15 Overpriced Condos, but Only 10% Down

[Britt Griscom]

We own 16 condos in a complex in Santa Fe, NM. We have the opportunity to buy 15 more using seller financing at 10% down with the rest amortized over 30 years at around 6%. We are negotiating each of these terms.

The 16 that we bought averaged about 36K each. The market has gone up, so they are probably worth 40K now. The seller wants 50K each. But since we would only be putting 10% down, we could make a higher return than if we paid cash to a different seller for one unit, which is the other option we are looking at.

Would you pay over market price if that gave you a higher return? The problem, of course, comes when we try to sell the condos. Then we will take a hit if the market doesn't go up.

Right now they rent out for about $690 per month each, but with about 5k in capital expenditures, we could get at least $725. The seller's terms are much more palatable if I just rent them as is, without fixing them up, at least initially. Then I could fix them up gradually as we save up the money. Is that a good way to think, or should I assume the capital expenditures in contemplating the deal?

Also, we would be borrowing money from relatives and credit card balance transfers to come up with the down payment. The interest rate on these loans would only be 2-3% and we would be able to pay them off in 2-3 years. Do you borrowing the down payment like this is crazy?

Here are some different possibilities:

https://docs.google.com/spreadsheets/d/1dJ_qq9lOho...

Thanks!

[David Torres]

@Britt Griscom , while it initially sounds like a good deal, I would be very concerned about your cash situation.  These units don't cash flow, so the real questions is where are you going to get the capital for emergency situations?   Where will you get the money to pay for the inevitable broken water heater, special asessment, unit turnover, new roof, vacancies etc.

I am also curious to know what a $40K condo looks like in Santa Fe.  Even in Albuquerque, that would land you in a fairly rough area.  You already have units in the area, what do your historic vacancies run?  What kind of crowd does it attract?

If it were me, I would try and package them up in to a commercial loan.  You would need to come up with more cash down, but you would be able to get a more favorable rate and a better price.  Lets say that you can buy the units for $36K each, if you put 20% down, your mortgage will only be ~$2400 at 5.25 percent(Principle and interest only).  That is a much more favorable number than your projected $5400.

Do you have someone you could partner with on the deal?  That might be another great option to move this project forward.  I would not bet on appreciation, especially if it is in a rougher area.