Deal or No Deal?

Question

I have found a motivated seller, (he is moving to Florida and really wants to tie things up.  Houses have been on MLS for 384 days)  They are in a decent neighborhood and 4 out of 5 units have been updated.  The 5th unit has been occupied for 6 years, needs updating but tenants seem to be happy with current conditions.

He own's 2 properties next door to eachother.  (3 family, 2 family)

Asking price #1  $129,900
annual taxes- $3106
monthly income- $1650
Seller owes full asking price and will do a lease option.

Asking price #2 $124,900
annual taxes-$1665
monthly income-$1150
Seller owns house outright and will do 100% owner financing.

I think (please tell me if I'm wrong) the 1st house is close to the 50% rule, the 2nd does not come close.  My question is if the seller is willing to provide financing does the 50% rule still apply?  If the 2 properties are sold together the seller is willing to sell at a discount.  What do you think...Is there anything worth negotiating here?  I do not have APOD yet, I have requested this information from the agent listing the property.

Thanks,
Heather

Heather Pelletier · Answer

Thank you Mike,
            
            You have now answered my question completely!  I appreciate it!  I will keep searching.  I'm sure I'll ask about a few more deals before I find a good one.  Grateful to have your expertise available to me!

Thanks to you to Jon, you made some great points!

Michael Rossi · Answer

Yes, it's a TERRIBLE IDEA!  We're in the middle of the worst housing depression in 100 years and the best you can do is buy a property that will break even?  C'mon!  Do the work necessary to find a GREAT deal!   Get one with great equity and positive cash flow.  Why settle for a bad deal when you can find a great one?

Mike

Heather Pelletier · Answer

Hello again Mike,

I agree with you 100%, I do not want to buy a house with negative cash flow but I would consider buying a house that would pay for itself.  Is that a bad idea?  Why?  If it pays for itself then I gain equity over the years correct?

You have answered my question, there's no value in owner financing if it's not a deal.  Thank you.

Jon Klaus · Answer

"I would consider buying a house that would pay for itself. Is that a bad idea? Why?"

On it's own it doesn't sound like a bad idea.  However, compare it to buying a property that not only pays for itself, but also pays you $5000 a year on top.  Then it doesn't sound like the best idea.  Find the best (or nearest best) opportunity you can.

How do you know you are getting the highest and best use of your money and attention?  Do lots of research.  Look at and evaluate 100 properties before you commit.  Read all you can.  Become an expert in your market.  Ask the kinds of questions you are asking now.  Get input from the "Mikes" of the world and listen hard to them, they've done this many times.  You get the benefit from their knowledge, experience, and generousity.  And read all you can at this site.  The last month I've spent here has been invaluable.

Heather Pelletier · Answer

Thanks Ben,

I'll have to do some math.  If I can get it for only 3% down it might be worth it.

Heather

Heather Pelletier · Answer

"I think you bring up an interesting point especially with the uncertainty of the stock market in recent months, is real estate a better storage of wealth/savings than the bank or the stock market even."

What do you guys think??

Ben Duq · Answer

I think the answer depends on your strategy. I would consider your economic cost, what would be the future value of your downpayment in 10 years at a set compounded rate of return? What would be the future value of cash outflows? I think you bring up an interesting point especially with the uncertainty of the stock  market in recent months, is real estate a better storage of wealth/savings than the bank or the stock market even. I think at a small cash outflow or breakeven you are banking on the favorable tax treatments and potential speculative appreciation on the property.

Michael Rossi · Answer

How much value is there in a property that is ALMOST DOUBLE the price you should pay for it but has owner financing?  In my opinion - NONE!

Here's a question I always like to ask.  How many of these negative cash flowing properties can you afford to own?    Between these two properties, you would have a negative cash flow of almost $300 a month.  If you had 50 properties like this, your negative cash flow would be $7,500 per month (OUCH!).  Compare that to buying 50 properties with the numbers I talked about.  In that case, your positive cash flow would be about $12,500 per month and the instant equity would be over $3 million dollars.  Which scenario offers the better retirement?

My issue is that you sound like a motivated buyer.  You want to buy something, anything just to get in the game.  In my opinion, that is a HUGE mistake.  Why not do the hard work of finding a Great deal - one that will give you cash flow from day one and instant equity?  The difference between a bad deal and a great deal is the work involved in finding the deal, especially when you're a new investor.

Good Luck,

Mike

Michael Rossi · Answer

Heather, 
                        
                        Here is how I see these deals:
                        
                        Deal 1:
                        
                        Gross rents:  $1,650
                        Operating Expenses:  $825
                        NOI:  $825
                        
                        Mortgage: (30yr, 7%, $129,900; NOO): $864
                        
                        Cash flow:  $39 LOSS  (OUCH)!
                        
                        Deal #2:  
                        
                        Gross Rents:  $1,150
                        Operating Expneses:  $575
                        NOI:  $575
                        
                        Mortgage (30yr, 7%, $124,900, NOO):  $831
                        
                        Cash flow:  $256 LOSS  (OUCH!)
                        
                        I would say that these are TERRIBLE deals as presented.  You would have to buy them BOTH for a total of  about $135,000 to make them cash flow properly.
            
            Good Luck,
            
            Mike

Heather Pelletier · Answer

Hey Mike,

Thanks for your reply.  I know the 2nd one is NOT a deal, my question was how much value does 100% seller financing have.  As far as the 1st property goes, isn't there some value if the property pays for itself.  One of my goals is to secure my retirement, I'm looking long-term.  If the property pays for itself and I don't get any cash flow but gain equity over the years isn't that a success?  I am 34.  If the property is paid for in 30 years, I own it free and clear that's income for my "golden years" correct?  Am I missing something here?

I appreciate you taking the time to respond.  Please do not think I am doubting your advice.  Just wanted to explain myself a bit more.  Having said that is this still a bad deal if I were to make the cash flow 0$ instead of $-39?