Is zero down a good idea in this market?

[Justin Dominguez]

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?