Help with analyzing a potential deal - Posted by Joe

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Help with analyzing a potential deal - Posted by Joe

Posted by Joe on July 03, 2004 at 10:27:36:

Hey everyone,
I have a property that seems to have potential and would like some feedback on analyzing this deal.

Property: 4BR/1BA, 2010 sq ft. 2 story, wood construction, w/unfinished basement, fenced yard, carpet and linoleum 1 year old, central heat - GFA, window AC, fresh paint outside and in. Repairs: Front porch has one side that the wall fell over (either rebuild or knock out other side to match)

Asking Price: $46,000 (verified mortgage balance)
Retail/ARV: $53,000
Repairs: $2,000 (cosmetic & some porch repairs)
H.O. Monthly Payments P&I: $368/month
Rent: $500-550 month (L/O would be $550-650)
Reason for selling: moving to another town w/offer on new house.

These people have put in an offer on another house and are very motivated. They simply want to walk away and need a contract in order to qualify for their new note. They initially mentioned that they would like $1,000 for move money but I’ve squelched that idea. I can take possession of this house which ever way I want as long as I make their $368 payments. They will deed it over to me with a wrap or L/O with rights to sublease (for as long as I want). Which way is better?

I believe I could also make my first payment due 60-90 days after they vacate. Depending on how fast I could get someone into the home I could potentially generate $350-1000 of new rent money before my first payment is due.

Here is my profit/exit strategy:

Sales price: $52,000 ($5,000 back end)
60 day before 1st pmt: $500-1000
L/O deposit: $1500 to 2500
Rent: $550 ($650-700 with L/O rent credit)

I’d like to get feedback from the members as to how strong, or weak, this deal appears to you. What can I do to strengthen the deal - they are desparate, but not rich, and I want to be fair so that we don’t create bigger problems down the road.

Thanks in advance!

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Re: Help with analyzing a potential deal - Posted by B.L.Renfrow

Posted by B.L.Renfrow on July 03, 2004 at 20:43:10:

I agree with Jason. This deal is marginal, with the numbers you give. If I were going to do it, I would only take title subject to the existing financing – not on a wrap, and certainly not on a lease option. You want to own it. If they are willing to give possession however you want, take the deed.

Given the numbers, I would only take this on if the seller agreed to make the next three payments, or even better, gave me the cash equivalent at closing.

I would then either sell on a land contract or lease option it, with a slightly higher price than the current FMV (maybe $55k or so).

However, I would ONLY do this deal IF I had enough cash reserves, or quick access to cash, to make several months of payments if for some reason you can’t find a buyer, or if your buyers stop paying and you have to foreclose/evict. If you don’t have the cash, you shouldn’t stay in the middle of the deal, as it’s poor business practice and not fair to your sellers, who could be harmed if you can’t make the payments for some reason.

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Re: Help with analyzing a potential deal - Posted by jasonrei

Posted by jasonrei on July 03, 2004 at 15:50:06:

Factor T & I payments. Might wanna ask higher than ARV even though you won’t be doing repairs.

I’d take the deed.

Doesn’t look like a very good deal, but not bad either. I require $10k net on my rehabs. Even though a L/O is easier, I’d still be looking for $10k on the back end.

I haven’t bought or sold on L/O in over 10 yrs, and haven’t dealt w/ tenants in that long. Hope someone else gives good ideas.

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Re: Help with analyzing a potential deal - Posted by Joe

Posted by Joe on July 03, 2004 at 21:21:05:

Thanks for taking the time to respond. I could carry the potential vacancy for 6 months but I do not want to force a deal if the numbers are not a clear go. It has to work both ways for it to be a good deal. I’ll counter with what you are suggesting and see if they go for it. I’m would also increase my selling price on the L/O and get more rent money with some credit back to the buyer. It would improve the monthly cash flow with and leave the same amount of back-end profit.

I’ve had 6 similar calls this week – only they were worse in terms of the numbers working out profitably. It is hard to believe there are not solutions to these people’s upsidedown problems without jeordizing the investor’s side of the deal. I know they put themselves into this predicament, but I’m disappointed when I can’t help them out. We’re supposed to be solution finders!!

Thanks for sharing your insight.

Re: Help with analyzing a potential deal - Posted by Joe

Posted by Joe on July 03, 2004 at 21:15:39:

Thanks for the reply Jason!

If I raised the price a few more thousand and then increased the rent with a rent credit would help boost the cash flow numbers. On a 24 month lease if they paid me 700 a month with a 250 rent credit I would have more money available to cover month to month operations. At the close of the lease I would break even with the same $5000 back end profit (assuming they purchased)which I’m willing to accept.

Thanks again for your time!

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