Help turn this into a deal. Seller financing and LOI?

Question

Good morning BP. Firstly let me say that I'm using my girlfriend's account, for some reason my Pro account (@Joshua Pavao) won't let me make a new post! I will post directly under this with my account, so PLEASE tag that account if anyone responds. Thank you!

So I've come across 3 properties for sale, (8 units total + 3 bay garage), seller is willing for seller financing, and all communications are going through a third party who has agreed with me when I told him I believe the seller has an unrealistic view of what his properties are worth.

I was initially only interested in the first two properties because that are on the same lot and need to be sold together. Once I made note of how much it would cost to run the properties properly, and that the seller's terms are high, the third party told me that the seller would now be willing to throw in the third property for the price of the two I was analyzing.

Great, already showing some eagerness to drop his properties (same owner for over 20 years and definitely not maintaining)

They asked me to start with a letter of intent to see where I'm at for terms, and we can work from there, he said the seller may agree to 850k-950k (which I still don't think it's worth it, unless if it was maybe south beach and rents were 2200-2500!)

If I were to get into this, I'd want to do so with as little money up front, some time to turn the properties around, and only pay a wholesale price.

Before I list the financials, I'd like someone to answer: When a balloon payment comes up, and assuming I have these properties producing for me, will a commercial lender open a loan for all three together? Should I be looking at these as separate properties using Comps or judging them by the income like a commercial prop? Either way, they are NOT even close to being worth what he wants. The only thing that tempted me was seller financing, as the seller must have a good idea that what he has right now isn't the best in terms of operations.

Building #1 (4plex/ all 1B/1B) - $500K (lol!)

Unit # 1 1,018.00/12,216

Unit # 2 1,018/ 12,216

Unit # 3 1,018/12,216

Unit # 4 1,018.00/12,216

Total Rent Income 3,054.00/48,864.00

Expenses

Repairs 1,345.00

Electricity 4,025.00

Insurance 310.00

Taxes 3,050.00

Water and Sewer 3,590.00

Total Expenses 12,320.00

Net Operating Income 36,544.00

Building #2 $350K (lol!)

(on same property as #1 - Duplex 2B/2B) Also has 3 bay garage supposedly rented at $100/bay

Unit # 1 - 1,060/12,720

Unit # 2 - 1,060/12,720

Garage - 300/3,600

Total Rent Income 2,420/29,040

Expenses

Repairs 2,500.00

Electricity 0

Insurance 310.00

Taxes 3,032.00

Water and Sewer 2,400.00

Total Expenses 8,242.00

Net Operating Income $ 20,798.00

Building # 3 (duplex 1B/1B) $285K

Unit # 1 - 1,018/12,220

Unit # 2 - 1,060/12,720

Total Rent Income - 2,078/24,940.00

Total Gross Income - 2,078/24,940.00

Expenses

Repairs - 1,380.00

Electricity 0.00

Insurance - 310.00

Taxes - 2,437.00

Licenses & Service Contracts - 65.00

Water and Sewer - 1,659.00

Total Expenses - 5,851.00

Net Income$ 19,089.00

I'm not sure why the insurance is the same for all three properties, I don't know if it's 310 for all of them together, or if it's the same price to insure each duplex and the 4 plex?

Just for potential notes:

going by the numbers, the 4plex doesn't seem to have separate electric meters,

both the fourplex and duplex looks like a roof replacement is due,

some windows are boarded up (100% occupied)

driveways would need to be added (currently a dirt lot)

There is definitely room on the property to add another 4plex if zoning allowed (there is an apartment complex right next door so I don't see why not)

even the third property has a good chunk of land behind it considering what the norm is here.

There is a nice elementary school that is just being completed on the same street less than a few houses away. I'd say the neighborhood is a B - range, and in a city that has lately been having tons of tourists attractions built (this is South Florida after all!)

I believe rent could be raised, especially on the duplex with 2/1, but probably not by much on the 2/2.

The current owner is obviously getting all rents as "passive" income right now because he has no mortgage so I'm worried anything I offer may just seem like a horrible deal haha, and I can almost guarantee by looking at the properties, the money is definitely going into his pockets and not back into the units.

Any info is greatly appreciated and thank you so much for reading!

Wayne Brooks · Answer

This is a recipe for suicide. Your expenses are way too low...you have nothing for vacancies, capex (roofs, ac, etc) nothing for management, and not enough for repairs. You need at least 15-20% for these, without management. Your NOI numbers are way off, without even considering the "units don't have separate electric meters". Owner financing doesn't make this a deal, it just sets you up for foreclosure when you can't refi, based on the Real performance of the properties, 2-3 years down the line.

Justin Jocewicz · Answer

10% CAP = PP of $760K. Minus debt service on top of that and if your numbers are correct. Depending on the area, the class of buildings, that could be a good deal at that PP. You would want a commercial portfolio loan which will require 30% down. This is done through a local bank. At a PP of $760K, 30% is $228K....after debt service of ~$3500/mo or $42K/yr CoC = 18%. Monthly cash flow is $2869.25. IMHO, since I have been looking at these too, is that commercial properties are too expensive right now. You could buy $100K properties, use the BRRRR method and make a higher ROI. But, you could make almost $3K/month and just be done with it. For me, it would probably depend mostly on the building class. C-, D...no. C+, B...maybe to a yes. Also...seller financing would be awesome...but you need to get the price lower.

Joshua Pavao · Answer

You're most likely right. the potential I saw with seller financing is what intrigued me. The more I think about it as I share the idea with other people, the more I think that even if I could get the seller low enough to where it was cash flowing.. Turning this property around would really slow me down from my goal of getting into commercial apartment complexes. I won't submit an LOI. I have a feeling I'll have a desperate seller contacting me soon by the way he sounded

David Huynh · Answer

I honestly wouldn't touch that deal. I'm in a very similar situation with numbers and having the seller finance the property. It does not matter how you run the numbers or what percent you have down, or XYZ. No matter how you play it, it isn't even a deal.In my opinion and from my personal experience (I may be wrong)- I think you are intrigued that there is a possible deal with seller financing. That's what really got me married into the deal and I had to wake myself up and say "There is no deal here."Great work on providing the numbers in detail though :)

Joshua Pavao · Answer

I completely agree that this is NOT a deal at the current price and operations, and I told them that. Then they asked for an LOI for an idea of my terms. That's why I posted it here for ideas of turning into a deal. It looks to me that the seller just thinks he will break $1 million by selling 3 run down properties

Joshua Pavao · Answer

here is my account! I'd also like to add, my goals are to get into larger apartment complexes mainly for scalability and gain $20k+ a month in passive income. If anyone thinks this property will hinder those goals and we'd be better to save capital and avoid this. Feel free to give me your opinion

Shelby Bettencourt · Answer

Please tag @Joshua Pavao for any replies, that is my actual account. Thank you!