NJ Deal Analysis

[Joe Salimao]

Hi guys,

I have a deal I could use some advice on. Let me know what you think.

This particular seller has a home free and clear and is receiving $1200/month in rent. He is willing to hold paper for a certain length of time so I am trying to calculate what I should offer him as a monthly payment. I want to offer him $600/month for 10 years and then offer him a balloon payment of 55K or so. His
home is listed for 119K and has been on the market for 3 months at that price and even longer listed at a higher price. I estimate the home is worth about 100K.

ARV = $100,000
Total Purchase = $72,000 (monthly payments) + $55,000 (final payment) = $127,000

So I feel that this would truly be a win-win situation because he would receive approximately 27K more than his home is worth today…call it interest or additional cash for holding paper or whatever you like…and I would receive a property that has good cash flow and would only need to mortgage 55K in 10 years.

I want to present the seller with the payment in terms of what he is receiving now compared to what he will be receiving in addition to the benefits of not owning the property.

Here is how I have it broken down so far:

$1200 – Income
($220) – Taxes
($80) – Insurance (Just my estimate…don't know exact number)
($204) – Maintenance, vacancies, etc (17%)
Net cash flow - $696

So if I am offering him $600/month he will be receiving close to the same amount of cash flow he is now but will have no responsibility to the tenants and
doesn't have to worry about repairs etc, and he will be receiving more than market value for his home.

I am missing something or does this sound like a good deal that I should take to the seller?

I look forward to hearing input from all you guys!

Oh and keep in mind that this is in NJ, the state with the highest property taxes in the nation so this has an effect on cash flow.

Joe Salimao

[Daniil Kleyman]

Joe: One quick way of looking at it is to figure out PV (present value) of your payments to the seller. $7200 for 10 years, then $55000 in Year 10.

If you use a discount rate of 10% (an approximation for interest rate, or cost of capital, etc), the PV comes out to ~65k. This means your payments of $127k total to him over 10 years is the same as paying him $65k now (money later is worth less than money now).

So you're paying $65k for something worth $100k.

This is just one simple way of looking at it - many many other angles.