1st Deal Ever Seller Financing Need Help

[Nichola Dotson]

Hello I am new to BiggerPockets found them while just trying to figure out how to qualify for a personal residence and it has now turned my life completely around! 

I found a 4-Plex for sale by owner and I asked if they would consider owner financing they came back and said they would consider a Land contract, 30 year with 5 year balloon, 6% interest, $8,500 down. Sell price $85,000 firm for Land Contract. I need about 6 more months to be able to qualify for conventional financing but I do plan on taking a mortgage to pay the owner financing  debt.

I have run the numbers with the information given for the scenario of the rent revenue being Gross or After expenses just in case but waiting on them to confirm if the rent revenue is gross or after expenses: 

Rent Revenue - $23,040/yr

Expenses (approx. annual) 

Gas - $3,600
Water - $2,000
Electric paid by tenants
Waste Mgmt - $780
Lawn Maint./Snow Removal - $750
Taxes - $2400
Insurance - $800

I want to know how to put this deal together?

[Greg Scott]

Nichola:

Congratulations on taking the first steps.  This may be a great deal.   Here are a few thoughts / ideas for you:

 - Confirm the rent / revenue yourself.    Check Zillow (not very accurate) for their estimated rent or use RentRange (pretty accurate).  Do the math and take out a factor for vacancy, say 8%.

 - Now take all your expenses out, including financing to calculate your expected cash flow.  Be sure to add about $300/mo for ongoing repairs.  

 - Check with a property manager and ask them about the area. Some areas are hard to rent or hard to keep tenants because they are rough neighborhoods.  If it is a rough neighborhood, increase your vacancy factor by quite a bit.

 - Make sure you have enough cash to cover any deferred maintenance or emergencies.

 - I'd recommend making the purchase contingent on an appraisal, paid for on your part.   One of the benefits of traditional financing is that it requires an appraisal and is a checkpoint on valuation.   If you find out the place is worth half, you can bail.  If you find out it is worth more then you are good.  You don't have to share the results with the seller unless you want out. 

 - Seller financing is great as it minimizes your cash out of pocket and may allow you to keep a cash cushion on hand.  If you already know it will appraise higher, you may be able to quickly do a rate & term refi and pay off the land contract.  But this is why an appraisal is key to have done up front.

Good luck