4 duplexes - what do you think? - Posted by John Chapman

Real Estate Investing Duplexes
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Posted by John on April 09, 2003 at 08:04:42:

Sorry for being unclear. It’s definitely an option. My only incentive to carry out the deal would be not losing my 40K.

I’ll speak to him today and see if, in exchange for a quick close, he’ll let me have the property for what is owed on the two underlyings…

If that’s the case, it should be possible (!) to flip them to someone else in two years for a 40K fee. If nothing else, the cashflow alone will almost give me back my option money between now & then.

JEC

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4 duplexes - what do you think? - Posted by John Chapman

Posted by John Chapman on April 09, 2003 at 07:32:00:

Here’s what I found yesterday:

4 duplexes. 3 next door to each other (sold as a group), 1 across town

Gross rent is 4K/month for the group.

Current cash flow after all expenses is just over 1K/month.

Seller manages many rental properties, and also owns several. He is moving into a few bigger properties, and needs another 40K to make his down payment. He’s already put down earnest money, and doesn’t want to lose it. There’s definitely motivation to make something work.

His underlying loans are at 11% and 10% respectively, with a significant prepayment penalty before August 2005.

40k isn’t hard for me to bring to the table.

He offered to do the following:

40K buys me an option to purchase after August 2005 for 360K. So total price would be around 400K for the bunch.

He’d set up an escrow account which would pass through mortgage payments from me to his bank. Other than the 40K, he doesn’t make anything between now and August 2005.

I assume all rights & responsibility for the property when I pay the 40K, and keep whatever cash is left after expenses, etc.

After the prepayment deadline is passed, I can refi the 360K at a lower rate and cash him out. He says he’s flexible about the date, too, and would be open to carrying the entire balance for as long as it takes to get me squared away.

I’m doing a site survey this afternoon.

How does this look to all of you? I feel pretty good about it.

Any caveats for this emptor?

JEC

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Re: 4 duplexes - what do you think? - Posted by tyler

Posted by tyler on April 09, 2003 at 13:13:50:

John, only you knows the market there, but it sounds as though you are basically buying at a retail price…while doing him a big favor 40K upfront and leasing the property for a couple of years so he can avert HIS prepayment cluase…

If he were to list MLS this deal would find few buyers…since your working with him, you need to negotiate a better price. Just my opinion.

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my views - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on April 09, 2003 at 12:32:34:

John-----------

The gross rent vs price is unexciting. Not great, not horrible. What are similar properties selling for? Total price. Ratio of price to rents? That sort of thing.

I think the question to ask yourself is: what else is available? In other words, is this really the best you can do? Have you been studying your market place at least 3 months? If NOT, I’d suggest not buying this deal. Don’t buy until you know the market better. “Better to pass up two good deals than get stuck in one bad deal”–R. Starr, many years ago.

I don’t like the high interest rates. If I were you, I’d calculate HOW MUCH the prepayment penalty is and, after finding out what kind of loan you could get today, how long it would take to make up the penalty in added cash flow with a good loan. Sure, nobody likes to pay pre-payment penalties, but that may not be the worst alternative.

You don’t indicate the total owed on his loans. If it is less than $360K, and it makes sense to take the pre-payment hit, offer him a lower price to partially compensate you for the prepayment hit.

Good Investing*****Ron Starr****************

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Re: 4 duplexes - what do you think? - Posted by Jim Rayner

Posted by Jim Rayner on April 09, 2003 at 12:08:48:

John,

I can’t quite put my finger on this one but something’s strange about this deal.

This one does not pass sanity test 1. Price is higher than 240K for the stated amount of gross income.

An experienced property manager and investor should be getting better financing than 10 - 11% with prepays.

An experienced property manager/investor should know how to turn his equity to his advantage in making his business grow. The proposed scheme is not one that I would consider as coming from a pro. Could he trying to create equity where none exists? You have given us no indication of comps to work with.

I would suggest that you tread carefully one this one.

This one would not have made it this far with my criteria.

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Re: 4 duplexes - what do you think? - Posted by Dee-Texas

Posted by Dee-Texas on April 09, 2003 at 09:35:14:

Go to the part of Creonline that Ray Alcorn hosts. He or someone that visits there regularly can help you with this. I think it’s the commercial forum.
Best $uccess,
Dee-Texas

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Re: 4 duplexes - what do you think? - Posted by Terry Y.

Posted by Terry Y. on April 09, 2003 at 07:57:03:

I think it’s a good idea to escape the pre-payment penalty and avoid any due on sale clause that may be exercised. I’ve heard that’s very rare anyway. Is this a lease option or lease purchase? From what I understand with a lease purchase your obligated to purchase it, and a lease option, you have an option to purchase it. I know your going only forward with the deal, but in my opinion, it’s always good to have a bailout in the future incase anything arises. That way if you had a change of plans, you would get your option money back.
Good Luck!

Terry