What would YOU do? - Posted by N8


#1

Posted by Joe Kaiser on January 02, 1999 at 21:59:13:

. . . what he paid for it.

Any ideas?

Joe


#2

What would YOU do? - Posted by N8

Posted by N8 on January 02, 1999 at 20:10:40:

You guys (and gals!), I really need some advice.

I know few if any of you are familliar with my area, nor the property, but see if you can gather an opinion based on what info I give you…

(Keep in mind this is my first deal)

7 plex

gross rents $2,400/mo
avg. expense 500

Here’s what’s been accepted…now it’s in my court:

Purchase price $161,000
Assume 1st @8 141,000
2nd @8% 15,000
Cash Down 5,000

Seller seems a bit naive, but could be a good actor…

I tried to pull comps, but it’s a very unusual property (An old big home converted into apt. units), so I really couldn’t find anything comparable. Dry rot & pest report is OK.

My local realtor (hasn’t seen it) strongly suggested that I get an appraisal done “for peace of mind”, but I really don’t want to sink $800 into an appraisal…

He hasn’t had any problem keeping it occupied, but it is low income housing (not the nicest units, but not terrible).

As it sits, I’d be looking at a positive cash flow of well over 500 or 600 a month.

I’m nervous because it’s my first deal, but it SEEMS like everything looks good.

He hasn’t tried too hard to sell it, claiming that he “really doesn’t care if he sells it, but he thought now might be a good time to try considering how low rates are.” He put a tiny ad in the paper for a couple of weeks then quit. He said that he really wouldn’t mind holding on to it because it brings him about a thousand dollars a month income. He would like some cash for a different business venture, and probably wouldn’t mind to get out of the hassles of landlording a 7 unit.

It has 5-1bedrooms, 1-2 bedroom, and a studio

The tax assessed value is 181,000, but I know that really doesn’t mean much.

He told me he hasn’t gotten an appraisal on it himself…ever

He’s only owned it for less than a year–bought from an old man (70’s) who’s owned it for 40+ years.

I called that previous owner (and note holder) to inquire about a cash discount on the 1st, and he did mention things like “he really felt like he gave (the current owner) a great deal”

It is a "non conforming unit’’, meaning that it is in an area not zoned for multi family. Not a big deal, though with seller financing–and it is insured…

Just tidbits of info…

What would you folks suggest I do???

I’m afraid I’m passing up on a great deal–considered tying it up and flipping it, but it may be something worth keeping…? Is this too much “landlording” for a newbie?

Flip?

Keep for income? (I’m quitting my job to work on REI full time)

Many questions, a bit flustered.

HELP


#3

Re: What would YOU do? - Posted by Ed Wachsman

Posted by Ed Wachsman on January 03, 1999 at 04:08:20:

Five concerns come quickly to mind.

  1. Before spending money on an appraisal, I’d look at the mortgage he is suggesting you assume and determine if it is really assumable or if you have to buy the property subject to the mortgage. How old is it? Did he assume it? The vast majority of these types of loans are adjustable. What happens to your cash flow after the interest rates go up?

  2. I’d be very wary of the expenses he quoted. I’m not saying for sure they are not correct, but nothing that old and that large would have expenses that low in my area. The quick rule of thumb is 40% or higher for expenses. That is not a law, just a ballpark. However, when properties appear lower - look hard to be sure that is really the case. I would not buy this without tenant estoppel certificates that I personally filled out by interviewing the tenants. ( These are declarations in writing by each tenant stating how long they have been there and what rent and utilities they are paying).

  3. Do not rely on the fact that the property has been used as a 7 unit for years. Personally go to code enforcement (or whatever is comparable in your area) and check how many units they say it is ok to have.

  4. Do not accept a short balloon as part of your financing package unless you are strong financially and are sure you will have the cash or can get financing to pay off the balloon.

  5. If the seller normally manages his properties, why is he selling this supposed cash cow? If he is normally a flipper, this deal makes slightly more sense.