Owner financed 4-plex, to good to be true?

Question

Details: 
North Carolina 
120,000 FSBO
4-plex 600sq st each 1br/ba.  close to downtown living.  solid brick building, new water pump, has washer/dryer on location, no major upgrades needed.  all 4 units occupied and rented at $475  (good location, not worried at all on getting renters in place)

I love the property, but need to offer a sound owner finanaced deal that will releive him of having to worry about the property and allow him to enjoy retirement. 
Looking at atleast $1800 a month after handling water payment.  
My plan is to put 10% down (12,000).    
agree to pay $1000 a month  = 12,000 a year  (this is where I could use some advice to better structure this payment...)
10 year pay off date.  (i handle all fees, maintanenece, management etc of course)

Will this work, or will there need to be a balloon payment in place after 5 years?  I see that mentioned a lot with owner finanaced deals.

Owner is over 70 and lives in another state, wants to sell and enjoy retirement.
Property has been listed for over 6 months.  I went inside one unit and really like the place, no appraisal done - but I am looking for cash flow properties and this looks like a steal!

I plan to throw an additonal 5-10K a year at the principal as well to pay it off early, but do not want to lower the payment term to less then 10 years to be on the safe side.  I would like to stretch the term longer....but not sure if the buyer would be interested in anything longer then a 10 year payoff.

Any and all advice is greatly appreciated.    Thank you!

Dan Martz · Answer

Hi Dan,

I agree with others that the price may be too high (considering that you will be paying for water).

If I understand the numbers, you will be bringing in $1900/mo in gross rents (475x4) and believe that you will clear $1800 after paying for water (I believe $100 in water/sewer charges for a 4plex with onsite laundry is wishful thinking. Probably closer to double or triple that amount.)

If we assume that $950 goes to operating costs (water, management, repairs, improvements, vacancies, etc etc ad naseum-a roof will age, water heaters break, hvac units leak, pipes burst, outlets die, carpets rips- you get it!) and $950 is left to pay the mortgage you will have negative $50/mo in cash flow (though you would be paying it off in 10 years rather than 30 so it may not be that bad if your 9-5 can cover this and you have reserves in place after purchase to cover the unexpected).

Troy Fisher · Answer

1900/mo GSI. (Not including the on-site laundry!) 
-1000/mo rent
-300/mo W/S/G
-200/mo Taxes/Insurance

Leaves you with $400/month to cover repairs.  And whooobooooy lemme tell you about 4plex repair costs.  I'd love to experience this 50% rule!  Hahaha.

I've had two stoves go down in the same month, two HVAC units, Washers, two refrigerators, roof cornice, tree maintenance.  And then if someone moves out you are looking at negative cash flow.

You'd be better at $600/mo payments, or lower.

George Paiva · Answer

The way I structure these deals to an owner is give them 3 options to open the door for further negotiation. As the others posted you need to find out what exactly does he want?  Buyout or just be away from property mgmt.

My 3 options are something like this:  (these are example numbers)

Option 1: 90% Seller Finance
                Purchase Price:     $510,040
                Cash Down Payment:     $51,004
                First Mortgage held by Seller:     $459,036 @ 6.0 % with a 20-year amortization & 5-year term – Seller would be collecting about $3,288 a month with no work involved for 5 years then a lump sum of $388,380.

Option 2: 80% Conventional Bank Finance
Purchase Price:     $481,705
                Cash Down Payment:     $96,341
                First Mortgage held by Bank:      $385,364 @ 6.0 % with a 20-year amortization & 10-year term.

Option 3: 80% Seller Finance
Purchase Price:     $425,034
                Cash Down Payment:     $85,006
                First Mortgage held by Seller:     $340,027 @ 6.0 % with a 20-year amortization & 2-year term – Seller would be collecting about $2,436 a month with no work involved for 2 years then lump sum of $287,688

Matt Devincenzo · Answer

That won't be hard at all, when you close on the deal you would now own the property and have a note created that the current property owner would own for the remaining balance that needed to be paid off. The terms of the note would basically state that the loan amount is for 108K(120-12) amortized over 30 yrs with monthly payments of $580 (5% int PI payment only). It would then have something saying that the note balance  had to be paid off at or prior to year 10 on whatever the remaining balance is (about 90K at that point).

You would need to worry about the negotiating the terms of the note and everything else should be handled at closing by the title company. Just make sure whatever title company you were using understands it's a owner financed deal and that you need it recorded.

Dan Osterman · Answer

Thanks everyone for the great feedback! 
Ben,
1.	5k, with a good job that will grow this # back up
2.	That was a main reason for the post, to find the best wording to present this deal to the seller.
3.	Rents can be improved slightly, but with tenants already in place this would be a work in progress.
4.	Currently switched to a new company with a 100 % commission, even with great credit they require a year minimum track history.  (hence my owner financed criteria)
5.	Haven’t verified, but rents = 1900 and he mentioned a 1800 income a month.
6.	Yes

Matt, If he's ok with long term cash flow just doesn't want the LL part anymore see if maybe at closer to full asking he'll do owner finance with no balloon or with a 10 yr balloon. 
On any of them I would do a 30 amortization schedule though, you can always pay it off within 10 years but then you're not stuck with the high payment when you do need the extra for a repair or whatever else comes up

--Not sure how I would combine 30 year amor, with a 10 year balloon for an owner financed deal.  In order to accept the deal I am sure he will want to be paid free and clear in 10 years or less. 
-------------
Dan, That’s close to what I have figured out on paper for the deal – the management costs which I will handle.  I am ok with breaking even and putting any extra cash I have for the next 6 years and pay it off outright.  ---With this in mind, I wanted to pass my strategy along to the fellow BP community to see if I was missing any details that would sweeten the deal in my favor.  
--------------
(Unit background – the owner only has the property posted on craigs list, and has broken English (older Russian man that lives 5 states away)   I see this being a large part in why the property has been listed for longer then 6 months.  No realtor, has never been on Zillow, etc.)
 This is my first deal, and I see it being a nice cash flow backbone for future deals. --- 
Any and all advice is greatly appreciated!

Matt Devincenzo · Answer

I think the price is too high, and I think the fact that it has been on the market for 6+ months prob means that you could get a better price, I'd say more like 95-100K(just off the top of my head)

As far as the terms, honestly whatever you can negotiate is what you can get. The reason you probably see alot of 5 yr balloons mentioned is because that's kind of a common bank loan balloon to have on a commercial note.

You need to find out what the owner is looking for, if he just wants out completely see if maybe you can negotiate a lower price with a 2 year balloon to just the rental income on your schedule E so you can refinance as soon as you can and pay him off.

If he's ok with long term cashflow just doesn't want  the LL part anymore see if maybe at closer to full asking he'll do owner finance with no balloon or with a 10 yr balloon.

On any of them I would do a 30 amortization schedule though, you can always pay it off within 10 years but then you're not stuck with the high payment when you do need the extra for a repair or whatever else comes up

Ben Leybovich · Answer

Dan Osterman  Balloons are totally negotiable - it's whatever you can get.  Difficult to advise without furthre info:

1. What will your liquidity look like after you put 12k down?
2. What amortization and interest are you presuming for 1k/mo. payment?
3. Are current rents at market or can they be improved?
4. Are you financible with a conventional lender in terms of credit score and income?
5. Have you varified the cost of paying water?
6. Are the rest of the utilities separately metered?

Answer these questions plase so I can better anderstand how to advise.

Owner financed 4-plex, to good to be true?

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