3 family analysis

[Bryan M.]

Hi Everyone, This is my first post so we will see how it goes. I would like some thought and analysis of a deal I am looking at. The property is a 3 family in a mid size city in Ma. The seller is offering financing so that is attractive. I am looking to get it for 165,000, he is asking 175,000. The numbers are below.

165,000 purchase price
10,000 down
2800 taxes
2200 insurance, I should be able to get lower rate
1680 water/sewer
2400 rent(3 x 800 per unit)

I am looking to pay 900 a month for financing. This area has been hit hard by market and this property would have sold 4 years ago for 260,000. Anyone have any thoughts on this deal? I figured cap rate at 13%. It looks attractive for me but am taking my time analyzing this one.

Also the seller said he took a mortgage out on the propety last year, to take out equity, how does this work with seller financing? What if I buy the house from him with seller financing and he defaults on his mortgage, the bank would forclose on the house right? Not quite sure how seller financing works if the seller has a mortgage on the property and transfers the deed to the new buyer. Any insught would be greatly appreciated. Look forward to hearing from everyone, thanks.

[Jon Holdman]

Read the sticky threads in the rental property forum about expenses. The expenses you list in your original post include only taxes, insurance, water and sewer. You acknowledge you'll have vacancies. What about maintenance, utilities (at least when its vacant), tenant damage above security deposits, lawn care/snow removal (again, at least when you have vacancies), legal fees, accounting fees, property management (which you may do yourself and earn), or evictions. Hopefully, you won't have any of those items, but if you end up with 50 units and hold them for 10 years, you will have all of them, and they're in that 50% rule of thumb. If you just have this one triplex, they may be lower some months, but could be much higher some months. You may do better than the $271 I calculate, especially if you're self managing, which I would assume would add about $240 a month. $962 is overly optimistic, though. This is a pretty good deal, in my opinion. Just don't expect to be pocketing almost a grand every month.

Sounds like you're talking about a wrap. That's where the seller's existing mortgage is wrapped with a new one. You get the deed and give the seller a deed of trust or mortgage. The existing mortgage stays in place. I suspect the seller will want you to make the payments to him on the wrap, while he (supposedly) makes payments on the old one. Don't agree to that. Make the payments on the old mortgage yourself and send him the difference. The existing bank is not notified of the change of ownership. There are risks, but for the right deal it might be an attractive option.