Posted by Ed Garcia on March 07, 2002 at 11:00:03:
Without more information, I’m unable to tell you the value of this acquisition.
Since you main objective is to discuss the cash flow having $2100 debt service the property purchased for $340,000 I’m afraid that the numbers won’t work.
If you could average a first mortgage and seller carry-back second at 7% your payment would be $2261. An estimate on the taxes using 1.25 California taxes so there can be an adjustment there to what you state requires would be $$4250, insurance approx $500 totaling $4750. If tax and insurance were added to the payment, the payment would then be $2657.
Catherine, this is if you could get 7% financing on the deal. Not counting if you have to pay PMI and not counting for any expenses. If you should have a vacancy for any period of time you would be in a world of hurt.
On the other hand according to you, it may be difficult for you to duplicate your living in that area for only $700 per month. If you decide to pay more rent that also opens up opportunity to live in other buildings that may be even more desirable.
I think the first thing you should do is grind on the price. You and the owner have been kicking this around for some time and I feel that the owner will work with you first before going to the street.
Here’s a suggestion of how to work the owner.
First, find every little problem with the building you can find and point out the differed maintenance. Whatever number you come up with, that should come off of the asking price. The reason is, a building that gets top dollar, should be in top condition.
Second, you tell them that with an asking price $340,000 There going to get offers of $290k, $300k, $310k, maybe $325k, so you’ll give them something in the middle. You’ll give them $315k minus lets say $5000 in differed maintenance, would now give you a sales price of $310k. You then explain to the seller that if they sold it for $310 they would have to pay a commission of at least 6% which on $310,000 is $18,600.
Sales Price $310,000 taking off the commission of $18,600 leaves you a sale price of $291,400. This is an estimate of what the seller will get if they go through a broker and you will pay the same. Now you ask for a seller carry-back of 15%, which is $43,710 and ask them to carry it at 7% as long as you can get. Try 30 years, why not, I’m on a roll and if you don’t ask, you won’t get.
Now you mentioned putting down $10k to $15k. Now there is a good chance you can do 100% financing but again to get the payments where you want them lets say you put down 5% which is $14,570.
Here’s where we are.
New first mortgage of 80%, which is $233,120. The reason I did 80% is so you wouldn’t have to pay PMI mortgage insurance. The payment at still 7% is $1,550.
The second mortgage that the seller carried of $43,710 at also 7% will have a payment with a 30-year amortization of $291.
Estimated taxes on $291,400 is $3642 + $500 ins.= $4142. dividing the T&I into 12 months that would be approx $345.
Monthly payment on first including PITI will be $1895
Monthly payment on the second will be $291.
Total monthly payments would be $2186, pretty darn close to what you wanted.
Catherine, There is reality in the way I’ve worked up this deal. I certainly hope that it helps you.