the owner holding the loans?  A lawyer would draw up the paperwork?  What can I use as leverage in negotiations?  What hidden costs am I not thinking about (closing costs, commercial property taxes, etc)?  

If I can get him to lower 300 range plus holding the note at 6-7%, I can sell it as I won't refinance for at least 3 years, so he'll get the interest money but within 5 years so he'll eventually get paid in full.  Trying to be a bit creative here.  He said he's 70 so he's looking to sell eventually but not in a rush.  

Sorry this is a bit of a jumbled mess, I'm trying to put all my thoughts out there.