All Forum Posts by: John Humphries

In addition to @John Leavelle's great advice, I'd want to know if those rents are reasonable for that particular property.  Definitely find out what comparable properties are renting for before pulling the trigger.

The only other thing that I would want to do would be to check the ages/condition of all appliances, hot water heater, hvac, etc. just to know how that will affect your cap ex and maintenance numbers in the first few years.

Otherwise, sounds like a decent deal, not a home run, but I'd take a single right now myself!

Hi everyone

I wanted to update this post and hopefully keep it going for myself and any others who might find themselves with a possible seller financed deal.

So I took @Ron Flatt's advice, and actually came up with an offer that I could present. The seller and I both have real estate agents, so I contacted my agent and said that I could offer $140,000 with $20,000 down and then payments of $420 per month for 60 months (5 years). At the end of 60 months, we would pay off the balance of the $140,000 or if we both agreed, we could continue for 5 more years at $420 per month and then have a balloon payment. 

I just sent this to my agent, basically with a note that if they were willing to look at the offer and wanted to negotiate, then we would get a lawyer to actually draw up the contract.  Since is this is not a very good deal for the seller, I did not want to waste time and money until I knew that they were serious or willing to negotiate. 

For anyone who has done this before, would you have done this differently?

There has been a quite a bit of confusion and back and forth since the offer as this is everyone's first time dealing with a seller financed offer. In the future, had I known that we were going to go this route, I would definitely use an agent who has done this before!

We did hear back from the seller and they wanted a pre-approval letter from a lender. I assume that this is to make them feel more comfortable about holding a note and our ability to make the payments. 

How do most people work through this issue of proving finances or making the seller more comfortable?

I've told my agent that I would be happy to speak with the seller directly in order to discuss the offer and perhaps make them feel more comfortable with dealing with me. As expected, my agent said that we should only deal through each other's agents and not speak directly. Unfortunately, if anyone is familiar with that kid's game called broken telephone, that is what is happening now. Mass confusion!

Has anyone done seller financing deals with an agent before? Any advice?

As always, thanks for reading! Any comments would be greatly appreciated.

@Ron Flatt, I like it.  That could definitely work.  Thanks for the clarification.

@Ron Flatt, I'm curious about your recommendation, but am not sure I understand fully. Can you expand on that a bit? With 0 interest for 5 years, what monthly payment is the seller getting?

Hi @Jeshua Patrick, and thanks for weighing in. I wish I could get my spreadsheet to show up here in the thread so that everyone could see all of the numbers. I like your idea and will definitely keep it in mind for future offers, but for this one specifically, $450 per month for the P&I is where I top out in order to make my numbers. Unfortunately, for this part of NC, the insurance premiums are high ($171) and there is also a $160 HOA. With those expenses eating into profits, it's difficult to make good investment numbers in this particular neighborhood.

I'm not married to this deal enough to fudge my numbers.  Basically, the only reason I am looking at it is because it is directly across the street from Mom's house. As an out of country landlord, that takes out most of the worry about not being able to keep an eye on things!

I'm looking at this as a good opportunity to learn about seller financing through structuring an actual offer.  It is definitely a bit low for the neighborhood, but you never know what people will take until you start the conversation.

I see my attempt to attach my spreadsheet link seems to have failed so text it is...

Scenario 1 - 

Offer Price $125,000 with $20,000 down; 5 year term @ 3% with 30 year amort = $441.43 per month to the seller. At the end of the 5 year term, the seller has $20,000 down +$93,320.01 balloon at the end of 5 years + $26,497.97 in interest payments over 5 years = $139,817.98

After all expenses I will make $130 per month with 7.85% cash on cash return.  It's a bit low, but I can live with these numbers, especially since I can likely bump my monthly up to around $200 - $250 depending on how I decide to manage.

Scenario 2 -

Offer price $125,000 with $20,000 down; 10 year term @ 3% with 30 yr amort = $441.43 per month to seller. At the end of 10 year term the seller has $20,000 down + $52,995.93 in monthly payments + $79,764.91 balloon payment = $152,760.84

My question now is in the somewhat unlikely event that this offer is accepted, how will the "refi" after the 5 year or 10 year term look? Using the 5 year scenario above, I would need to make a $93,320.01 balloon payment. If I wanted to go for a conventional loan at that point, could I expect a lender to lend up to 70% of value? I expect that worst case scenario the appraisal would come in at $140,000 (70% of 140,000 = $98,000).

Alternatively, it's hard to say what the market will look like in 5 years, but if things remain similar in this area, I could easily sell for $140,000 and make a small capital gain after pocketing 5 years of rent payments.

What else have I missed here? Any other advice or tips? Or anyone else care to share how they have structured seller financed deals?

@Brian Schmelzlen and @Steve Vaughan, thanks for the insights.  I've mapped out some other scenarios using the idea of a 5 or 10 year term with a 30 year amort. These would definitely seem more reasonable for the seller than a 30 yr term that I originally put together. The offer prices are still crazy low ball, but factoring in the interest payments, the actual price that the seller will get at the end of either a 5 or 10 year term look a bit better.

Hey @Marc Izquierdo, thanks for the response. I definitely agree that the 30 year term is very unlikely. I think shorter terms with balloon payments would likely be more successful although I'm doubtful that there is a way to make those numbers work. I was hoping that someone might see something that I don't.

Perhaps I'm wrong here, but in my opinion, I would think that the seller would take a lower offer than list price because they are holding the note. Because they are holding the note, they are getting the extra interest payments and thus potentially making more on the back end (although not in my scenario above).

Unfortunately, I think what it comes down to is that this house is not a great investment property based on its price, expenses, and what it can be rented for. I was just trying to put my creative hat on to try to make something happen.

The owner is an out of state landlord that seems to have given up on the property. It's been sitting vacant for two months now and I don't imagine they are going to get any offers at their asking price based on the other inventory on the same street. However, you are correct, it just depends on their motivation. 

Thanks again for throwing your opinion out there!

Hi BP community.  I'm looking for some advice on an offer for a buy and hold rental property that I am looking at. It is a single family house in a coastal community in NC. 

The backstory: I'm from NC but live on Vancouver Island now. My market here is not conducive to buy and hold and rentals, although I did manage to scoop up a decent deal a few years ago. I'm looking for monthly cashflow to replace my income so I've expanded my search radius in order to keep my investment goals alive. My mother still lives in NC so I decided to look at some real estate there on a recent visit. The house in question is actually the house across the street from her so obviously, it takes a bit of the worry out of buying out of country for me. 

The house is listed for $163,000, but it is a DR Horton cookie cutter style neighborhood with 5 other similarly priced houses for sale in the immediate neighborhood.  The subdivision is still being expanded with new houses being built from around $190,000.  The house in question needs no work, other than having a HVAC which will need to be replaced within a few years. It would likely sell in the $145,000 - 150 range easily, but has been sitting on the market for over 2 months at its current price.

Buying this house at list price or even below list with 20% down and a conventional mortgage (for an investment property) does not make sense based on the numbers that I am looking for (~10% cash on cash with ~$150 in cashflow left over after ALL expenses, ie. mortgage, insurance, taxes, vacancy, management, HOA, etc.). However, I found out that the owner owned it outright and asked about seller financing. They said to make an offer...

Here's where I could use some advice - In order to make my numbers work, I could offer $20,000 down with a 4% loan on $85,000 for a 30 year term. The offer is only for $105,000, but the seller would receive $405 per month for 30 years for a total of $145,500.  For me, I would hit my cash on cash target (10.04%) and would clear $167 per month after all expenses. 

This is a very unlikely offer to be accepted by a seller in my opinion, but obviously it works for me. I don't hold out too much hope that we will be able to come to an agreement that works for both of us, but would really like to make an offer, if for no other reason than learning this process. Can anyone offer any advice on another way to structure this offer or something that I might be missing somewhere? Any advice or comments welcome...

House list price - $163,000

Insurance - $171 per month

Taxes - 74.25 per month

Strata - 160 per month

Rental rate - 1000 - 1200 per month

Welcome @Jeffery Drake. You are definitely right about the 1% rule not working in the Comox Valley market. This is not really a buy and hold cashflow market at the moment.  I did manage to find a decent deal here in Courtenay last year, but it definitely would not be considered a great deal in most markets. I picked up a half duplex for $190,000 that rents out for $1300 per month. With 20% down, the mortgage, property tax, and insurance comes out to just under $1000 per month, so I "cash flow" ~ $300 per month. This does not take into consideration vacancy (my tenants plan to live out their lives there), management (I manage myself), or cap ex. In the year and a half that I have owned this property, I've had to do several minor repairs, and replace the fridge and a dishwasher. Basically, I'd say that the majority of my cash flow mentioned above will likely be eaten by cap ex and repairs leaving me at just better than a yearly breakeven. This is with amazing tenants that are putting lots of their own money and sweat into the property and a property that was in pretty much move-in ready shape when I bought it. 

If you are looking for monthly cash flow, I'd say that 0.5% will not cut it. It just depends on what your goals and expectations are as to whether or not it is a good time or place to invest in. While I don't rely on appreciation at all, you are definitely right that we have seen amazing appreciation in the last year here. It does seem as though it will likely continue for some time, but even with all of the tailwinds here, I'd be hesitant to bank on it.  The 2 major head winds that I see at the moment in this market is 1) rising interest rates and 2) the loan qualification rules.

I think rising interest rates are going to be a much bigger problem here in Canada than in the US since our mortgages here are predominately 5 year terms.  I think there are quite a few people out there that are having a hard enough time paying their current mortgages.  As these 5 year terms expire and newer higher rates kick in, there should be an increase in foreclosures.

Secondly, the loan qualification rules are going to make it more difficult for buyers to get into the market.  Sure, you can still get a 3% loan here, but in order to get that loan from one of the major banks, you have to qualify at the Bank of Canada posted rate which jumped in the last few months. As that rate pushes up towards 5% it becomes much more difficult to get loans. 3 months ago we qualified for a $350,000 purchase.  I got a call from our banker a few weeks ago saying that we no longer qualify for a loan due to the increase in the posted rate. 

Having said all of that, I still think the Comox Valley is a great place to own real estate!

As for the BRRR strategy, I'm still trying to wrap my head around if that is really a viable strategy here. Again, depends on what you are looking for and what your goals are. Given the current market, I'm not sure you can purchase a place cheaply enough here to be able to rent it out with enough cushion to cash flow in the first place, much less after your have refinanced your money back out. I love this strategy in theory, and I would really love for someone to prove me wrong here. I'd be curious to hear how you would do it and what your strategy would be.

I've not looked at Gold River.  I've mainly been focused here and am still holding out hope for Port Alberni. I've heard rumors of a new copper mine on the north island near Holberg and that some people are hoping for a rebound in Port Hardy. Not sure about that, but perhaps worth looking into.

Good luck with your investing here and keep us posted on what you are able to find.  It's great seeing some others in the valley that are trying to get off the ground with real estate!