Is low down seller financing worth doing a deal you would normally pass on?

Question

I was presented with a  deal today that I would normally pass on, but the seller financing at 5% for 20 years with low downpayment (as low as $25k) is tempting me a lot. It is a 19 unit, all 1 bed 1 bath efficiencies. I have not been visited the property and do not know if there areHere are some details:

Asking Price: $350,000 (running the numbers at $300,000 to make cash flow more desirable)

Monthly Numbers (my estimates are in bold, everything else is from the seller):

Rent per unit ~$421.00

# of units 19

Annualized rental income $96,000.00

Expenses: Vacancy $9,600.00 (10%)

RE Taxes $6,000.00

Insurance $1,500.00

Management $9,600.00 (10%)

Maintenance $9,600.00 (10%)

Utilities $20,200.00

Reserves $4,800.00 (5%)

Operating Expenses $61,300.00 (71%)

Net Operating Income $34,700.00

Debt Service: $1,815 ($25k down, 5% for 20 years)

Cash flow: $1,077/mo

1 year CoC: 51.7%

So, this is a deal I would not normally go for because I don't like the 1 bedroom 1 bath unit mix. But, with the seller financing and low down, it seems  like a good deal. What do you guys think?

Account Closed · Answer

@Giovanni Isaksen

Interesting information. I really have no factual basis for my bias against 1/1s. It just seems to limit the pool of tenants, but your data may suggest otherwise.

Regarding this deal, I have since learned a few things that have made me less interested. First, it is in a flood zone. I don't think the owner would require me to purchase flood insurance since he doesn't currently have any, but its a big risk anyway.

Second, this place is currently considered the cheapest place to live and kind of a "last resort" type place for folks. Most of the tenants are on drugs and have no jobs. I was told at least 50% of the current tenants would need to be let go if I wanted to turn the place around.

Third, the building has a lot of deferred maintenance and every unit would need attention.

Forth, there is not enough parking for 19 residents. Most of the current tenants do not drive, but if I were to turn the place around this would become a big problem.

So, based on all of those facts, I am most likely going to pass on the deal. The $25k entry point was very enticing, but the actual number appears to be greater than that (deferred maint.), and the cash flow would most likely not be what I desire until a turnaround.

Giovanni Isaksen · Answer

@Austin Lee  Sometimes the best investments are the ones we don't make. If we pay attention they're all educational though (And what doesn't kill you is educational). Good onya for dodging that bullet!

One of our clients is just getting to see the light at the end of the tunnel with a property they acquired that had been stuffed with druggers and gangbangers by the previous management. The only saving grace is that we got first class property mgt. installed day 1.

The key takeaway is don't let deal fever (your need to do a deal) push you into a bad investment. The property mentioned above I thought was a good deal at a 15% lower price but the client had despaired of searching the haystack for a needle. At one point they yelled at me saying they'd never buy anything if they went by my standards (I thought well, you'll never overpay for anything if you stick to my standards but didn't say it).

Fortunately they're long term investors and over their 20-25 year holding period they'll do great but the first four or five quarters haven't been all rainbows and unicorns.

Good hunting-

Bill P. · Answer

Account Closed said, I'd certainly would check out the vacancy issue. Don't know much about Whittier NC but it seems to be in the middle of nowhere. I would also consider what your target audience might be and I would be skeptical of appreciation due to the age of the units. It seems the guy just wants to hand off his problem child. However, with that said, I'd find out if he would be willing to do 30 yr. amort with a balloon in 20 years as that helps your cash flow. $300,000 is a great place to be but be good to yourself as I fear that vacancy is a big issue, especially with 1/1 units.

Account Closed · Answer

This cannot be repeated enough for people hunting deals. It does get frustrating when the search drags on. Good deals are hard to find, so everyone has to understand it takes time and patience. If all you had do to find a deal was simply decide you were ready for one, everyone would do it and this business wouldn't be lucrative.

Account Closed · Answer

@Patrick McGowen

I agree that it seems like a good deal, and I'm having a hard time finding reasons not making at it. I already have a multi and don't really love it, but its hard to argue with cash-flow. The biggest downside to me is the units all being 1 bedroom.

Bill P.

These units are not in Whittier, and you are correct about it being the middle of nowhere! They are actually in a slightly larger area closer to where I work everyday. They are in an area that has a good rental market right now, so that helps.

The owner is 73 years old and has owned these units since the 90s.

I agree with the 1/1s being a concern. That is my biggest hang up at the moment.

Account Closed · Answer

@Mark  Ferguson

I forgot to put the mention to you in the previous post.

Account Closed · Answer

Geez, sorry about leaving the price out! Asking price is $350,000. I'm running the numbers at $300,000 to make the cash flow more desirable. I don't know about the current vacancy rate. The building was built in 1937 according to the tax records. I just had this passed my way today, so I haven't even had a chance to gather all of the details. I'm trying to decide if it is with pursuing further.

Giovanni Isaksen · Answer

What happened to the edit button? Oops, found it.

Steve Olafson · Answer

Lots of red flags.

Are your numbers based on proforma or actual income and expenses?

You will need money for the deferred maintenance issues.

I want locations that people want to be.  This might be worth more negotiations if this property can be made into something desirable.  If not, you will always be stuck with less than desirable tenants.

Giovanni Isaksen · Answer

@Austin Lee  I don't know about the local market there but 50% of all the adults in the US are single, up from 37% in the '70s according to the BLS (see http://www.bloomberg.com/news/2014-09-09/single-am... )

Do you have data that shows 1/1s are bad or is it just a bias you picked up somewhere?

Good hunting-

Is low down seller financing worth doing a deal you would normally pass on?

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