Posted by Ed Garcia on March 05, 2002 at 23:45:26:
Fletch,
I gave you a great post and then pushed a button an blew it away.
I’m now tired so rather than try to reconstruct it, I’m just going to give you bottom line.
We don’t do deals for the practice; we do them to make money.
So here is the bottom line on this deal
Sales Price $221,500
1st Mortgage 180,000 rate %7.75 for 30 years with a payment of $1288
Seller carry 29,000 at 7% interest only for 10 years. Payment will be $169 per mo.
Down 12,500
This property would more than likely be appraised using a GRM (gross rental income).to establish value. Because I don’t know the area, I’m just going to simplify it and say that if I capped the deal out for you using only 25% in cost and expenses, I would get an NOI (net operating income) of $23,400. At a 10 cap the property would be valued at $234,000. I just gave you a deal at a 101/2 cap, which is respectable.
Regardless of my formula, when the smoke clears you’ll make about $500 per month.
Fletch, to do a deal just to do a deal with no rhyme or reason doesn’t make sense.
Don’t get emotionally involved. This is not a personal thing, it’s an economic one.
Tonight I met a couple of folks who might end up being my new best friends. They may have brought me my first deal. They are in their sixties, have been starting and running different business ventures including real estate investing for 40 years. They told me that they are tired of landlording and are looking to sell a few of their properties. I asked if they were planning on cashing out. They said not at all. They would be able to carry financing. I said what kind of down payment would you need. Wait a second, I am so excited that I’m getting ahead of myself.
The property is a 4 family in the best neighborhood in the area. Property values keep going up. Crime is nonexistent. They have been renting to three older couples and a microsoft exec who is never there for the last 12 years. Payments are always on time. (I’m really wondering why they would want to sell.)
Anyways, they are asking $300k. I said what kind of down payment would you need, 10%…?
They said,“not neccesarily.”
At this point I was trying to hold it in!
I asked about rent and they said it brought in $2600 per month.
Now, I haven’t looked at it yet, but I’m thinking. 15k down.
Owner financing 95% over 30 years @ the best rate I can get. Maybe they will take 6.5% I’m looking at mortgage payments of $1850?? But I don’t know how to calculate insurance and taxes without calling the right professionals.
Can anybody out there help? What do you think? Time is of the essence. Anybody out there who reads this, please give me your ideas. I’ll be waiting.
Thanks,
Dan Fletcher
I can’t wait to send JP my success story about my first deal.
Re: I need good feedback (serious) - Posted by Ed Garcia
Posted by Ed Garcia on March 05, 2002 at 20:36:24:
Fletch,
Don’t get a head of yourself.
On 1 to 4 units a lender would usually hit with 25% off of the top for taxes, insurance, vacancy, and expenses. That leaves you 75% of $2600 per month, is $1960 to work
with. Now lets work it back wards. You don’t say what State you’re in, but lets work it backwards.
Taxes on 300K at 1% is $3000
Insurance is approx 550
5% vacancy 1560
Expenses 2570
Fletch, if you had to get a loan at market rent doing a 90 - 5 and 5 meaning 90% financing 5% down and 5% carry-back. Your payments would be $1982 on the first at 7.875 not even counting the payment on the second.
I’m showing you this to demonstrate that if you ever had to sell the property or get conventional financing of any kind the deal wouldn’t pencil out.
These folks know that they’re getting over market and are willing to carry paper to do it.
As the little old lady in the Wendy’s commercial use to say, WHERE’S THE BEEF?..
What would have to happen to make this deal work. I am sure if they would come down on price, certainly that would be a big help.
I thought I might try this approach. What if I said."I think the price is a little high, but I will pay it if you agree to these terms.
5% down
95% owner financing at 6.5% with no payments due for a full 12 months.
That would build up quite a reserve to cover a little negative cash flow until the rents go up to the break even point. Am I forgetting anything? Is this feasible?
Thanks for the serious feedback, Ed. I really want to make this deal work, and I don’t want to give up until I have looked at every approach. I think there is a deal in here somewhere. I really appreciate everyone who spends their free time helping newbies like me.
thanks again,
Dan Fletcher
btw I’m in northern kentucky, really close to Cincinnati.
Posted by Ed Garcia on March 05, 2002 at 23:53:15:
Fletch,
One more thing.
If you want to know why I structured the deal with a smaller carry-back, it’s because I felt that if the seller did not get their over market price, they wouldn’t want to carry as much paper.
There are other ways I could structure the financing but I wanted to structure the deal so that you wouldn’t lose any sleep and wonder how you’re going to clean up the financing later.