Seller Financing Available, But Not Sure If This Deal Can Work

[Rob Young]

I talked with a pretty desperate seller yesterday. He is willing to let me use his existing financing to purchase his home so he can stop worrying about it. However, I'm not sure that this deal can work. I'd appreciate any ideas on how to pull this off. 

Here is the situation. The seller has an empty property that he was renting. The previous tenants moved out three months ago and the seller has not made a mortgage payment on the property since the tenants moved out. To make the house rent-ready would require about $3,000; to make it sale-ready would require about $10,000. 

The house is generally in good shape. HVAC, water heater, and electric are all new. The roof has about three years left in it. The house could rent for a few years without replacing the roof, but could not be sold with the existing roof. The big expense required to make the house rent-ready is having a large tree removed. 

The seller has a 30-year fixed mortgage on the property. Unfortunately, he refinanced three years ago, so there is little equity in the house. 

The  monthly mortgage payment, which includes taxes and insurance, is $475 per month. The house was renting for $700 per month. The seller said that he had planned to raise rent to $725 per month. I talked to some experience local landlords about the house. They said that the numbers just don't work as I should budget about 50% of the monthly rent for contingencies. 

Based on what I see on rentometer.com, I think I could easily raise rent to $825 per month. Assuming I can increase rent to $825 or more, the numbers are still tight, given that the roof will need to be replaced in the next few years. 

I was hoping to wholesale the property, but I'm not sure there is much room for profit. I know that seller financing is very valuable to investors, but I don't know that the numbers are going to work. 

Any thoughts for how to make this work? 

[Jay DeCima]

Walk away fast.

In order to acquire properties at bargain prices, or at prices that will allow you to make a reasonable profit, you must first determine if the property can actually be purchased for a reasonable price. I hear you thinking, “Boy, that doesn’t seem so tough! Why can’t I just ask the seller?” Friends, sellers may not understand why they have problems, especially if they paid too much themselves. Many times I’ve found desirable properties for sale, but they’re seriously over-financed. Owners with over-financed properties are often anxious to sell and many times for little or no cash down payments. They need to stop their negative cash flow. Beware of these kinds of properties.

Forget sellers who can’t make you a good deal. Quite often you’ll find sellers who have over-financed by paying too much in the first place or by adding additional loans during their ownership. These sellers are simply not in a position to make you a good deal. The only way they could, would be to pay down the existing debt, or to pay you money to take their property. Obviously, those are not very attractive options for most sellers. When too much money is already owed on the property, it can seldom be a good deal for you.

Good luck.

Fixer Jay DeCima