How would you move forward with this deal?

Question

So through mailing to absentee owners I've come across a decent property that has a renter in it. I told the seller that I would be looking to buy and rehab. I have not seen the inside of the home yet but ARV of this home is around $160,000 or so. The home might be in great shape and in which case I can't do anything with this home. The renter is paying $800 a month for the last 4 years which I think is pretty low.

Assuming he's not interested in a lower offer like $110,000-$120,000, what strategies would you use to acquire this home in a good part of town? I think he owns the house outright. Seller financing? What terms could I offer with as little coming out of my pocket as possible but still looks good to him but where I am in a good position too.

I've told him I don't pay retail for homes and he says he "understands" but still wants me to come look at his home and make an offer. I'm not interested in picking up a renter especially one that is only paying $800 in rent.

Marcus Kennedy · Answer

Account Closed I'll keep you guys updated! Im going to give the tenant another call tomorrow and see if I can catch her and schedule a showing.

Fred T. · Answer

Motivation is key on this one and an upfront conversation with the Seller should be had to make that determination.

1) If you determine the motivation is he doesn't want to deal with the Tenants or Building Upkeep, then try a Master Lease approach coupled with an Option Agreement for x-years. The Master Lease fee would be the base current rent, minus taxes and insurance and then 50%. The option would be set at the best possible price you can negotiate for the longest period of time. Using this method, the Seller doesn't have to worry about the tenants or building and will get even more than their asking price in the future and you will have a cash flowing rental that you can remove the existing tenant, spruce up the place and increase your cashflow with a fresh tenant OR better yet a tenant that for a fee would take over the option and related expenses. Of course this is an advanced strategy and consultation with an attorney to get all of the paperwork right is very important.

2) If the Seller won't budge on the price, then you could ask the Seller to carry a mortgage and after 3mths you will show him how he can sell off that mortgage to get his cash. Using this method, the Seller would have to come down on the amount of cash he would be willing to receive BUT he doesn't again have to worry about the asset or tenants.

3) If Cash is the driving factor, my thoughts are he would have listed it with an Agent...especially having a tenant in it. But let's say Cash is the motivation...then you have to make the case that the property won't likely be sold on the retail market with a tenant in it...so he would have to remove the tenant, spruce up and repair the place, possibly stage it for sale, hire an agent, pay a commission, wait to see what the market does as far as buyer interest, be willing to drop their price if no movement in 30days, play the Buyer mortgage process of WDO Inspection, home inspections, appraisal report and rely on the Buyer that they can close. By the time all of this process is completed, who knows when it would be sold and for what NET Profit..not to mention they now have a vacant property and anything can happen while they are waiting for the sale process to run its course...and I (you) am here now..so let's negotiate. Then run your numbers and let the numbers speak for themselves. Out of state owners usually don't like the retail approach...so use the entire process and stress-fullness of the out of town retail sale process to help you in your negotiations.

There are combinations of other methods you could also use, but the processes are complicated and have a few moving parts. The ones above may work in this case, based on what you said, so I would give those a try first. If the Seller is hounding you to see their place...there is some form of motivation in play...it's up to you to hone in on it to be successful.

Good Luck!/

Account Closed · Answer

Ideas to think about:

You mention the guy is out of state. He may not have seen the property in a while and may not know its true condition. If his parents lived there for years, who knows if there is deferred maintenance? Or the house is really outdated? You absolutely need to see it and run the numbers and come with the right offer price.

Don't start worrying yet about whether your offer will offend. Go with an open mind and let the numbers point you in the right direction.

So curious to hear how this turns out. Let us know once you saw the place.

Eric W. · Answer

Marcus,

Don't expect the tenant to cooperate, and in fact, expect a battle if they are paying below market rent and you disrupt them.

If the seller is calling you they are motivated.  How motivated will be determined when you make your offer.  To arrive at an offer price it would be nice to have pictures of the interior, or better yet an honest and reputable contractor's bid.  If you don't have those you can make assumptions about the amount of work that will be required, and make an offer than makes sense to you.  Make sure you are conservative on the numbers, and consider major items such as mechanical systems, electrical (service type, aluminum vs copper), sewer line age (age and trees on property), etc.  For the risk and time I would want to be all-in  no more than 70% of market value (after all repairs and all expenses), and that is hiring a general contractor to handle everything.  Keep in mind, that if the price is right you can close on it now, and find a solution to for the tenant later.  Never forget that this may not be easy, will definitely take some time, and could really set you plans back if you have to pry the tenant out or pay them to leave.

There are many strategies you can consider.   If you can't agree on cash purchase price, then try seller financing with small down payment, and a low interest rate with payments that allow you to work your plan.  Since the owner is collecting $800 (only if the tenant is paying), I would think the seller would consider $200-300 less to not have the hassle.  Find a private lender for the down payment (I may be able to help).  Lastly, if you're still not successful with the seller carry option then try to get an option to purchase.

Communication with the seller is paramount, and be honest about your intentions.  Let them know you'll do you best to make it happen, but the tenant's lack of cooperation, and amount of work is largely unknown.  Explain that in the end we all need to make money, and if it doesn't make sense it doesn't make sense.  If you go the option route make sure put up some cash (preferably at least $100 in escrow), as this will give you an equitable interest in the property and make your agreement binding.   Make sure your contracts are assignable (most are unless otherwise stated), and always  consult your attorney.

Eric

Marcus Kennedy · Answer

@Fred T. Awesome advice! Still trying to get in touch with that darn tenant!

Marcus Kennedy · Answer

Thanks @Brent Coombs ! I guess the best thing to do is to go and look at the house and if there are updates that need to be done I will tie that in to my max offer. Let me just get it as low as I possibly can and then I will come back and ask you guys what you think. We could be having this conversation for no reason if he thinks he's offering a wholesale price but in reality it's closer to retail! I probably won't be able to see the home until next week barring the tenant cooperates!

Brent Coombs · Answer

A lot depends on your goals. Congratulations for taking mailing action, and also for posting your question here. You've said that you "would be looking to buy and rehab" but it looks like you have also cottoned on to the idea that there are multiple options in RE. Not knowing the area, or your finances etcetera, I don't have any specific suggestions. "Wholesale it? Just get it at a cheap price and resale at a higher price?"

Or buy-to-hold for that matter?  This is where your BP/RE education kicks in. What will work for YOU? Any mentors nearby?  All the best...

Marcus Kennedy · Answer

@Fred T.

1) My understanding is the renter is month to month.

2) I do not know the motivation behind the sale? He just keeps reaching out to me and asking me to go by and see his property. I've tried but the renter isn't exactly being cooperative which I could understand seeing she's paying below market rent for a good location rental and could possibly be displaced.

3) I dont know for sure it's free and clear but I'm pretty sure it is. One listsource said it was which doesnt really mean much I know. But also he got this home from his older parents about 4 years ago and they lived in it for years and years. He lives out of state so I think he's looking at just getting a wad of cash and being done with it all.

4) I don't know of another investor with an available rental.

5) I think the owner has tried to sell the home to the tenant but they didn't take the offer.

If the property is in good or great condition how would I move forward? Wholesale it? Just get it at a cheap price and resale at a higher price?

Fred T. · Answer

1) Is the renter on a month to month or annual lease?

2) Have you determined the motivation behind the sale?

3) Do you know for sure the property is Free and Clear, no outstanding code violations, no outstanding liens or open permit issues, etc.? This is a big piece to a puzzle of course.

4) Do you know any other Investor in your area that has an open rental to move this tenant to if month to month?

5) Did you talk to the tenant at all to determine their financial status? If your strategy is fix/flip and you already have a tenant that has lived in this for an extended period of time, you could have a golden opportunity...if you know what I'm talking about!

Even if a property is in good or great condition, doesn't mean you can't make a win win deal on it...in that case, motivation is key.

Look forward to your response!/

How would you move forward with this deal?

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