3 duplexes, seller financing, curious on terms

[Jacob George Lada]

Hello, I am currently interested in buying 3 duplexes. All are currently rented and bring in 4500 per month gross. Property taxes per seller are 8,000 per year. The owner wants to do seller financing with these terms Asking price: 600,000 but says he is not totally firm. Down payment: 150-175,000 Interest rate: 5-7% Payment: unsure yet but wants a balloon in 5-10 years. So I'm posting looking for advice as I am going to meet with him next week and discuss further in depth about buying the property. I have over 60,000 in savings so also interested in ways of obtaining money for the down payment. Thank you

[Craig Jeppesen]

Is it turnkey or does it need repairs? I wouldn’t pay $600k for it unless you can raise rents. Also, you don’t have enough for the down payment. You need to save up more first or see if he will let you buy one duplex at a time as you save up the down payments. You also need cash reserves for capital expenses and vacancy. I also don’t like the balloon pmt option. What happens if the market value drops and you can’t refinance. I would keep negotiating with him. I think at this point you are only able to purchase one of the duplexes and at better price and terms.

[Bjorn Ahlblad]

@Jacob George Lada Welcome to BP! If it were me I would not bother going back to re-visit this deal. Spend your time looking for something that makes money and that one will not do that at anything over 400k max. Congrats on saving up the 60k; find yourself a better deal to invest in! All the best.

[Jacob George Lada]

@Craig Jeppesen he is not opposed to splitting the duplexes far as I know. What would you offer in my situation? And yes turnkey all units currently renting

[Craig Jeppesen]

I would shoot for 125-135 k 20% down at 5% 30 year fixed rate loan, no balloon. depends on hvac, plumbing and roof age. If it is a great property with no capital expenses for a long time that would attract great tenants and has appreciation potential $150k at the most for me. Also is area improving.

[Jacob George Lada]

@Craig Jeppesen he is older and is retiring as to why on the balloon I think. Property is in northern Michigan and is a very nice area with a large work force

[Jacob George Lada]

@Craig Jeppesen also all the duplexes have basements and are perfect condition

[Craig Jeppesen]

Sounds like great properties, just make sure the numbers work. If you do the ballon just make sure you can refinance or he will foreclose on you and get them back. I would do a traditional loan before I did a balloon especially after 5 years. Too risky for me. If I did a balloon it would be a 15 or 20 year balloon.

[Tracey Wittke]

I currently have 7 rentals in Northern MI and live in Traverse City. Where are these duplexes located in N. Michigan? I ask because 600K could be a great deal or a huge mistake if you are not familiar with the area you are buying in. I know that there are a group of realtors up here that are “breaking up” and selling off their properties. I’ve looked at a few... not good. They are asking way too much. I am willing to give you my honest advice:-)

[Charles Kao]

@Jacob George Lada

Negotiating seller financing is all about knowing what you want and the seller wants and making them think they are getting what they want. For me the most important thing for me is cash on cash return so I focus with as little money down as possible. If the seller is focused on a certain price I give them that price but ask for better terms. If they want a high down payment then I point out a bank will finance repairs so a land contract may not be as beneficial to me as I think and again ask for better terms. This is a general message mainly because you have given general information but build rapport with the seller as much as possible

and make sure they are confident of your execution to pay. We are working on a 2.1 million apartment purchase where seller has already agreed to drop down payment from 20 to 10 percent because they are confident we can run the property better than they ran it. They would not have done this if they perceived our ability to manage as an added risk. Hope the negotiations go well, feel free to reach out with questions. Remember choice of words and presentation matters.

[Jacob George Lada]

@Tracey Wittke traverse City area off 72

[Jacob George Lada]

@Tracey Wittke and no realtor, private owned

[Jacob George Lada]

@Charles Kao thank you for the advice. I'm meeting him Wednesday so I'll let everyone know how it goess

[Tracey Wittke]

So 72 going towards Glen Arbor or Williamsburg? 

Six units in Glen Arbor or Williamsburg sounds high to me unless of course there is water involved. That is a whole different ball game!

Are you familiar at all with Northern MI real estate? 

[Jacob George Lada]

@Tracey Wittke real estate no. But I'm currently working up here and have been coming up here for years. And it's maybe 10 miles from the bay on 72. No water involved but property sits on over 5 acres

[Wayne Brooks]

Outside of Cali, or other really high appreciation potential markets....no way to pay $600k for $4,500/mo in gross rents...close to break even cash flow., with $150k down, 6% interest, 30 years ($2,698/mo).

[Tracey Wittke]

Well without seeing  the property your payment on 600k will have to have a rent increase on all six unit to make it worth your wild. 

I just acquired a foreclosed property in TC, 500 ft from one of the inland chain of lakes ( Spider, Arbutus) for a great deal. It’s a total rehab. I plan on doing a summer weekly and winter monthly in it. I think this is one of the most profitable ways to go up here:-)

I also have a LC in Central Lake. It’s walking distance to the upper chain of lakes. I only paid 38k for it. My Amitorzation for 5 years at 7% is $650/month. 

I have yet to invest in anything at 600k , but I do study this market and know it very well. 

[Jacob George Lada]

@Tracey Wittke thanks for the info. I sent you a message not sure if you got it? And yes I planned on increasing the rent. The initial conversation he was not firm on the 600 and not opposed to splitting up the duplexes. What do you think about buying 2 or 1?

[Tracey Wittke]

Replied to your message

[Jacob George Lada]

@Craig Jeppesen @Charles Kao @Tracey Wittke So to update anyone following. I have the actual numbers back. The seller wants to do 650,000 for 3 duplexes and extra lots/buildings, or just 600,000 for just the duplexes, 160,000 down payment, 3200 month payment for 5 years then balloon. 6% interest. Property tax is roughly 8000 and insurance is 2500 per year. Current rent is 4300 a month. He has extra lots for 4 more duplexes to be built on the property and a building currently present that can be built into a 1bed1bath easily. Appreciate any feedback on how to negotiate back to this. I plan to increase rent to at least 5000 gross per month. All units rented currently. The owner is in his 70s looking to retire

[Craig Jeppesen]

That is a horrible deal. You are negative cash flow and that is without any vacancies, repairs, capital improvements and utilities. You should be positive cash flow $200 a month a door on a duplex so $1800 positive cash flow per month. You will be putting in over $5000 grand a year of your own money to hope for appreciation. I would run as fast as you can.

[Jacob George Lada]

@Craig Jeppesen If I were to pursue this further, what do you think ideal terms would be? The majority of duplexes in the area for sale currently are right around the 190-220,000 range. Majority being stand alone duplexes. One property has 2 duplexes and is for sale at 390,000. These separate properties are in traverse City Michigan and closely surrounding areas as well. From what I seen on Zillow, market place, asking co-workers, and Facebook, rent for 2 bed 1 bath is roughly 900-1100 a month. I understand what you said but for what he is asking seems to be with market value for the area. Thanks for responding

[Craig Jeppesen]

Well if you can get $1000 per door for rent that changes the numbers and you would cash flow each month. Why is rent only $4300 if fmv is $6000?

[Jacob George Lada]

@Craig Jeppesen Possibly couple factors. The property is 7.5 miles from the city. He does own the property out right. Majority of tenants are older on fixed income. Most tenants have been there years and never raised the rents. The owner built them 22 years ago. So as to why exactly I don't know but those are my thoughts. Also another bit of info, each unit could be sold as a condo as well. Not sure if I mentioned that.

[Craig Jeppesen]

So will you kick out the old tenants or can they afford an extra $300 a month? How are you going to pay the mortgage if you kick them out in order to increase rent to what you need? Can you really rent them out for $1k? How many are under a current lease so you can’t raise the tent? You need to answer all these types of questions and come up with a good strategy and make a decision.

[Jacob George Lada]

@Craig Jeppesen I'm not sure on the length of lease so I would need to figure that out. I'm unsure if current tenants could afford the increase up to 1k a month. The owner said the current tenants have never missed a payment and have never caused any damage and says they're extremely good tenants.