First deal, but not without your advice first! - Posted by Mark (CO)

Posted by Ed Garcia on June 24, 2001 at 12:58:44:


I think that you’re on the right track with your thinking. I’ve read what Bill W has told you and must admit that he gave you some sound advice. However I wanted to discuss it in a different sense.

When I said that I think you’re on the right track, I was referring to the fact that you’re offering $150,000 as a lease option. After all, the seller owes $148,000, so we know at this point and time, that they don’t have a lot of room for further negotiation. They’re motivated, and just want out.

My concern is the differed maintenance. The cleaning and paint is no problemo, my concern, is the CARPET in 2 units, and the ROOF. That can cost you, and could be the deal killer, depending on what’s going on with rentals in the area.

Let me take my shot at some of your questions.

  1. How would you structure the “offer”? (I avoid using the word “deal”, I’ll let you be the judge if there is a deal here or not).

I think, that your L/O of $150,000 is fine. Now remember, my answer is contingent on the information that your providing. I have to assume that you know what you’re talking about and have done your homework. You say that after the fix-ups, and the smoke clears, that you can get $28,800 Gross Rents.

You also tell us that a 6unit just sold for $272,000, which is $45,333 per unit. That times 4 units, would give your property a ballpark value of $181,332. This is not a correct formula, just a ballpark to put values in prospective, as to how much units in the area are worth per door.

Mark, there is so much information you didn’t share with us; such as what are the current monthly payments? What it will cost to do the fix-ups?
What is the unit brake down, how many 1 bed, how many 2 etc? I’m assuming for now that they’re all 2 bedroom. I smell a deal can be made here because the seller is motivated and you can turn this into a leveraged deal, meaning your going into it with no money out of your pocket and doing it on a lease/option with no real credit risk. It’s a matter of getting the numbers to work.

Again a rule of thumb on 4 units, and how it could look 12 months from now.

Gross Rents $28,800

Hit it for 30% expenses and 5% vacancy = $10,080, giving you a NOI of $18,720

When Bill was talking about financing, I’m afraid he was referring to multiple units, which from a lenders stand point, 4 units are not there. The financing on 4 units can be achieved from most residential lenders, which do from 1 to 4.

New loan at 80% which is $144,800 at 8.5% which gives you a payment of $1114 X 12 months = $13,368. You’re going to have the seller carry the difference as a second for 5 years with no interest, which is $5,200 and gives you a payment of $86.67. X 12 months gives you $1,040. $1,040. + $13,368 = $14,408 giving you a positive cash flow of $4,312. or $359.00 per month. I hit your deal pretty hard Mark, normally a lender will only plug in 25% for vacancy and expenses on a 4-plex because there is usually NO management on 4 units. Owners usually manage them their selves. Because of that, I will split the difference, and there could be another $1440 for you to play with, which could sweeten the deal even more, giving you $5752 or $479 positive cash flow per month.

Mark, Bill in his post refereed to “Cap rates” and that he had a preference to 12 to 15. I can’t argue with Bill because when I do a deal, that’s exactly where I’m coming from. But this is only 4 units, and I don’t think I would look at this deal from a standpoint of Cap, but rather from a stand point of GRM ( Gross Rent Multiplier). Not knowing what multiplier they’re using for the area, I’ll have to discuss Cap for now. But even at that, with no money down and at a 10 cap, this could be a deal. The reason I was reaching so hard is because it’s your first deal, and it would be nice to see if we could put it together with no money and a little positive cash flow.

  1. Do people generally offer to make payments to the seller equal to the seller’s payments?

In order to get to the deal we’ve just discussed you’ll need full cooperation from the seller. From this point on I would agree with Bill where he starts No. 1 and says, “If I was willing to do this, (and from the numbers, I would pass at the moment)”,

Bill is right Mark, I was just playing with numbers trying to reach for you, to see if I could make chicken salad out of chicken you know what.

Mark, I did all of this just to give you some more food for thought and possibilities that could be achieved.

Ed Garcia

First deal, but not without your advice first! - Posted by Mark (CO)

Posted by Mark (CO) on June 23, 2001 at 11:30:55:

Here is some information on a property we are currently looking at. We appreciate all input!

FSBO, was listed for 1 yr at 175,000. 4 unit, built in 1965, located 2-3 blocks away from the two main streets in residential area. Property needs some work: cleaning, carpeting in two units, new roof, painting in two units.

Only comp in last 6 months:
6 unit, built in 1982, sold for 272,000

Info from MLS sheet:
–Gross rent = 25,800 (2 x 500, 2 x 570)
–Expenses = 11,910
–NOI = 13,890

Asking 175,000
Negotiated 150,000
Owner will consider L/O-haven’t discussed the details yet
Currently 25% occupied (we asked that all but one unit be vacant due to unsatisfactory tenants)
Reason for selling is somewhat complicated-summery: Folks lived here and owned a restaurant. They bought the 4plex as well. Eventually folks relocated to another city, transferred property into son’s name. Son has owned property approx 3 yrs. Son/seller has had problems with poor choice of tenants, poor management. Property has some differed maintenance as stated above. Seller’s brother from CA was a realtor. I’ve talked to him(brother) on the phone and he’s basically the consultant to the seller. He is quite knowledgeable regarding creative real estate, currently L/O his personal home. Seller presents every idea to his brother first. Both seem flexible. Seller has two mortgages on property totaling about 148,000. It might be possible to assume the 2nd (60,000 at around 10%), but I’m not sure why.

Additional info:
There is a nice 2-car garage under one unit (thought about building individual storage units for each unit).
There is also a laundry room (I’ll need to supply a washer and dryer). The tenants do not have w/d hooks.
With fix-ups, storage, laundry, paint etc. we should be able to get 28,800/yr gross.
At this point I do not have numbers on what it would cost to fix up.

A couple finer details: seller seems motivated, he’s keeping 3 units vacant (either for us or just doesn’t want the hassles any more?realtor friend of ours says his office is getting lots of calls every day for rentals). So far seller hasn’t objected to our ideas/requests (price, possibly financing, L/O). He’s even let me know of a couple other houses he owns in which he would be interested in selling. Brother of seller called today. He will be in town in a couple of days and would like to talk. He was okay with the L/O idea. He said they (his brother the owner and he the consultant realtor?sorry this is confusing!) may be able to be even more flexible with the other properties.

I have some real estate mgt experience. I’ve been reading this site for a few months, have a couple REI courses and several books that I study. One course is Bronchick’s Alternative Real Estate Financing. I also have a equity line of credit-100K at prime + 0.5. My FICO score is 727.
I plan to protect myself in the l/o by:
?recording option
?having right to sublease
?having right to assign
?having right to extend lease (1yr)
?will not offer non-refundable money
?escrow the closing documents (title co holding executed deed and bill of sale for personal prop)
?record performance mortgage
?somehow verifying that the seller is paying his mortgage (escrow to collect my payment and make the seller’s payment or use bank account in my name that automatically sends money to sellers lenders by electronic funds transfer).
Thanks Bronchick for the above!

  1. How would you structure the “offer”? (I avoid using the word “deal”, I’ll let you be the judge if there is a deal here or not).

  2. Do people generally offer to make payments to the seller equal to the seller’s payments?

  3. Do I need state specific paperwork (contract, L/O agreement etc), or can I use Bronchick’s forms?

  4. Who pays for the escrow (set up to verify that seller is making his payments)?

  5. In a year or so when I exercise option and approach the bank, will the bank look at my situation as a purchase or as a refinance?

  6. We would like to improve the property in the mean time. How is this worked out between us and the seller?

  7. Who pays for repairs/improvements? Or, I should ask is this point negotable?

As always, thanks everyone for your help (here and elsewhere on this site)!