Would You Do This Seller Financed Deal?...

Question

I am attempting to structure a seller financed deal for a SFH that has been on and off MLS for the last three years without a sale. The property is in a decent location, has complete exterior/interior renovations, but has some apparent structural issues (house will need jacked up a bit and shimmed...which I can do). I plan to remedy the issues and place a tenant. Here are some of the numbers:

After Repair Value $90,000

List Price $79,900

Monthly Rent $775 (low capex/vacancy/will self manage)

Offer $69,900

EMD $1,000

Buyer to pay all closing costs/attorney fees (should be less than $3,000)

$10,000 down

Payments at 5% based on 30yr Amortization schedule

10yr term on repayment/ Balance due in full at year 10.

Thoughts on this structure?

Fred T. · Answer

Let's break it down and see what we come up..shall we? If this was a potential deal I was reviewing and based on the information you provided, this is how I would approach it:

1) I would ask that Structural Engineer who performed the inspection of the foundation to issue you, at the Seller's cost, a current HUD Foundation Certification or Foundation Approval Letter which should include a) Distress Analysis and b) Manometer Survey effective January 2015.

2) Since the Owner agreed to bring the Electrical "Up to Code", I would be looking for an Opened/Closed Permit -OR- a completed 3rd Party Electrical Inspection Report to verify the work was completed "To Code".

3) If a Pipe Bursted, one has to ask is the Heating System working and are the walls insulated properly and if so then why did the pipe burst. If the Heating System is turned off then why wasn't the property winterized. Bursting pipes could be a tell-tail sign of other issues and shouldn't be handled lightly in my opinion.

Ok..back to the Numbers of this Deal.

ARV: $90,000

Proposed Market Rent: $775/mth (Also using a Vacancy Rate of 8% to derive EGI)

EGI: ~$713/mth

P.P. $49,000 financed at your rate and amort of 5%/30 (I'm pretty sure this rate is a little off unless you are putting down at least 20%..but let's run with it)

Mortgage: $263/mth

Taxes: Estimated at $94/mth (1.25%)

Insurance: Estimated at $55/mth (in OH if that's where this deal is of course)

Management: 8-10% EGI ~$71/mth (even if Self-Managed should still factor in)

Maintenance/Reserve Account (1% Value) ~$75/mth

Estimated NOI (Assuming Tenant pays all utilities): ~$418/mth - PP=10.24CAP@$49k or 7.17CAP@$70k

Estimated CashFlow: $155/mth (DSCR ~1.59 which is good IF your Loan Assumption is accurate)

IF you can get this property, with a clean bill of health, for $49,000 and IF the property valuates at $90,000 and IF you can secure a loan for the $49k at 5% Interest with a 30yr Amortization with only the information you provided and general assumptions, it looks like a potential deal as far as numbers are concerned.

It may not be a deal at all for a Purchase Price of $69,900, $10k down and seller financed at $59,900 with your DSCR heading towards 1.30, CAP below 8.43 and your cash flow dropping to about $96/mth which would put your COC B/E at 11-12yrs.

With that said, this deal sure does send up some red flags based on the info you provided./

Good Luck and let us know how it all turned out on this one!

Alisa O. · Answer

Fred T brings up very good points, although I doubt the seller will pay for the January 2015 Manometer Survey and the distressed analysis. He is already bleeding money on this "Pandora box". Most likely he will just tell you to accept the existing report done by the structural engineer and the independent contractor or to continue to march. There are no current active red flags related to this foundation and with all the other stuff going on he might buckle. I would tread waters lightly here, although I would put a contingency in the offer regarding the structural integrity of the property. This being said if you are still interested in this property.

If the seller is getting electrical fixed, is it up to code and what kind of quality job is it? The seller is probably in "fight or flight" mode now, being freaked out by the burst pipe and by the refusal of the insurance company to cover the claim and all the costs pouring on him at the time when he least expected it. I would be seriously wondering what kind of job are they doing and how many corners are they cutting. It is not necessarily the case that they are, but one can wonder.

Fred's point #3 is excellent. If you are still going to proceed with this property, go through that house with a fine tooth comb. In addition to everything mentioned above I would get a professional thermo-graphic assessment. You will know where the pipes might be in danger and where the property is loosing heat. Whether it is you or the tenant paying for heat, it just makes sense. Small cost to pay as a preventative measure.

As a last point, I would include in Fred's calculations above the cost of acquisition. I don't know how high/low your acquisition costs run in Ohio, in NY they cost a pretty penny. And why shouldn't you include them? They are part of a deal!

Keep us posted!

Jesse T. · Answer

If it potentially retails for 90K, flipping to retail would be my preferred exit strategy.  I agree with @Alisa O. that you have some room to push the price down a little.  I would want to be able to do repairs(counting compensation for your time) and at the very least be able to sell to an investor for 70K and have some profit.

Bill Gulley · Answer

So much for guessing, must have been an expensive pipe, LOL. Good luck with it, take your fins and mask with you....  :)

(Really, good to hear!)

Alisa O. · Answer

So, if the furnace was on, I wonder why did the pipe burst? Now I'm curios from learning standpoint. I know that cpvc pipes can be used in cold climate if they are insulated, but you are saying the furnace was on. Let me know if you learn the answer. I will ask my guy as well.

Brandon Sturgill · Answer

Thanks @Fred T. Good perspective on the repairs...agree about the red flags...still cautious about the appraisal when I attempt to pull some cash from the equity in six months.

Much appreciated @Alisa O. Oddly enough, this house had electrical service upgrade by a licensed electrician (new panel and romex wire) a couple years ago...and the pipe that burst was cpvc, which I have never seen before. The house wasn't winterized, and the owner indicated the furnace was on...working with my realtor now on formulating contingencies.

Brandon Sturgill · Answer

@Alisa O.  Thanks for the insight. I went and looked at the property today and talked at length to the owner...his insurance refused to cover the cost, but he has totally gutted the kitchen. He agreed to have an electrician bring the kitchen up to code, is hiring a sheetrocker to repair all the sheetrock, replacing the kitchen cabinets, and replacing the SS dishwasher to match the fridge/microwave/stove....and my offer is still $49k.

I also talked to him about the foundation and they had it inspected by a structural engineer and repaired for $13k a couple years ago.

@Jesse T.  this might be an option....

@Joseph Ball  this was crazy bad news for the sellers...it was a full-on busted pipe in the ceiling right over the kitchen....you couldn't make this stuff up.

Joseph Ball · Answer

How did you arrange for a pipe to burst? Inquiring minds want to know...

Alisa O. · Answer

I hope you are NOT going to accept it!!! $49K was with a pipe intact, not its not! You should lower your offer at least by a few thousand to fix the pipe. I would say to the seller that if one pipe burst, the next one might be coming soon and you want some funds to cover it. Plus your situation changed and now you can do this deal at $45K? Even if they are not motivated enough, at least they will listen. Who knows what will come out of it. The least you can do is ask. If you don't ask, you don't get!

Let us know how it turned out and how awesome you did! Good luck!!!

Brandon Sturgill · Answer

Thanks for the input @Nathan Emmert  @Bill G.

@Alisa O.

@Trisha Shaw

@Jeremy Tillotson

@Joseph Ball

I definitely appreciate the guidance...just got a call from my realtor about an hour ago that a pipe burst in the kitchen over night and the sellers would be interested in my initial offer of $49k financed through my portfolio lender...

Would You Do This Seller Financed Deal?...

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