Passing on a 10%CAP/ 13% CoC Deal...What would you do?...

[Brandon Sturgill]

Alright, so I have a seller finance deal in the queue...it 's a duplex...solid property...decent location...cash-flow is $191/month...10%CAP, 13%CoC, DCR 1.33. The deal would be a 84-month balloon, 10% down, 6% interest on a 30yr amortization schedule...not bad...and I would need to leverage about $18,000 total to get closed, cleaned up, organized, and ready to start collecting cash...

Here is why I am passing on this deal: Looking at the future provides a grim outlook...so, there is little appreciation in this neck of the woods...meaning 3% per year would be generous...and my exit is a re-fi to settle the principal balance on the note...but, at 70%LTV and a favorable appraisal leaves me significantly short to settle the debt...I simply can't do this deal because I would be unable to perform on the balloon and either have to come out of pocket, or...foreclose...

What would you do?

[Roy N.]

@Brandon Sturgill

When we play in cash-flow only sandboxes, we model properties with no appreciation (sometimes even depreciation).   It'a all about cash-flow ... and, when there is a vendor carry, about paying down to a point where you can easily refinance.

 If you can step-up your payments from monthly ($500/month) to accelerated bi-weekly ($250 every two weeks), your balloon will only be $70,320 at the end of year 7. 

If you are able to put-up the downpayment w/o financing it, then you can re-allocate the $81/month slated to service the second position in your analysis across the 26 accelerated bi-weekly payments per year ($37.38 per payment).  The balloon in this scenario would drop to $61,880.

BTW: CAP is a meaningless measurement on a residential property.