How would you seller finance this deal??

Question

An elderly lady, Jane, owns 4 off market and an empty lot by one of my rentals.

Jane wants to sell to me and escape of the headache of land-lording . She is too old to deal with tenants, maintenance, and she wants to enjoy the rest of her life.

All 4 of the units are rented at $800 per home ,but market rent for each should be $1700.

She wants 1 million for all 4 houses and one empty lot with utilities already on it.

Market price for each house is 240k and tennants are in there until August.

My DTI is pretty high but I was going to try a DSCR loan w creative financing, To delay bigger payments until I get the tennants out.

What do you think is a good seller financing strategy or structure to get these into my portfolio?

JD Martin · Answer

Jane has lost a couple of marbles. She wants to sell you 4 rental properties right at market value despite the fact that none of the properties are performing anywhere near potential. If we were running a cap rate on these you'd have a worse return than just going and getting some CDs from your local bank and YOU would then have the fun of dealing with tenants paying less than 50% of market rates (assuming your numbers are correct). There's no deal to be had here unless you can bring her down significantly on her ask. Properties get marked to discount because of their condition or performance. The holder of the note makes no real difference; in Jane's case, it might be more advantageous to her to hold the note than sell outright depending on how she can absorb the sale from a tax perspective; in your case you don't have enough income to do a conventional loan so getting a seller carry can give you more properties. So there's some working room there - perhaps you're paying a slightly higher interest rate or a 3 or 5 year balloon or similar. But the purchase price is just cracked. Even if you bring these up to market rents they're still not great performers based on market rates. PS: The empty lot has no value to you whatsoever unless you have the skills to build or flip to a builder. It would not at all be surprising to find out the lot has building issues which is why it has remained empty, regardless of existing utilities to the lot. People end up abandoning lots all the time because of title issues, sinkholes, ground contamination, setback and other zoning problems, and a whole host of additional problems.

Derek Dombeck · Answer

I deal with scenarios like this often. If a seller is stuck on their price then I need to get favorable terms. I just bought 3 properties for full retail a couple of weeks ago. There were tenant issues and the seller was getting screwed by his property management company. So, I told him I would pay full retail only if I can cash flow the properties by having a payment no more than 45% of current rents ( not projected rents) and at zero percent interest. Each house needed some improvements, so I offered zero down as my cash would be improving the units and his security of the promissory note/mortgage.He accepted as this is the 1st time in 7 years that he's actually putting money in his pocket each month.BTW, I resold each individual property on terms using a wrap around mortgage (which the seller is aware of and approved) at 7% interest to other landlords. I make a spread and they do the work.I'm currently structuring a laundromat with 3 apartments above it the same way. We are paying about 100k over retail to lock in a 2% rate amortized for 30 years which gives the seller what they want and a monthly payment that allows us to cash flow.There's certainly a way to buy these 4 properties if you both are flexible on terms.

Don Konipol · Answer

EXCELLENT work!

Rafael Mercedes · Answer

THIS is great to hear Derek. It isn't always about the price as some mentioned above. There are multiple levers to the deal. We've got to know all of the metrics to see what levers can be pulled to make it work. If the levers can't be moved then there may not be a deal. If we can pull at least one/two of them the numbers can work out. It also depends on the exit/long term strategy. Some stuff works for holds, while some work for lease options, while some works for flips. I look forward to reading more of your experiences.

Michael Smythe · Answer

You've lost your marbles as Jane is taking advantage of you!Why are the rents only $800? How long are the leases?Pretty sure you will find that the houses need a lot of work and the tenants are not that great. NONE of these tenants will accept doubling of rent as they can't afford it.

Brandon Leffler · Answer

You’re 100% right I had an inspection completed and found a lot of damage. Including foundation and plumbing issues. I’m still in negotiation ,but my offer is definitely going down. I’m estimating repair costs and I’m currently awaiting the appraisal before I make my final offer.

Brandon Leffler · Answer

Thank you for the insight JD and Derek. I appreciate your honest take and realistic advice. I have been trying to grasp these seller financing concepts and out of the box strategies ,but it’s hard to find information from people who have actually done one of these deals. Both of your posts have clarified a lot of grey areas. Thank you very much