Help! Newbie tryin' to close 1st deal - Posted by Kareem

Posted by Nate(DC) on January 24, 2002 at 15:28:56:

You want to pay $155K for a building that is worth $130K? Sorry, I can’t help you there.

NT

Help! Newbie tryin’ to close 1st deal - Posted by Kareem

Posted by Kareem on January 24, 2002 at 13:24:50:

I have the seller of a 4unit, 2br, 2bth, multiunit with comps of around 130K. He is asking for the 155K he spent on building it in 1984. He owes $101,018.05 at 6.625% with $1,131pmt. He is willing to carry all the costs (financing his equity at 3% and if need be, the 1st at 6.625%.

I have just received a salesperson’s license in Real Estate so I don’t have provable income. I make about $8,000 a year as a musician. I don’t want to lose this deal.

Your counsel is much appreciated! Oh yeah…I live in one of the units. Any suggetions?

Some partial analysis (very long) - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on January 24, 2002 at 22:58:51:

Kareem----------

I’m not as negative as the other people are. There are three financial benefits of owning rental properties: C A T. This is Cash flow–the difference between the expenses and the income. Appreciation is the difference between what you paid and what you can sell for in the future. And Tax advantages are the reduction of your income taxes on other income.

Until you start making more money in real estate, you won’t get much tax benefit here. You have a “Negative appreciation” potential. If you sell soon, probably nobody will pay as much as this seller wants, so you will lose money on a quick resale.

This leaves “Cash flow.” Could this be a good enough deal to buy based on the cash flow? You provide no information about the rental amounts and expenses other than the loans, so it is hard to judge.

One part of the cash-flow benefit will be there-- the paydown on the mortgage principal balance–actually on both mortgages. Eventually the loans will be paid off and you would own the property free and clear. Even if it were only worth $130K at that time, you would have that much wealth, unencumbered by obligations. It will take many years to get to that point, but it is possible.

You don’t tell us when he took out the first loan and for how long a term it is. Also, you don’t indicate whether the $1131/month loan payment that you cite is principal and interest or PITI–principal, interest, taxes, and insurance.

These things make some very significant differences in what the situation is and whether the deal might be good or not.

For instance that payment as a principal and interest could arise from a 12-year loan with an original principal balance of $112,250. If that were so, the loan will be paid off in about 12 years. That means that a lot of the loan payment pays down the principal balance. Thus, in a fairly short time–five years–you will have paid down the “overpayment” on the purchase price.

So, you need to give me more figures for me to try to judge out good or bad this deal may be for you.

You need to give me the rents which you feel could honestly be gotten from each unit, using rents of similar properties in the area to figure it out.

You need to tell me if the $1131/month payment is for P & I only or PITI. You also have to know when the first loan was orginally taken out and for how long a term it runs. Also, has the owner mentioned for how long his second mortgage loan would run until it is fully paid off. (Never mention the idea of a balloon payment–whereat he would be paid off before the loan is totally paid off with monthly payments. You do not want such a thing.)

Now, if the potential rents are greater than the expenses, this could be the other thing positive about this purchase. You could be getting in each month extra cash which would “make up” for the over-payment of the purchase price. And it would be being paid by the renters.

Also, as part of the cashflow, you need consider something else, it seems to me. If it fits your life-style you could rent one bedroom and it’s associated bathroom to a roommate for added income.

Now, the low interest rate on his loan is a “hidden” reduction in the value of the deal. The added equity price is not really $35K, since it is partly offset by the lower than normal interest rate on the second loan. Also, the interest rate on the first loan is low, so that also offsets some the higher price than the comps. When you have “soft terms”–low down payment, low interest rates–on loans, they allow a higher purchase price and still may provide a deal which is as good as the “comps” which have poorer terms.

Now, we have gone through a partial analysis of the “economic benefits” of owning real estate. In this situation there is another benefit involved. That is your own personal use of a part of the property. When you are the owner, you can allow yourself as the renter to have pets if you like. You can be lenient with yourself when you discover that you have painted the whole apartment with zebra white and black stripes on the walls and ceilings, etc. You will probably never evict yourself for paying less than 1/4 of the collected rents each month.

So there is something to be said for being the owner of your own domain.

Oh, and the possibility of buying with no cash downpayment? A nice feature. Probably fits your musician’s pocket-book doesn’t it?

Also, you might want to consider how you would feel about being a “landlord.” If it sits well with you, fine. There is some learning involved to do it well. However, there are some good books available, which, if you avail yourself of them, you will probably avoid the worst of problems being a landlord.

Well, get me some more numbers Kareem, and we can finish the analysis of your potential deal here. I need a daily ration of numbers to feel healthy. Pleasen serve me the figures, the numbers, the digits, the facts.

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

Re: Help! Newbie tryin’ to close 1st deal - Posted by HarryAtl

Posted by HarryAtl on January 24, 2002 at 15:42:35:

I agree with Nate and say you should abandon this deal. It really doesn’t make much sense unless you feel that appreciation is going to be nuts wild or that rents are drastically below market.
It’s nice that the owner is willing to give you a 55K second mortgage, but I would just make some aggressive offers.

Also, since you have zero cash, you probably won’t really be able to deal with a multi-unit complex. The first repair and vacancy will crush you.

My advice is to do wholesaling and flips. If you are now a license RE agent, your access to the MLS should help you find some sweet deals. Just flip them if you contract them yourself or just help an investor buy them.

Just my $.02
Harry