Package deal that doesn't make sense... Or does it?

Question

So, here's an interesting thing I came across recently.

I've signed an NDA so can't share locations, addresses, etc. But numbers to a theoretical deal.

Like the title says, those are the properties in a nutshell. 17 are rented currently, most have been rehabbed recently. There are 2 vacant and ones a scrape. The 2 vacant properties need some finishing touches and both are duplexes I believe.

Of the 17 that are rented the rent last year was a hair under 91k

Expenses totaled just a hair over 30k not including mortgage.

Asking price is 945k, which for that income is laughable in this area and would make my lenders lose faith in me.

But, in a conversation with one of my team (we were bored) we tried to find ways to make this one work.

The first idea of course is to get the seller to cut the price by about 50%, we know how much they owe on this stuff and so that was floated, and of course dismissed as also insane.

Second idea, get seller to finance the whole thing, 100%, in two notes. A 1st for about 60% and a 2nd for the rest. They could sell the first position note (which would be at an attractive rate) and hold the 2nd (which would be as close to negative as I can get it) but even then running 19 buildings for a few grand a month seems pointless when there's easier money here.

But, what if we got really creative. I'm not about to shell out 20k for the due diligence on 20 properties that don't make me a some actual money. I would however, resell them on a note to the people renting them. This moves taxes and insurance off my shoulders, creates interest and relieves me of maintenance in any form.

All the properties are close to each other, so once you sold them all off and registered the land contracts with the county you could sell the notes and walk, right?

Anyway, I don't intend to do it because it would create a full time job for the next 6 - 9 months and I don't have the cash to plunk down for that kind of thing. But what do you guys think?

Barry H. · Answer

SEAN - I am a HML and I have BRRd a dozen or so low end properties over the years. They are high return and high maintenance. I have tried several times to put my tenants into OCB low interest loans (about 2% over bank rates). For example, I explain they pay $750/Mo in rent and I can sell them the place and they will bay $600 (incl taxes and insurance) and build equity. They still don't wanna do it - just baffles me.

I guess what I am sayin is that you are right - it is a ton of work for 20 properties of which you "might" get 5-10 tenants to do OCB loans with you (or they get conventional financing). "Creative" is your key here. You are thinkin' outside the box and that is great. Deploying several different strategies at the same time (Creative Acquisition, Rehab, OCB lend, sell, manage as rentals for cashflow), all good stuff. I think you have your eye on the ball with the Acquisition though. The Owner(s) is trying to sell a bouquet of mixed flowers which really don't go together so well, but he/she doesn't want to sell a 1/2 or 1/4 bouquet if it can be helped. I think if you stay just far enough away so the Owner can see you, he/she might come around and sell the whole bouquet for $600K. At that point, it's your puzzle and I would argue a fun one to work on. :-)

Sean Cassidy · Answer

@Barry H.

That's kind of what I was thinking. It would be a fun puzzle to work on. It's a small area so once you recorded the sales comps in the area would improve, so you'd have an easier time selling the notes, plus whatever you had left over as rental stock would see some instant appreciation. In theory.

The biggest part to me would be to bring equity and cash flow in line. If paid an average of 50k a door, and could move 7 OCB, and pocket 70k on each you've got 455k invested now. And these aren't salt boxes or GI houses. These are big old farm houses and Victorians.

455k for 10 producing properties, 2 BRRRs and a scrape makes more sense but still not quite there. A lot of moving parts there.

Now, 600k purchase with 30k per door and we've got something worth looking at!

Now you only need to pocket 60k for 7 sales and you're down to 180k invested. This I would do all day!

Package deal that doesn't make sense... Or does it?

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