How to structure/finance this deal - Posted by Casey

Posted by Casey on August 19, 2005 at 17:03:00:

Thanks Kevin,

Yes, I have confirmed rent roll (although it has not been rented in two years). The property is not metered on a per unit basis. I do not know how it is zoned. You have brought up some good points. I appreciate your insight.

How to structure/finance this deal - Posted by Casey

Posted by Casey on August 19, 2005 at 15:31:09:

The property is a triplex with the top and bottom split. The top of the home is a 3 bed 1 bath and the bottom is split between (2) 1-bedroom apartments. The seller currently lives in the top ½ of the property (3bed portion). The owner has not rented the bottom apartments out in the last two years, but prior to that the owner had one rented for $425 and the other for $475. I anticipate that the 3-bedroom portion of the home would rent for $650.

Total potential monthly gross income = $1550/mon.

I am not sure what the monthly expenses would be and vacancy. I would assume that it would be about $400-$500 per month.

Repairs needed are $2500 for bathrooms.

Using an income approach for valuation and a cap rate of 10% that would make the property worth approximately $132,000.

The city has the property assessed at $120,000.

The owner is facing bankruptcy, and just wants to have enough money to be able to put some money down on a new place for his family. They are $1800.00 behind on payments. They owe $66,000 on two mortgages. The owner is not interested in a subject-to scenario.

The lowest I could get the property for is $80,000. I do not want to keep it long-term, I would either want to sell my interest and have someone else close, perform a double closing, or take possession and get the property rented ASAP and then sell.

My questions are:

Should I go ahead and enter into contract to purchase with contingencies on an appraisal (min. $XXX) and financing?
What is the best way to finance this so that I can close as soon as possible? I keep seeing 100% financing for NOO properties. Is this the sort of scenario that these companies are looking for when they will go 100%?
Which is the best way to value a triplex, the income approach or the assessed value?

Any insight is much appreciated

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Re: How to structure/finance this deal - Posted by Kevin IL

Posted by Kevin IL on August 19, 2005 at 16:33:43:


I would be more inclined to value the property based on comparable sales than on income. If this were a larger building, say 8 units or more, then I would use income.

Is the triplex a legal and conforming use (check the zoning)? Are the utilities metered separately? If not does the landlord pay? Have you confirmed rents in the area? Don’t just take the sellers word for it. Verify against similar properties for rent in the immediate area. Having these answers will allow you to make a pretty good estimate of value.

If you intend to flip do you have buyers that you can shop this deal to? This would be a quick way to find out what you could resell for.

The best way to finance for quick sale is always CASH. If that’s not an option, find hard money or perhaps a small local bank that does portfolio loans. The 100% NOO loan from a mortgage broker will probably have a lot of fees that will erode profits on a flip (true for HML too). Hope that helps.