Flexible seller, maybe not motivated. Help! - Posted by Mark

Posted by Tim (Atlanta) on June 28, 2001 at 12:52:40:

First of all, value the property based on it’s current rents, NOT what you think it will rent for when fixed. If the rents are under market, fine, you can change that later and make more cash flow. NEVER value the property based on raising the rent rates. Below market rents can be an incentive to look at a deal, but they should not determine what you offer for the property.

Now let’s look at the 4-unit. Gross Rents of $25800, expenses of $11910. The expense ratio is 46%. That sounds a little high. Are any of the utilities included in the expenses? You mention lots of deferred maintenance. How did the owner come up with high expenses and lots of deferred maintenance? Just doesn’t seem to make sense to me. If you take those figures, you get a NOI of 13890 per year. Using the $150,000 price, the CAP rate is only 9.26%. That is a little low for my taste. You may be different. For the cash flow, you will get $13,890 per year for debt service. That is $1157.50 per month. If you were to get a 30 year, NOO mortgage at 8%, payment is $823.11. This doesn’t include the 20% that the owner carried back in paper. You would need to make that payment as well. And my figures don’t take into account the repairs you need to make. How will you pay for those? It sounds to me like you will end up with a negative cash flow for the long term on this deal. I don’t think that would change even if you L/O it from the owner for 6 months, then get him to carry the paper. The price is simply too high to justify the cash flow. My vote on the 4-unit is PASS.

On the 2-1 house, maybe you could to a sandwich L/O there. Offer the home for sale to an owner occupant on a L/O agreement. Lease it from the current owner at say $400 on a purchase price of 60K, then sell it on a L/O for $600 on a purchase price of 70K. You get $200 in monthly cash flow, and a 10K payday at the end.

Flexible seller, maybe not motivated. Help! - Posted by Mark

Posted by Mark on June 28, 2001 at 24:02:32:

I’m getting consumed by this newbie-itis. There’s so many bits and pieces of information spinning around in my mind I’m having a hard time seeing straight. But, I know I’ve come to the right place for help.

Thanks everyone for responding to my past questions. Here are the details.

Seller has a 4-unit for sale and after talking further, wants to sell a sfh as well. I’ll start with the 4-unit first.
150,000 firm (from 175k)
148,000 in mortgages
2 x 2 bed, 2 x 1 bed
current gross rents 25,800/yr
expenses 11,910 (includes vacancy)
The inside of the place is a mess
the more expensive fix-ups will come to approx 15,000 (part of roof, carpet, painting, heavily molded refrigerators).
Once smoke clears rents should increase to around 28,000. These units were poorly managed-little or no deposits, no tenant checks, little things left to pile up. Both next door neighbors said the place use to be quite nice. At one point it was full of little old ladies and later some teachers. One of the neighbors is an appraiser of 20+ yrs. He said a ball park idea of value is the assessors actual value x 1.1 (their actual values, he said, are about 10% below his appraisals). Doing the math this comes to 168,300.
One comp is a 6-plex sold for 272k (w/in past 6mo)
The appraiser said properties in this town have been appreciating at 6%/yr for 10 yrs, land even more.
great location

The house is a 2 bed 1 bath
again, great location
60,000 firm
less than 5k equity
using the mls-sold book, I comp it at 70-73k
rent for 525
assessor actual value = 47,910
appraiser’s ballpark value = 52,701
of course I’ve been told by everyone (realtors, owners etc) that rents could be higher. I tend to agree with most based on personally renting and just looking at a bunch of properties.

Owner is out of town investor. Ok with l/o, or carrying 10%-20% now. In a few months once he sells his commercial property may be willing to carry 90%. Didn’t mention terms. Did say he actually likes to carry notes.

Is there a way to structure this to be of maximum benefit to me while satisfying the seller’s asking price? I have so many fragments of info/ideas floating around inside my head, I’m not sure which way to go from here. ANY DIRECTION OR ASSISTANCE YOU COULD PROVIDE IS GREATLY APPRECIATED!

Re: Flexible seller, maybe not motivated. Help! - Posted by Carey_PA

Posted by Carey_PA on June 28, 2001 at 13:20:06:

I agree with Tim to pass on the 4-unit.

As far as the sfh, go for the l/o, even offer a little less than $60k…because they ALWAYS say they firm, but you never know until you make an offer.

I got a place for sale and my price is FIRM until someone offers me an ALL CASH deal and can settle quickly :slight_smile: