Is zero down a good idea in this market?

Question

I am considering putting in an offer to purchase 4 duplexes with seller financing.  I have a relationship with the sellers already as I have recently purchased other duplexes from their portfolio. Great school district, growing area, all built since 2002.

Having recently purchased their other units, I don’t have much cash. So my offer would, out of necessity, be with them providing 100% seller financing. They have expressed an interest in selling the rest within the next couple of years anyway, I’m just trying to find a way to secure them now.

If they accepted, it would seem like a win because I was able to get into them for no cash. And based on my opinion of value, they are being sold at (conservatively) 80% of market value. But here are my concerns:

1. Cash flow would be positive, but tight - each unit would only net me about $50 a door ($400 total). (I can raise rents to market and get up to around $100/door but it will take time).

2. Valuing these duplexes is difficult for lenders, as there isn’t enough recently sold inventory to produce solid comps. At least one lender has refused to lend on these units, others have said their values will be conservative in the face of no comps. It’s a matter of finding the right people, but still, refinancing may not be simple.

3. I’m worried about a downturn in the market in the next couple of years, which would make refinancing even more difficult. Which would be a problem since the sellers won’t want to hold the note for long (1-3 years is my guess).

4. Buying at 80% of their value would mean having to put in cash in at some point in order to secure long term financing that usually comes at a max of 75% LTV. (See number 3, a downturn, which would put me further in the hole.) (And I wouldn’t be able to hold the note long enough to pay down principle much.)

Is this a gamble? Or should I wait and build up cash  to secure stable, long-term financing and hope I’m prepared when they are ready to sell?

Joe Villeneuve · Answer

Zero down is a problem if the deal is a problem.  The market shouldn't impact this decision if you plan on holding the property for cash flow.  What matters is the cash flow.

In this case, I wouldn't do the deal.  Not because of the zero down...because the cash flow per door stinks.

Dennis M. · Answer

It could still work and there’s a lot of variables to consider . What is your personal financial situation . Your cash flow is lousy and one major system failure could sink you unless you have plenty of reserve money . Is that a thing for you ? Do you have the wherewithal to weather the storm when things go bad and the correction comes ? Because your pittance of cashflow will not sustain you when you get hit with a couple vacancies turnover costs and a furnace dying . Real estate is funny because stuff all seems to hit at once  ! I would pass based on what you are saying . If you are paying 10-15k per unit like I do then I’d consider it but I suspect your prices are far higher than that which increases risk . Cashflow is how we survive in bad times and it’s how we build wealth

Caleb Heimsoth · Answer

@Justin Dominguez first off 50 bucks a door is basically zero cash flow.  You can run your numbers anyway you want to get more or less “cash flow”.  If you’re at 50 bucks a month, that’s basically zero.

Secondly, not being able to find good comps is a red flag.  What if the appraiser doesn’t agree with your evaluation? You could be underwater very quickly.

My advice would be figure out the refinance part first before you make an offer.  Once you figure out what that is, make an offer, knowing exactly when and how you will refinance. If you know your market well enough, you should be able to determine ARV, and the bank you’ll refinance with.

Mark Durham · Answer

IMO little to nothing down is always a good idea. Using OPM is one of the keys to building wealth in real estate IMO.

Justin Dominguez · Answer

@Joe Villeneuve But that’s my problem - the sellers won’t agree to hold it for long. And if they say “3 years max” and we see a contraction during that time, I’m screwed.

You guys are great. I think I knew my answer before I asked, just wanted to see if there was a way to make it a little more secure.

Joe Villeneuve · Answer

There are a number of ways to offer the seller but at even $100/door it isn't worth mentioning.

Mike Dymski · Answer

If you can get them for 80% of market value, you absolutely should buy them. And, if you are concerned with liquidity, just flip them. I must not understand the question. Or, the market value is actually less because of the appraisal challenges.

Joe Villeneuve · Answer

Excellent answer.  The best so far.  Right now, you're making your offer based on what the seller wants.  You should be making the offer based on what you "need".  If the seller doesn't like your offer, then move on.

Mike S. · Answer

I would say 0% down is great in any market, especially now.

If things go badly what is worst that can happen? You loose the property and the money you put in. But you didn’t put any money!

So the only risk for you is the time that you invested and possibly your reputation. These two are important for sure but the education you would get may be worth the time and your reputation can be spared if you are totally upfront with your seller and you kept your promise. An outside event that you had no control on may sink your boat but probably not your ethics and reputation.

Anthony Wick · Answer

@Justin Dominguez

I just thought of a couple other things. First, how are your finances as far as reserves? Not that big of a deal if you have enough reserves should something go wrong in the first year. Also, while slim, perhaps the sellers would be willing to purchase 12 month home owners warranty on each building? I always ask for this. It doesn’t always happen, but when it does it allows me to not spend large reserves in that first year. And then I do not renew said warranty after the first year.

Is zero down a good idea in this market?

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