The Due Diligence Process

The whole process has made me nervous... From meeting with home inspectors and contractors to spending hours and hours researching. It's a process!! 

This particular home has a few things that NEED to be addressed right away. There is a drainage/grading problem and all the runoff water hits the back of the home creating unwanted moisture in the crawl space. This moisture over time has created some of the floor joists and sill plates to deteriorate. It's an old home and I expected there to be problems so it was beneficial to get second opinions on what kind of renovations are going to be needed. The current owner is not willing to fix these problems so it will be up to me and my wife. 

I took this information and presented it to the seller along with a copy of the home inspection and presented the new price that I would be willing to pay. The owner said he did not know the home needed that amount of work and dropped the price significantly. We have agreed on a new price and new terms for seller financing that are much more favorable to us as buyers.

Original Contract Terms - $140,000 with a 5% down payment, 15-year seller financing note with a 5-year balloon.

New Contract Terms - $105,000 with no down payment, 15-year seller financing note with a 5-year balloon payment.

Originally, I was going to immediately raise the rent on the close of the home in order to cover the mortgage. It would be a long-term investment and I wouldn't see any cash until we went to the bank at the end of year 5 to get a traditional loan.

The new contract terms allow me to get into a home for little money out of pocket. Again, there are current tenants so the mortgage will be covered along with about $200.00 in monthly cash flow after mortgage, insurance & tax ALL without having to raise rent. I can take the money that would have gone towards a downpayment and immediately start renovating the most important items. 

SIDE NOTE... One of the ways I originally got the owner to agree on such a low downpayment was by printing off an amortization schedule and showing him the amount of interest he would make over the course of 5 years. I also, explained the tax benefits from seller financing as opposed to paying capital gains all at once on the sale of an investment property. (Technically, it's NC so he wouldn't pay them at the time of the sale, but you understand what I'm getting at)