I'm drawing a blank... - Posted by Soapymac


#1

Posted by DavidV on November 11, 1998 at 17:05:05:

If the owner is willing to finance 80% with 20% down get him/her to make their 80% a 2nd position. Then get a 1st mortgage for 20% from a bank, hard money lender, or Bill Bronchick. :slight_smile:


#2

I’m drawing a blank… - Posted by Soapymac

Posted by Soapymac on November 11, 1998 at 10:13:07:

and I hope someone can get my thought processes moving.

I am a RE agent. I’ve located a $95K FSBO duplex that I would purchase for my own account. I have also been told by one of his close friends that he would take less just to get out.

Homework time. Did a drive by…appears to be in reasonable condition on the outside. Have not yet checked with the owner to express my interest because I’ve come up against a little problem.

Each unit is a 2BR 1BA. My homework suggests it is a LEGAL duplex (there’s a problem in this area of the state - a vacation spot - with LEGAL VS ILLEGAL).

I have MLS available…and there are NO COMPS AVAILABLE that are either active listings or SOLD within the last year. All the comps for multiple family units come up as 3, 4, 8, or 12 apartments. To top it all, in the whole COUNTY there are only 15 multiple family units (LEGAL) that are listed in MLS.

Given this, how do I determine a comparable price range? I don’t want to cheat the owner (he has a mouth and knows how to use it), but I do not want to buy a “pig in a poke” either.

Suggestions? Or am I hung up on something here? Education would be appreciated.

Soapymac


#3

Thanks to all! - Posted by Soapymac

Posted by Soapymac on November 12, 1998 at 07:09:34:

Seems the clutch between my brain and my mouth was disengaged. Thanks to all of you that contributed. I will keep you informed of what goes on.

Soapymac


#4

Re: I’m drawing a blank… - Posted by JPiper

Posted by JPiper on November 11, 1998 at 15:33:04:

Soapy:

I look at two things. One is the comps…and I look at these from a couple of different points of view. Two is I do a cash flow analysis.

For the purpose of comps, in your case, I would look at the comps you have available that are 3 units and 4 units. These are still considered residential from the stanpoint of the loan, and therefore in my opinion are comps. I would look at the unit price, and perhaps even a per square foot price. Further from these comps you should be able to establish rental comps as well…in other words, what are equivalent units renting for in the area. The comps that you have that are above 4 units in size are considered to be commercial, and therefore I would look at them less intensively, but I would still look at them…particularly again as it applies to the unit cost and the rental comps.

Finally, I like to also develop comps based on a cap rate. You can do this for all the comps you have, but again placing emphasis on the comps that are 4 units and under, by calculating the gross rent, and then estimating expenses. I generally use a 40% expense figure (which includes taxes, insurance, repairs, deferred maintenance etc) and then add a vacancy factor, perhaps 5%-10% if you don’t have an exact figure. Once you have determined the net operating income for each comp, just divide by the sales price and it will give you a cap rate, the value at which income properties are selling for.

The other analysis I like to do is using the gross rent, I like to back out my expenses (the figure I estimated above) to get my net operating income. Then I subtract out my debt service to see what type of cash I’m left with. I then compare this to what I will have to use as a down payment. I want this return to be high, otherwise my cash can better used in other ways.

You have not provided any of this information so it’s impossible to know whether there is any deal here. But I notice that Bill Bronchick provided some numbers below. If those were the numbers, and using my expenses, this would not be a deal that would cash flow in my opinion, and would not be a deal I was interested in. Just my opinion.

JPiper


#5

Re: I’m drawing a blank… - Posted by hk CA

Posted by hk CA on November 11, 1998 at 12:57:01:

I agree with Bill. Sometimes people get overly concerned with formulas, yields, market values, etc., etc. Of course you have to be careful that you don’t overpay for a property, but the bottom line is this: If you’re going to hold that property, is it going to produce a decent profit for the effort that you have to expend? If the rents are $1000 mo. and the expenses are $500 and there are no other foreseeable problems, it looks like a good deal to me (this is an oversimplified example, of course). There have been times when I paid market value and more for a property, but it produced an income stream that made it attractive for my particular situation. Formulas, etc. make good guidelines, but they shouldn’t be carved in stone.

BTW, I doubt the owner is going to let you cheat him! Go for the best price you can get (disclosing that you are a RE professional, of course).


#6

Re: I’m drawing a blank… - Posted by Bronchick

Posted by Bronchick on November 11, 1998 at 10:55:47:

I have a non-scientific formula (because I don’t know how to use an HP12C, nor do I know how to calculate yields, present value, etc).

I would look at the rents. Let’s say you could pick it up for $90k with 20% down (owner carry or bank financing. $72k at 9%, 30 years = $579/month. Add insurance, taxes, vacancy and repairs. Then look at the rents.

As a ballpark here, I wouldn’t touch it unless the rents were at LEAST $1,100/month.


#7

Re: I’m drawing a blank… - Posted by ss (mi)

Posted by ss (mi) on November 11, 1998 at 12:47:02:

How do you get the owner to carry financing when the bank requires 10 or 20% down. This doesn’t make sense to me.
Sam


#8

Re: I’m drawing a blank… - Posted by Bronchick

Posted by Bronchick on November 11, 1998 at 13:44:31:

If the owner will carry, offer 20% down subordinate to new financing. Then borrow 20% from the lender as new first.


#9

I don’t follow - Posted by MilNC

Posted by MilNC on November 11, 1998 at 14:03:49:

20% down subordinate to new financing?
Do you mean a 2nd mortage of 20% carried by the
seller?

Did you mean contingent upon new financing?

Sorry, I didnt’ follow your train of thought here.


#10

Re: I don’t follow - Posted by Bronchick

Posted by Bronchick on November 11, 1998 at 17:32:17:

No, you borrow the 20% down from a lender, secured by a new first mortgage on the property. The seller carries a second for the balance.