1st Offer? Any Criticism Welcome

[Mitchell Brown]

So bare with me here ladies and gentlemen, I'm new and this is my first post. I haven't spent much time browsing the forums as I've been trying to gather knowledge from other sources reading books, podcasting, webinarring? etc for a little while now. I'm not financially 100% there (as in don't have the cash for a downpayment yet) to go about traditionally buying my first property But, I've found a deal that peaked my interest and the possibility is there, but the numbers don't work. I recall the phrase "every deal has a number that makes it a good deal". So on to the details.

The asking price is 120,000. Its a two unit property, located 1 block from a local state college in East Texas. The first unit is a 2BR 1 BA, and the second unit is 1BR 1BA. Currently the 2BR 1BA rents for 800/mo and the 1BR rents for $600/mo. The seller is offering owner financing at 8-10% interest rate, no prepayment for 5 yrs and 5000 down. The loan amortization will be based on a 30 yr term. Both units have been recently renovated, the CAD shows it is owned by an LLC outside of the area since 2019 so I assume that it is an investor owned property trying to cash in on inflated property values, or get out of a bad investment. It has been on the market for approximately

As I stated, I currently don't have the cash to do a traditional down payment of 20%. But, I do have a personal LOC that I can pull 10,000 from.

The only way I could make this deal work, would be a purchase price of 92,500. 10,000 down @ 5.5%. I've accounted $70/mo for insurance(wild guess, waiting for response from insurance agent to get more accurate idea) 8% towards property management, 5% for vacancy, 7.5% for repairs and maintenance, $80/mo for lawn care & 25.50 for trash service. Each unit has its own separate water meter and electric meter. Under these conditions based off of the BP rental calculator it would cash flow approximately $220/mo. This would cover the note on the LOC payment but only leave about $10-20 left over after. I can and likely will work overtime at my job to make extra payments on the LOC to be able to free up that cashflow sooner. COC ROI is 22% based on what I have plugged in. I do not expect my offer to be accepted, but I wanted to gather opinions on my calculations, and also get your thoughts on whether or not you would submit the offer I've made. I know it can't hurt to try, but if there's a chance the offer is too much of a lowball and may reflect badly on me to the agent I've been dealing with I would rather just decline to submit an offer as I do believe the agent could be an asset in the future and would prefer not to shoot myself in the foot before I even get started. All of this is new, and I'm just trying to get a feel for how to approach these negotiations.

On to the questions

Does anyone here see any blatant issues with what I've calculated? Something I've missed? 

Is it unlikely to be able to negotiate down an owner finance interest rate from a (presumably experienced) investor?

Do you believe that my strategy is a bad one for trying to get started? 

Do you believe the "no prepayment for 5 yrs" would be something worth negotiating? I only ask, because I do believe that the potential for a market crash is there when/if the cost of building materials goes down , and being locked into a owner finance for 5 yrs seems like it could backfire being that the clause is present that "after 5 yrs a balloon payment is due, but the seller may agree to extend the owner finance if the buyer cannot secure institutional financing." However, in 5 yrs if the property value has tanked, and I can't secure financing then I'm caught between a rock and a hard spot and could have to forfeit the property if the seller opted to raise interest rate, etc. 

Essentially, this was an idea that came to mind to get me started sooner rather than waiting until I've saved enough for a 20% down or enough to attempt a BRRRR.

I'm open to all criticism, suggestions, etc.

Thanks!

Mitchell

[Joe Splitrock]

I would look at sales of comparable properties in the area over the last 12 months. If it is a 2% location as @Jesus Garcia mentioned, that means value based on current rents is $70,000. I would also caution that the owner financing at 8-10% is double what standard commercial interest rates are today. Of course that would require down payment. It is not uncommon to "overpay" for a property when doing 100% owner financing. That is one way the seller gets paid for the risk. Another way to look at this is if you don't put any money into the deal and it still cash flows, you are getting unlimited cash on cash return. The only risk then becomes vacancy or repairs/CAPEX. That comes down to condition of the property and location. A state college town seems like it would keep rented, but I have no knowledge of the area.