how can I structure this deal? - Posted by james

Posted by James on February 04, 2001 at 08:12:19:

Bud, thanks for responding to my questions, your right on the money, the property is in the lower value part of town but in a upcoming neighborhood. Alot of propertys being renovated around it. Five minute walk to the beach. In the condition the property is in the rents are probably at maximun right now. Roofs are good but needs paint, garage doors, exterior cosmetics like sinks removed from yard, car on blocks removed, screens etc. I own a restotaiton company and can do this work for about 30% of retail but realize i still need to be paid. His debt service, taxes and insurance is around $1400.00 per month and the gross rents are $2250.00 per month. How could I structure a L/O to make this work. Is it legal to go 5 yrs.? I don’t understand how a pac-trust works. I’m supposed to look at the inside of the units this afternoon and check appliances W/H’s etc. If I offered him $100.00 a month over his expenses and $90-$95,000.00 in 5yrs., how would that sound? I might be just a little excited here, just don’t want to screw-up. Thanks again for responding to my questions, what a wonderful site!

how can I structure this deal? - Posted by james

Posted by james on February 02, 2001 at 23:32:38:

I am considering making some kind of offer on this property please let me know if there is a deal here. 4 plex and duplex for $95,000.00 Has 1st. Mortgage for $80,000.00 at 11.00%30yrs.2nd for $15000.00 at9.00%5yrs. which is about fair market value. Gross Income is is 27,000. Total estimated expenses is $6760.00. Net operating income is $17,288.00. Debt Service is $12996.00 Which would leave $4292.00 or $357.66 per month. Do these numbers sound right? If so how can I structure my offer to not trigger the dos clause.Owner seems very motivated, started with $15,000 down and I said that was not possible. He ask what is possible? And here I am! As you can tell I am a newbie and can use any help I can get.Would like to just take over payments,but thats a long way from $15,000.00 down. Owner lives 75 miles from property and does not want to pay for management and maintenance, showing property, etc. Thanks,James

Re: how can I structure this deal? - Posted by BillW

Posted by BillW on February 03, 2001 at 07:35:16:

James, On the surface this deal seems to have a few problems:

  1. Rent seems low. At $375 per month average, that sounds like a lower end property. Also, since the rent averages out so perfectly to $375 per month, are you sure that this is not projected rent? The actual amount you collect will vary due to vacancies and collection costs.
    2.When figuring operating expenses, most of us use about 40 percent of projected income. 40 percent of 27K is $10,800, not $6760. The difference of $4040 could very well eat your entire profit by itself. Often sellers leave out certain items of expense. Have you checked the operating expenses list carefully to see what’s left out?
  2. First mtg. rate seems a little high, but probably not out of line with the loan to value at 80 percent plus. Most lenders I know prefer to stay at 70 percent or less on first mtg’s. Also, 30 years? Most lenders want shorter times. Like a 10 year balloon. Are you sure that there’s not a balloon due? Have you checked to see if this is a private mortgage?
  3. Second mtg. with a LOWER rate than the first? What’s with this? Also, not too many lenders want to increase the loans to 100 percent of value.Also, many lenders on first mtg’s don’t want total of all loans to exceed 80 percent loan to value. You’re at 100 percent.
    You did say selling price was 95K, right. Loans 95K -sell 95k. Why does the seller want 15K? Could it be that seller is asking 110K for the property?
    Numbers don’t look right.
    As to the dos clause, if the loans are private loans, there’s a good chance they don’t have a DOS clause. Have you seen the papers?
    Owner living so far away and being a don’t wanter MIGHT work for you, but it seems to me that seller is not motivated enough yet (still wants cash). To me this deal would only be worth looking at if holder of the second would discount it, if seller would just sign over and take zero cash, and if I could raise rents. Otherwise there’s no cashflow and no reason to do this deal. Keep looking if seller won’t sign off.

Re: how can I structure this deal? - Posted by James

Posted by James on February 03, 2001 at 14:27:39:

Bill W, thanks so much for sharing your experience, my first expense analysis came to about $10,000.00. Owner said it was to high so i went by his figures. Made me wonder why he wanted to sell. The duplex rents for $500.00 each and the 4 plex, 3 @$300.00 and 1 @ $350.00. Haven’t seen any paper work yet but the $15,000.00 2nd @9% is from a “buddy”. If i could more or less take over payments and maybe give him an extra $100.00 per month, how could i structure the contract? Or should i let this one go? Thanks again for your time. James-Tex.

Re: how can I structure this deal? - Posted by John (Baltimore)

Posted by John (Baltimore) on February 03, 2001 at 09:05:38:

Thanks Bill W.
I am impressed by your taking the time to respond so completely. It is so easy for us to try to make every deal work. Your insight regarding certain figures has shown how things could come around and “bite” us. It seems like you have a blueprint that you follow. Do you have a single source for your guidelines or is it just experience?

Re: how can I structure this deal? - Posted by Bud Branstetter

Posted by Bud Branstetter on February 03, 2001 at 23:25:09:


The reason the owner said it was high because he was doing the handy man maintenance work and the management. That is included in the 40% guesstimate. You have a job when you do it but that may be okay if you’re willing to do sweat equity. The main thing to look for is deferred maintenance. AC, water heaters, appliances, roof, etc. -how old and what condition. Yes the rents sound low. what would it take to get them up.

You could lease/option or PACtrust so that you fix a price going in then when you get the rents up and sell you get the profit. This sounds like an innercity or rural town on the low end of values.