3% down on a 12 unit land contract, but no inspection til signed?

Question

I'm working on a deal for a small 12 unit apartment property. Units are 1bd/1ba 500sq ft. Avg rent is $420. Cash flows $1800/mo at 100% capacity. Seller is an upstanding member of the community with 400 units and growing. We've verbally agreed on a purchase price, a down payment of 3%, and a balloon in 45 months. He had his attorney write up the contract. His agent showed me 3 units. The contract allows for an inspection, but does not give the purchaser an exit from the contract should the inspection be unsatisfactory. I understand my position is not strong in this deal and should the inspection come out well, I'll be walking away with a good deal. However, I'm reluctant to sign on a property without having an exit route should I uncover more repairs than I'm ready to handle.

Are my expectations set too high for the contract to have a "pending an agreeable inspection" clause?

Jay Hinrichs · Answer

OK if I am reading this right he wants the 3% down payment paid up front none refundable. normally that would be couched as EMD .. subject to inspections.he owns 400 units you own how many ? playing devils advocate this screams of someone unloading a property they don't like for various reasons.. tenant base.. property condition.. etc etc.and sucking you into giving him 3% up front and you lose it if you don't close.. wonder how many 3% he has gotten from others :)

Brent Coombs · Answer

You wrote: "I'd be interested in any drawbacks you see in a land contract scenario" (which coincidentally I also raised as a response question in another thread today), so I googled it and came across the following site:http://www.ppblawyers.com/benefits-and-pitfalls-of...Quote:..."Situations not uncommon in the current market are those where the land contract buyer has made all payments, complied with all requirements of the agreement, and paid all property taxes and insurance amounts when suddenly, they have a foreclosure notice on the door. Often the seller has pocketed the buyer’s monthly payments instead of applying them to the mortgage, leaving the home in foreclosure. Such is also the case where the underlying mortgage has an adjustable rate, leaving the seller suddenly unable to keep up with higher payments in the event the land contract payments are less than the monthly principal and interest due on the mortgage. Without protection written into the agreement and proof of payments, there is no guarantee that a buyer’s payment will be applied to the mortgage. This can leave the buyer having complied with every single provision of the agreement and left without the property, as the bank’s first position lien trumps a buyer’s possessory interest".So, no wonder Darren said: "I’m not sure I️ would want to purchase on a land contract"!You also wrote: "10% seems to be the going cap rate. This one is around 11% - largely because of the remarkably low down payment". Are you sure you're using the right formula?ie. "Divide the net operating income by the sale price to get cap rate" does not vary because of deposit amount or funding cost of the balance. You need to totally understand cap rate!And another thing: On top of every other red flag that we already knew about, you "asked for historical rent records, but their in-house "PM software is not reporting that right now."" Don't you agree: This is starting to become beyond a joke?...

Stephen Richardson · Answer

@Brent Coombs - I was wondering when someone was going to catch on to their in-house PM software being partially broken. Yeah, the shroud is definitely suspect. They're going to have to shed some light or hang on to the property until someone more gullible comes around.

Brent Coombs · Answer

@Stephen Richardson, how much is being asked (per door)? What should the market value be (per door)? ie. Do you know the commercial market cap rate for the area? (No good can come from just taking the Seller's Agents' word for it).Of course you can ask for a "pending an agreeable inspection" clause. But of course, they can say "no". [Certainly, that'd be a big red flag for me].Your position is strong, because you can offer your price, or walk away at any time!I agree, 3% down owner financing is very tempting, but it begs the question: why would the seller be offering this, if he's already getting more than what you'd be paying him per month on average? [Because if he's not, how would it be a deal for you to make money?]Two answers spring to mind. #1: Lots of already overdue deferred maintenance/cap ex, and/or #2: Vacancy may be (artificially?) lower than usual at the moment, so the seller wants to strike while the iron is hot. [Nothing here suggests he'd be charitable to you]. All the best...

Darren Budahn · Answer

I’m not sure I️ would want to purchase on a land contract, but 3% down is certainly attractive. With that being said, I️ certainly would not buy without being able to have an inspection contingency. You said you only saw 3 units. What if the other 9 are destroyed? What if there’s a $30,000 foundation issue? If I️ were you, I️ would be wondering why the seller doesn’t want me to be able to inspect the entire property. Also, make sure you have a plan w the property. Are you buying at market value? Will you be able to refinance if values go down? Can you create some value since you have very little equity in the deal to start? Just some things to consider.

Mike McCarthy · Answer

I admittedly don't have experience with apartment buildings, but I would 100% want some kind out out clause for inspections. If the remaining units are in similar condition, everything is great - but what if you saw the 3 best units? What about the roof/foundation/hvac/etc? Maybe suggest a dollar limit? If the inspection reveals more than $10K of deficiencies, you can back out. Something like that. It's nice that he's a great upstanding guy, but I wouldn't place a lot of money on the line for that trust. And in reality, he shouldn't expect you too.

Avi Garg · Answer

Stephen Richardson I had a similar situation with the inspection though the seller wanted the EMD to be hard the moment it was deposited which I was opposed to. So we came to an agreement (in contract and signed) that if specific issues (we had a few - roof, flooring, plumbing stacks because the seller claimed recent work done) are identified during inspection, we have the option to back out and get our EMD. We did find a huge issue which we were not ready to deal with and received our EMD.

Stephen Richardson · Answer

@Caleb Heimsoth and @Mike McCarthy - I replied to you guys above, but it didn't apply the tag.

David Lichtenstadter · Answer

Stephen Richardson I would send in a inspector on my own costs before signing the dotted line.

Caleb Heimsoth · Answer

Has he told you why he wants to sell? What’s the interest rate on the loan? 3 percent down seems really good deal but the interest rate and location could be a deal breaker. What’s the asset class? 420 rent is really low generally speaking