All Forum Posts by: Jesse T.

How much above market?  

You have to count that premium as a "negative" down payment in your calculations.  

As currently constructed it looks like you are giving him a pretty sweet exit strategy without a whole lot of upside.

I would suggest him putting the least valuable unit on the market - condition/lease as seeing what he nets from that.  Then I would base the offer on the net to him from that with a significant volume discount.

I would also account for vacancies/commissions vs. current rents rather than assuming the below market ones can be raised.

@Jenny Chung 

I would run away from anyone who isn't willing to be paid from escrow.

You need to talk to a Real Estate Lawyer and probably a CPA.  

Was the property owned by just your father?  Are you the only heir?

If you inherited the property from your father, you would be eligible for a stepped up basis based on the value at the time of his death.  This means you would only pay tax on the capital gains for the appreciation since then.  Assuming 900K selling price, 700K value in 2008, a 6% commission and 15% capital gains - it would only be about a 20K tax bill.  You also could add any improvements since 2008 to the basis.

A 1031 would benefit from the stepped up basis, but seems like an unnecessary complication for relatively small tax deferral(you have to pay it at some point).

Do you own your house?  Could you get a Home Equity loan to cover the purchase price and the repairs?  It would be risky, but the financing would be a lot cheaper.

If you don't own the house would you be willing to live in the property?  I think there are a number of loan products that will allow you to buy and rehab, but they generally have owner occupancy requirements.

Assuming your interest costs are low, generally a more liquid position is better.  Assuming you had a theoretical 500K portfolio it would generally be better to have 25K in equity and 100K in reserves vs. 100K in equity and 25K in reserves.

The liquidity isn't free.  Even at 4% you would be paying 3000/year for the extra 75K in leverage.

Besides the interest costs there are a couple of other risks of a large pile of cash and low equity.  The first is having the discipline to keep the cash in the business.  The second is making a bad deal because you have "free" money.  A deal with a low return can look deceptively good if you remove the interest costs.

If you want to help her out, why not help her with a down-payment vs. her being a permanent tenant?

If it wasn't 9 hours away, it might be attractive as a long-term rental when she moves out.  However assuming she stayed for 5+ years and the amount of equity was decent, there could be a number of investment options at that point.

The simplest option would be to gift the down-payment assistance.  A more complex option would be to buy an option to buy the property down the road.  I would definitely consult a real estate lawyer before trying the second approach.

One possibility maybe they could only afford to sell at $280K+  If they bought relatively recently or at a high point, this may be the case.

If they can sell cheaper, it may be worth making an offer for under 250K. When it comes time to make an offer, assuming they are free of the listing agreement point out that a deal through the MLS will net them 6% less due to agent commissions. You may want to included a contingency for needed significant repairs in your initial offer. This will allow you to make an initial offer that is relatively high, rather than just something that will be disregarded as a low-ball offer.

I wouldn't wait on the wholesaler if there is a way to contact the seller directly.

That said you probably don't want to completely cut out the wholesaler either.  If you ultimately close with this seller, you should honor whatever agreement is in place. 

I would start off contacting the seller and mentioning the source of the lead.