All Forum Posts by: Joe Conklin

Location: "B-" area / development in a "A" town with "A" schools. The development that I am looking in is the least affluent area in the town. However the rental I'm looking at is in the good section of the bad area. It is known to be a lesser section of the town and has occasional drug bust etc and I'm not so sure which way the development is trending.

Property:

3 bedroom , 1.5 bathroom townhouse

List Price: 115k

ARV: 120k

Rehab Costs: 20k (bathroom remodel, carpet, painting)

Rent: $1350 (this is a fairly conservative number)

I currently have an offer in at 90k that was countered to 110k and I am trying to find my best offer on this deal.

Cash flow:

Numbers considering 100k purchase price and seller paying all closing costs. Also, 30 year fixed rate at 5.25%. I have private money lending at 6% that will fund the rehab and I want to ensure that I am calculating this correctly.

Rent - Mortgage - Insurance - Tax - Vacancy(10%) - Maintenance(10%)

1350 - 440 - 50 - 210 - 135 - 135 = + 380

Cash on Cash return (initial):

380x12 = 4,560 / 40,000 (down-payment + rehab) = 11.4%

Cash on Cash return (after rehab and appraised at 120k)

New Cash Flow using refinancing with 80/20 conventional:

1350 - 530 - 50 - 210 - 135 - 135 = +290

290x12 = 3480 (per year)

Total Cash invested:

Down Payment + Interest to Private Lender + Cost to refinance (4% of remaining principal) 24,000+1,200+ 3850 = 29,050

New Cash on Cash: 3480 / 29050 = 11.9%

Major concerns are not knowing which way the area is trending and not getting any sort of discount on the rehab.

Any input would be greatly appreciated.

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I believe that I insulted the seller. My agent relayed a message to me saying the other realtor mentioned offer will likely flat out rejected and will insult them.

Listing: 125k

My Offer: 90k

My max: 115k

So tomorrow when my offer gets rejected, what do you feel is the best approach? I'm either thinking a) submit my max offer or b) raise my offer price to 105k.

I'm leaning towards raising my offer to 105k as them rejecting my offer is a good negotiation tactic on their part.

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Okay, I want to ensure that I am analyzing this correctly because currently I am not seeing it as a deal.

Cash Flow = Rent - Mortgage - Insurance - Taxes - Vacancy&Maintenance (15%)

Cash Flow (initial) = 1400 - 675 - 50 - 335 - 210 = + 130

Cash on Cash (initial) = 130x12 = 1560 / 17000 (14000 + 3000 attorney & additional costs) = 9.17%

Hypothetically, after a year I refinance and property is accessed at 165K. I refi and have to keep 25% equity in the home.

Now I am in for 41,250 and my cash flow stays the same.

Cash Flow (after refi) = 1400- 665 - 50 - 335 - 210 = +140

Cash on Cash (after refi) = 1680/41250 = 4.7%

Not a deal for a buy and hold.

What I should do is get in cheap and flip it myself if its truly accessed at 165k.

How is this even close to a deal? Am I missing seeing value here?

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Originally posted by @Adam Johnson:

In my opinion, a traditional deal set up like this is a formula to fail. Here are a few points to consider:

- it is very challenging to refinance and close on the refi within 12 months unless you have significant experience and/or additional capital to do so. The balloon is the failure point if the seller decides to take the hard line and foreclose if you miss the date. If you have, or are very confident that you WILL have enough to pay in to refi with roughly 25% of the purchase price to close, then maybe this is an option. Then again, if you have the capital to close with 25% down, why not just go to the bank now? I suspect that you don't have the 25% down, hence the owner financing option being discussed.

- if you have a great relationship built with a local bank, run the scenario by them to see what circumstances they may refi under. That balloon clock is very fast and you will find yourself racing to beat the clock. Know ahead of time how you will deal with the balloon.

- a quick glance at the numbers - you won't create enough positive cash flow (might not create any at all) from the property to help close any gaps, so the money to do the above options will have to come from somewhere else.

A few alternatives to consider:

- negotiate a longer balloon period, ideally 3 or more years out as that buys you some time and breathing space. Never wait until the last minute to start figuring out the refi!

- lease/purchase agreement - you become a "master tenant", get the rental income and buy some time to put together money to close

- seriously consider passing on this deal. You mention it is another investor offering this deal to you. With the short balloon period, I'm assuming the investor has some experience. It appears to me that you are being drawn into what could become an ugly situation by focusing on the wrong numbers (low interest rate, low down payment) which is being used to draw your attention away from the short balloon as well as what is going to be marginal cash flow. This investor might be gambling that you miss the balloon date, he forecloses, he keeps the down payment, and he repeats. You can make every payment on time for the whole year and in month 13 you will be in default.

I don't mean to be discouraging. Sometimes your favorite word needs to be "next". At the very least, I would get a copy of the proposed financing agreement and run it by an attorney and see what his/her thoughts are. I do a LOT of deals with owner-financing in the beginning and a refi down the road, but something about this one smells funny. Keep your eyes open and look at ALL of the numbers. Don't rush in just for the sake of getting any deal done.

Good luck and happy investing!

Thank you. I agree, this guy is way ahead of me skill wise. In my opinion there is nothing different from this deal and going to the bank for a conventional mortgage (like you mentioned). I don't feel comfortable being under the gun like this, his goal is obviously not to have a steady stream of passive income.

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Originally posted by @Steve Vaughan:

@Joe Conklin- a 'balloon' refers to the loan balance needing to be paid in full. Essentially a 1-yr balloon for you will mean a payment of $140,000 - $14,000 = $126,000 due in 12 months. It will be a little lower with principle buydown over 12 pmts but you get the picture. In case your lender requires 12 months of seasoning before the refi, be sure and get a 60-day extension or ask for 14 months up front. Pretty short balloon in my opinion.

Closing costs in my area run about 2% of purchase price. Some are buyer-paid, some seller. Depends on area customs.

Your instrument of seller-financing is hugely important. DO NOT DO A LAND CONTRACT. Structure it where you get title to the property on day 1. Here it is a Note and Deed of Trust (mortgage). If not getting title anyway, I'd put down less up front (like 2-3% total) for an exclusive option to buy. That's about all the protection you have anyway with a Land Contract.

Thank you for the advice and explanation. I will take that into consideration

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Originally posted by @Andy Mirza:

@Joe Conklin

I would interpret #1 to mean that the entire remaining principal will be due in one year. A balloon payment refers to one last lump sum payment that pays off the entire loan. With this kind of loan, the investor wants to get all of his money out after a year. That means you'll have to refinance it with another lender or pay it off in full with your own cash or from another investor that you might partner up with.

You mentioned that the purchase price is $140k. What's the Fair Market Value? If your plan is to refinance the property, you'll probably need 20-25% in equity if you get a typical loan from a bank. Based on that and your down payment, the market value should be around $157,500, assuming that you don't pay down any principal during your one year.

He mentioned that the property is assessed at 165K, it is currently being rehabbed - so once I refinance, lets say I'll be in for 25% = 41,250. This seems like a lot to be in for, and it does not seem like a good deal. Thoughts?

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I just looked at a house that I plan to pursue to buy and hold. The only problem is in one bedroom the parquet floors are uneven. It is higher in the center of the room than it is on the sides. It is not near a source of water. I plan to put carpet over these floors.

How serious of a problem is this? Has anyone encountered this situation before?

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So I am working with an investor who is looking to owner finance a rental. This is my first time using this approach and have some questions. I want to ensure that I am understanding the deal correctly.

Purchase Price: $140,000

Down Payment: 10% ($14,000)

Interest Rate: 5%

Balloon Payment: "1 year Balloon payment of balance".

Rent for area: $1,400 / month

Taxes: $4,000 ($335/month)

Questions:

1. What is "1 year Balloon payment of balance"? Would it be 12 months of P&I = $671.56 x 12 = $8,058.712

2. When determining "cash on cash return" how much should I factor into deal for closing costs (attorney fees) etc.

3. Any other factors that I am overlooking when dealing with seller financing? I want to make sure that I am looking at the numbers correctly before determining cash flow and cash on cash return.

4. Advice would be appreciated. This deal doesn't look good right now but may be a starting point in the negotiation.

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So I am looking to purchase this property as a buy and hold. I see these types of cabinets often, whats the best and cost effective way to update them?

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My first purchase was a condo and it is working out well. I personally factored in 5% for both vacancy and maintenance.

I would evaluate this as (looking at worst care scenario for rent):

Rent - P&I - Insurance - Tax - HOA - Maint(5%) - Vac(5%)

1400 - 305 - 45 - 110 - 225 - 70 - 70 = +575

Assuming 3k in closing costs your cash on cash is 36.3%

So given the numbers, its a definite buy

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All Forum Posts by: Joe Conklin

Joe Conklin has started 33 posts and replied 62 times.

Post: Deal - Need Advice

Post: I insulted seller

Post: Seller Financing - Real World Deal

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