16 unit seller finance, and possible 21 unit next

[Zach Sikes]

I met with a seller today that has two groups of units. One is a set of 21 condos, and the other is 16 units. He said he would consider seller financing. I would like to establish a relationship with him to get better terms on the deal. He said that he would take $600k for the 16 units, which have a gross cash flow of a little over $7k per month. Thoughts?

[Joel Owens]

Yeah I usually do not like these kinds of properties.

Sounds like the seller just bought in the last year or so. They rehabbed some and put in tenants. So the place doesn't have seasoned tenants for on time payments at the new rent level yet.

It doesn't show yet but does landlord pay water??

The HUGE issue I find with people doing value add rehabs is that generally they lipstick it meaning carpet and paint and leave all the old expensive mechanicals, roof, and parking lot untouched. Then they try to sell for a huge premium. Not only as a buyer will you overpay but your capex will be huge the next 5 years replacing all the expensive stuff. Many sellers hope for a sucker.

Owner financing can be good or bad depending on the terms and money down. If you are putting hardly any money down but can pick up a cash flow stream it might be worth it with a non-recourse and no personal guarantee loan.

If the seller is wanting an over inflated price and crappy terms with a bunch of money down and a guarantee it's a loser. You might as well get a bank loan and use leverage against the seller for a much lower price. Many value add deals I find the seller will not hold a 10 to 15% second as they maybe are making a spread of 30% and after resale fees and holding a second they wouldn't cash out much and would just hold in that situation. You didn't mention the age of this building which matters a ton.

Zach I owned a 20 unit before and never again. The scale is too small for a full time PM and maintenance. I was going over there 3 times a week or more. I make more off of my commercial closings so I was losing time and earnings per hour dealing with issues even with a PM in place.

The cash flow doesn't matter because it's about how much time will you have to give up for that cash flow?? Anything that takes away from my commercial brokerage activity to produce a return is a job and not an investment. The investment has to go on it's own which is why 40 to 50 units or more is key. If you could do both properties as a package you might have something. The 21 condos maybe you could sell those off one by one for a higher profit and knock down the total owner financed loan. I do not like all 1 bed and 1 bath as they have high turnover unless a college town etc.

7005 X 12 = 84,060 / (.50) = 42,030 = 420,030 at a 10 cap with no deferred capex going in.

If landlord pays water use .60% so 84,060 x .40 = 33,624 or 336,240 10 cap

At 600k at 50% costs is a 7 cap. I wouldn't take on a property like this for a 7 cap. 7 cap is a trophy location with tenants that have been there years and years and pay on time every time and mechanicals are updated. This seller is trying to sell at overinflated pricing and then stick a ton of debt with owner finance on someone. I run away from these types of deals. I can tell you from experience that this is not appealing for many more reasons I have not posted. Hope it helps.