Second possible deal/owner financing/Need help

[Khadijah New]

Hi guys,

I'm new to investing and am currently working on my second deal. The first is a wholesale deal and I'm still waiting on a response from the seller/agent. The second is on a 2 family property that the owner owns free and clear.

She is willing to do owner financing but only wants a 4 year term (planning to move to another state once her husband retires), 4.5 interest rate and 10% down. I believe all of these things can be negotiated down but the main sticking point is the price. She dropped the price (home has been on the market for a hear and a half) from 70k to 53k but is refusing to go any lower (emotional attachment, focused on what she paid and how much she put into it.) The comps in the area are around 45k and the home doesn't need any repairs except for a roof in the next 2-3 years. She's gotten an estimate of $3,500.00 and has agreed to pay half the cost of the roof. Now based on everything that I've learned, I know I should only be willing to pay $70% of the arv however she is willing to take payments of $350.00 per month (taxes and insurance included) and the property is currently rented (1 tenant 3 years and 1 new tenant). It's in a so so neighborhood on a really nice street and currently rents for $950.00 (total, however I believe the rents can be increased at least $50.00 per unit). Considering payments to the owner, estimating vacancy, repairs, and landscaping cost the property should net approximately $330.00 per month.

From what I've read and researched it seems that if the seller gets their price then I get my terms. However, do you all think that the price is ok since it's currently rented and will have immediate cash flow. Also, my thoughts are that if I can't get her to drop the interest rate or price then I shouldn't go through with the deal. Lastly, should the down payment be a sticking point. Please give me your thoughts, I'd greatly appreciate any help you all can offer on rather this is a good deal or not or if there are things that should be done to make it a better deal.

Thank you!

[Aaron Mazzrillo]

So I have a few comments that warranted me putting down the ipad and opening up my laptop to properly respond. I am huge proponent of seller financed deals. I always make a seller financing offer on every lead I get. I don't always get it, but at least I ask. I'll number them out so it makes it easier to follow.

1. 4 years is way too short a term. 4 years goes by so fast. With the above market price you are willing to pay, you should get at least 8-10 years. I would hope to see at least some mild appreciation over the next.. decade? so this will give you time to pay down the loan, the value to rise, and not get you caught in a short term trap.

2. 70% of ARV - repairs is the house flipper's formula. If you pay more, you are not likely to make much of a profit, especially if any surprises show up when you are rehabbing and flipping. When it comes to long term buy and hold, I focus on cash flow today. Of course, I also like to get an equity cushion, but I won't pass on a deal if I can get a good return on the cash I have into it and I have some extra cash sitting idle.

3. On most seller financed deals I've done, 10% typically works very well for me. I've put more down on some, and less on others, but 10% is what I try to negotiate for.

4. With a sales price of $53,000, 10% down is $5,300. With escrow, title, and other misc expenses, lets say run you $1,500, you will be into it for $6,800 or round up to $7,000 even. I'm not going to 2nd guess your numbers. Your return on your $7,000 with $330/month net coming in is 57%. I expect that is not truly accurate, but in the end, it will still probably be north of 30% which is a pretty healthy return. The only problem is loss of investment if you don't get longer terms. Then you will be working for 2 years just to break even. Those deals are not fun.

5. There are so many ways to structure seller financing. 4.5% in a 4% interest rate market on an over priced house - I'd definitely try to negotiate the price or interest down and with out a doubt, a longer term. If you get her at 4% for the first 4 years, then write into the note a 4 year extension at 5%, and an additional 4 year extension at 6%, you have a much better deal on your hands even with the higher sales price. Sell her on the idea of making it safe for both of you. Once she sells and gets used to cashing those checks like clock work, she won't want the house back and you don't want to do all the work, only to end up having to call her and tell her you couldn't obtain financing so you don't have any other options.

You seem to be thinking about the right things and I am sure with a little more negotiation and rapport building, you can come to an agreement that works for both of you.

P.S. This might be a great play for a friend who has some money sitting in an IRA. Their IRA lends you the money, you pay it a nice return and make a little yourself every month. Could be a great no money down strategy for you to control a piece of property.