Realtor in the process of purchasing my first duplex - advice plz

[Alexander Quan]

Hi Biggerpockets world!

I am a realtor looking to purchase my first duplex. Property has two units that can be rented out for 1800-2200/month. There is also a garage that was converted to 3 units with tenants paying $400/m. The property is in pristine condition. The zoning is Multi Single Family -2 to 4 units. And is in an area with lots of renters. The price for the property is $680k. We gave the asking price. There are 4 offers total. The sellers want to work with me and my fiance because we connected but they said if we offer $705k then they will accept our offer and not have to do a multiple counter offer.

What I thought about is that I will offer $685k and give my $17k commission to the seller to make up the difference. I am not sure if this is the best approach and as this is my first property that I am purchasing, what would you do? Is this even a good deal?

My mortgage will be around $4200. Please any thoughts and advice?

[Joel Owens]

(Alexander Quan said:"Guess it was just harder because I was planning to purchase owner occupied but not actually live there.")

You do realize that this statement constitutes what is the equivalent of potential mortgage fraud. Lenders underwrite risk. They know if someone lives there and times get tough they tend to fight to make it work. If it's simply an investment property and they are living elsewhere then they walk away easier from a difficult or losing proposition.

This is why FHA owner occupied is around 3.5% down and an investor loan is 20% or more down. Different risk profiles to a lender.

At closing a buyer will sign a mortgage affidavit usually that says the buyer intends to occupy the home. Making false statements to put less down that a buyer will occupy could land someone in a bad situation and possibly criminal prosecution. 

It's just a horrible idea to contemplate such a strategy and should never be done.

On whether to buy unpermitted units I would not. The simple reason is the rent to sale ratio is already tight. If the unpermitted rental spaces are disallowed in the future then income drops potentially making the property cash flow negative.

I have lots of clients from California but they bought property at the bottom of the last cycle in 2009,2010 and now are selling with a 1031 exchange. They are buying more passive commercial properties that are NNN. If you buy California at it's current peak that state is more appreciation than cash flow so when it naturally cycles down again you likely will be cash flow neutral to negative waiting for the next upswing. That could be 8 years or more from now. So the question becomes do you want to take on high debt for a poor rent to sales ratio at the peak of a cycle for that state for minimal cash flow? If your plan is to hold 10 or more plus years then it might work.

Why not rehab a property there for a better rent to sale ratio once stabilized with potentially built in equity? My California clients buying in other states are getting about 4% cap rates for their CA properties and 7 plus cap rate for commercial in other states to buy. Lot's of people have had equity jumps over the last 5  to 6 years there but now feel it is peaking and do not want to hold another 8 or more years for the next upside.