1st Duplex: Pls. Help me analyze this deal

[Adam Frehm]

View report

Hi everyone. I'd greatly appreciate your advice and ideas. I'm wondering what a good purchase price would be on this duplex along w/feedback on my numbers/ideas/red flags/etc. The final numbers don't look great but I'm hoping there's a way to make this work for me and the seller. Some background info first: I live in an inflated market where demand is greater than supply and people purchase at and above asking price extremely quickly. This property is not yet listed on the MLS; the seller would like to avoid a realtor, and I'd like to avoid a bidding war. He wants to list on MLS this week if I don't make an offer so there's some pressure on me now. The idea is a joint investment with my girlfriend, for her to live in the top 1 BR unit for the next year or so, and we'd rent the bottom 2 bedroom unit to start, and eventually she'd move out and we'd rent both units. The property is an old farmhouse the seller has completely rehabbed it himself (gutted & added new spray insulation, new electric, all new plumbing, fresh sheet rock & paint, all new windows (cheaper Andersons double pane), brand new fiber-cement siding, 13 yr old shingles, appliances approx 5 yrs old (beautiful stainless in lower unit). His finish work is not pro-quality, but the work he did seems sound, solid, up to code, and the units are nice, bright and attractive. We've looked at many dumps in the area in a similar price range. *Seller has also done engineering on the parcel for a subdivision for a future duplex w/two 3 bedroom units. I don't think we can initially afford that too although we'd love to have the extra land and ability to develop that lot ourselves. He's asking 120k for this lot. Seller says a standard purchase and sale is not really applicable because the town won't let him finish creating the new lot until this duplex is sold first. He's paid lawyers to create a contract regarding the subdivision but he said the contract still needs more language around the subdivision (could this be a few thousand for more lawyer fees?) Seller's asking 340k. I ran my analysis at a 325k offer, assuming that's a stretch and the final analysis/numbers do not look so good. Besides attaching the report, I've listed more detailed info w/the numbers with my concerns/thoughts. Thank you all so very much for your ideas!

Total Square Footage: 1,800 sq/ft

Are there any other expenses I'm not seeing, i.e: inspection/appraisal (or does the seller pay those) etc?  The seller thinks the property will pull more income since he used this chart with his numbers here: https://www.mortgagecalculator.org/?q=KJQm-1KQ  But it looks like he didn't use any Variable Landlord-Paid Expenses.  I don't understand how he came up with '$903 monthly cost to live and build equity at this property if occupying upstairs' (see below)  Here's what he wrote to me:

Hi Adam,

Great talking with you tonight.

Total monthly utility expense: 352.85+65= 417.85

Current Rental income: 1345

Estimated conservative rental income from downstairs: 1600

Total: 2,945.00

Utility: 417.85

Net: 2,527.15

Mortgage payment with tax and insurance escrowed: 2,085.15*

Profit margin in first month: $442

Cost to occupy:

$1158 monthly cost to live and build equity at this property if occupying downstairs

$903 monthly cost to live and build equity at this property if occupying upstairs

I hope this is helpful, and I hope I didn't take all of the fun out of this process by doing these numbers. I just was wondering about it myself. Also, please check the math. I know I would.

Looking forward to hearing from you,

-Seller

[Adam Frehm]

thank you @Jaron Walling. I really appreciate your help. I initially ran my numbers as though both units are rented out at the top figure people will likely pay and the gas/elect is included in the rent. The $360/mo for gas/elect. was what the seller, who was living in the bottom unit was paying for both units combined. He said there's a perceived benefit by having the utilities included which outweighs the actual cost and allows the owner to charge a higher rent, and since the building is now very energy efficient, it increases the profit margin to include them, along with the assurance that the heaters won't stop during the winter if the tenants misses paying those bills. I did a new report (with me still paying for and including heat/elect. and the same rent income figures) and dropped my management fee down to 1% and bumped up the vacancy to 4% (as per your advice) and used 320k instead of 325k as the purchase price. The results are a little better but still not great. I would love to share the new report but can only do so with pro members. The 'view report' link still goes to original report. The new debt coverage ratio went up from .8 to 1.12 and the ROI went up from 1.64 to 2.43 I appreciate your thoughts. Thanks again for your help.