Looking for an advice on AFS - Rent to own deal

[InaGefter]

I have a motivated seller, we agreed on:

purchase price of $365,000,

deposit of $16,000 (upon finding a rent to own tenant). and me taking over his mortgage payments. The seller needs the money and was not willing to sell without some cash upfront.



Total balance on debt: $340,000

The balance is paid when the tenant buys the house.

The property value is about $385,000.



It looked good from the start, but then he has disclosed more details:

First mortgage:

$300,000 - mortgage at 5% interest and $1870 monthly payments, matures in April2012

Second mortgage:

$40,000 - private loan - second charge, interest only with $400/month payments maturing in January 2012, one month interest penalty to prepay. The seller agrees to make payments on this loan, but it has to paid off at maturity.

Property taxes: $300/month



The market rent in the area is around $2000/month



Could you please help: is there any way to structure this deal, or should l drop it?



Thanks a lot,

Ina

 

[Thomas Beyer]

[quote user=InaGefter]should l drop it?


yes, as you have negative cash-flow AND must pay off the 2nd mortgage in less than a year !



The ONLY way this would work is

a) if you could get more rent from an upstairs and downstarirs suite + garage, and

b) if you could re-finance at 80% LTV later this year based on your own income and perhaps a higher appraisal due to market or some improvements to the property

 

[JimWhitelaw]

Yes, pass on this deal. Even if you got it with no cash up front, you still have too much neg cash flow, plus the $40K obligation in less than a year. Too much risk.

 

[JohnSoucie]

Hi Ina;



Regardless of the new debt information/issues, I think you are fundamentally overpaying for the property in the first place. I feel you are actually paying OVER retail for the house if your $385K is a valid comparable. If your seller sold at retail through conventional methods, this is approximately what he would NET at closing:



385000 selling price....verified by comps from your realtor

-11500 Typical "sellers discount" of 3%, or none, or higher. Check your local stats and recalculate

373450 sale price(accepted offer)

-18672 5% Realtor fees

-2427 HST on Realtor fees

-800 Legal fees for seller to sell.

$351,551 Sellers NET at closing



He's not getting any more than that(+/- buyers discount of course). So why should you give him any more...you are an investor and need to make at least a reasonable "spread". If he sells to you....he has no legal fees as you pay them all, he doesn't have to clean and repair his house for a picky buyers, he doesn't have to keep it spotless at all times and doesn't have to vacate the property to show it. He also doesn't have to worry if the buyers financing has a snag along the way...or even late in the game. Or the dreaded home inspector thumbs down condition. He also can sell, close the deal and leave NOW or whenever he needs to. With a Realtor...it may or may not be on the market for 7-90 days to accept an offer, then there is the 30-120+ days till closing until he gets it actually gets paid.



Don't you think that all of the above has at least SOME value? If the answer is truly NO(which it isn't!), then just pay him true retail of $351K. But eleminating the uncertainty of when it will sell, how long the closing will be, selling it "as is" without even having to sweep the floor...that is also worth a discount. If the seller did the basic math above, then he might figure it out. But if you don't show him why your offer of $351K...or less, is a very fair offer, he probably won't figure it out on his own.



Here is a tip I received...get the extremely large button calculator at Staples for $5...let them run these numbers themselves at the kitchen table with your guidance and let them discover for themselves the true reality of GROSS versus NET in a real estate transaction. If your area is getting 100% listing price, you are still paying a little over retail....there has to be some sales skill to make them understand all the value you bring to the table...besides the fair price you are offering, which in my opinion warrants further discount to be negotiated.



My 0.02

John Soucie

 

[JohnSoucie]

Another point I forgot to mention when it comes to educating your seller about Gross versus Net....did they consider their HOLDING COSTS? For example, the seller may be downsizing or moving to a rental where their monthly expenses will be reduced. So you also need to help them consider the benefits of selling quickly and saving real "spendable" money.



From one of my recent prospects....holding costs $2050/month and they want to move to a $1000/month apartment. They will typically not get their house closed for 3 months(.5 to 1 month to list/sell, 2 more for closing). That's $6150. If they sold to you now and moved quickly they effectively get $3150 extra in their pocket they wouldn't get with a Realtor. In fact a worst case scenario could happen(maybe the house is not in great shape?)....2 months to sell and 90 days closing. Surely this "close quickly" aspect of your business model also has measurable value to some people. So your offer becomes that much more attractive and sensible. In my opinion, the Realtor route becomes akin to speculating for sellers in financial trouble.



It's the old "1 bird in the hand is worth 2 in the bush" scenario! I think a wise man said that.



John Soucie

 

[InaGefter]

Thank you very much John, Jim and Thomas for your input.



The example with the numbers by John provides me with the great tool for future negotiations on the next deal.



Best regards,

Ina