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Updated over 7 years ago, 08/18/2017
Closing on a owner financing deal!!! (3 properties)
Hello,
I am a new investor. I am currently 2 weeks away from potentially closing on 3 properties using owner financing (I am the buyer). The terms of the contract is all 3 properties listed for $278K, with 45K down, 30 years fully amort., at a int rate of 7.905. no balloon payment. The seller wants to do a bundle mortgage for all 3 properties. All of the properties are rented and half are 100% HUD bringing in $3625 per month in rent. I am at the appraisal stage awaiting to get the reports back.
My question is, what should I do if the appraisal come back 5k, 10k, or 20k/greater lower than the proposed price? I feel like this is a very good deal but I'm not sure on how should I negotiate if the appraisals come back lower. The owner is a good guy but obviously does not play when it comes to business. I am a good communicator but, smart enough to walk away from a deal if it's not in my best interest. Hopefully you guys could give some advice. Thanks!
@Kindrell Hutchinson well congrats I think/ hope. Remember we said you were dealing with a fox. The tip off for me was the term " I don't usually go 30 years but I am for some reason". I hope we didn't miss something else. Its hard to evaluate a deal from a computer vs seeing it. And seeing the properties. RR
@Ralph R. His lawyer informed me of the sellers goal unintentionally (Its a practical move as a owner financer). He wanted to stop worrying about the hassle of management and just collect a check (He is retiring and actually selling off half of his inventory and leaving the rest to his tow kids. Also, with the plan having a high interest rate that is spanned out to 30 years. worse case scenario, he'd get the property back if I am unable to pay.. I am pretty financially stable and plan to pay off one of the homes by 2019 and refi the others after maybe two years of income.
Question: Given that these homes will not be reported on my credit, would that be a benefit for me to have going into finding the best deal to get them refi? Seeing that I have a income increase?
@Kindrell Hutchinson - As others have said the Interest rate seems high so that is one area that you can further negotiate on once the appraisal is in and value comes in lower than you agreed upon. Negotiate both price and interest rate at the same time. Also, I would definitely recommend 3 separate loans rather than a bundle mortgage. If for whatever reason something goes wrong on one property you cannot do anything without risking the entire portfolio. Selling one property of the 3 and getting that approved and in writing from the landlord is ok but doesnt cover you in all situations so I would strongly suggest 3 separate loans (1 per property).
@Kindrell Hutchinson you are correct the loans may not be on your credit report however the income will be on your taxes if you are operating above board. Any lender is going to see on your tax return that you are making payments on these properties. Rember if you don't disclose these loans to a new lender that is loan fraud. They likley will want to see promissory notes for any such loans. The promissory note will disclose all information including interest rate about these loans. ONCE AGAIN DO NOT SIGN THOSE NOTES until your lawyer reviews them!!! Here again that interest rate isn't going to do you any favors. A new lender may not count rental income from these properties until you report them on your taxes for 2 years. Once you establish yourself as a landlord then new property income can be used as income as soon as you purchase it. If I were in your shoes I would re-fi those things ASAP. Trouble is it's going to depend on how they appraise. Non owner occupied houses need a 20-25% down payment or (equity) to qualify for most loans. If they appraise low your stuck with his loan unless you have enough cash to add to bring the loan down to 75 or 80 percent. I hope you realize at 8% his money doubles itself every 10 years. In 30 years you will have paid for those houses 3 times. By selling you these properties in this manner he has spread his Capitol gains tax out over 30 years. Saved 3% commission to the realtor (normal commission is 6%) and managed to over charge you about 3% on the loan You are dealing with a shrewd wolf here. There's no way to know how bad he's hooked you on the price of the properties or what other pitfalls he's hidden in this deal RR
@Ralph R. @Vinod Dasani The appraisals came back, The Duplex that I am buying for $110,000 came back at $128,000 The SFR buying for $85,000 came back at $87,000 and the last SFR buying for $83,800 came back at $77,000. I agree about the high rate of 7.9 but given how hard it is to get approved for these loans being a new investor, I can take the payments along with the lump sum of 50% of the loan I will pay off next year, have them all paid off in less than 5 years
@Kindrell Hutchinson - All the best to you.. Since its cash flow positive even at the higher interest rate I don't see a reason to not do it. When you decide to go through a bank your cash flow will only increase (if interest rates are lower) and assuming you get a commercial loan for 30 years. The only thing that I dont like is the bundling of the loan. All the best to you!!
@Vinod Dasani Thanks, I managed to get them on all on three separate loans. So I can pay one off at a time.
@Kindrell Hutchinson - That sounds great. I think you will do well with these.
@Vinod Dasani Thanks to you and others that have helped me see things that I wouldn't have picked up on. @Ralph R.
@Kindrell Hutchinson one last thing to consider. Since the new agreement splits the loan into 3 different loans how is he splitting up the deposit?? 2 of those properties are appraising at purchase price. Or a little above. In order to get a re-fi you will need 20-25% equity. If you can get all 45,000 down placed against the duplex you will have a balance of 83,000. At 7.9% that loan by itself will be about 603.00 a month. For 30 years. You could re-fi that one with a commercial loan 5% for 25 years. Your payment would drop to $485 a month and pay off 5 years sooner. Whatever you do if you get in trouble making payments make your payments on the two that appraised right. If he is going to take one back make sure it's the last one that appraised low. You don't want any of the down payment to be applied to this property. Money put in this property loses value the minute you put it in there. RR