How Much is Seller Financing Worth?

[Edward Smith]

So I found this 2 flat for 54k. He is was willing to owner finance for 63k for 6 years no interest with 8-10k down..... comps in the area comps are 65-75k it would be a 6yr deal monthly payments around $764 not including taxes and insurance for about $250 a month. Both units are rented $800 and $650 a month. Units have been updated roof is 4-5 years old. He even has the garage rented at $200 a month. So I thought this sounds too good to be true. I asked if I can have my inspector walk thru the units and no issues. The next day I get a text that said "hey sorry but I can't sell to you at that price I need at least 75k and 1k a month". Now my spread doesn't look nearly as good. Should I pay an extra 20k for a property that was listed for 54k for owner financing or just walk away? 

[Andrew Johnson]

@Edward Smith Put another way, it's a 37% premium over the original list price. Put yet another way, if you look at total rents ($800+$650+$200) you have $1650 in gross rents. I'm guessing if it was originally listed for $54 for a 2 flat that it's old and not in great shape. So let's assuming that if you roll all of your expenses in (for the sake of simplicity) your NOI is 50% of that, or $825. Now you have a $1,000 per month loan to pay back. And I'm guessing it's with a guy that would happily foreclose on you (getting to keep your $8K-$10K down) if you don't make a payment.

Even if we move to a more favorable (might be too optimistic) number and say you had only 35% in expenses, that would leave $1073.  If that $800 unit turns over and it takes 2 weeks to get rent-ready and 2 weeks to rent you've lost $800.  That lost $800 will take you 11 months to recover.  Now the expense ratios should factor in some level of vacancy but one "unexpected" month of vacancy and you've likely lost your entire year of cash-flow.  And that's with using some, shall we say, generous metrics.  

Again, I don't know nearly enough about the property but that's my quick back-of-the-napkin math.