Thoughts on this Deal: Calgary up/down with Agreement for Sale

[bizaro86]

I came across a potential deal recently that's outside my area of expertise. I know some of you do AFS and some of you do suited bungalows in inner-city Calgary, so I thought I'd post this for discussion. Let 'er fly!



RC-2 Zoning, legal non-conforming suite (listed on the city website as having a suite). 5000 sq ft lot with single garage currently used for storage by owner, could be rented. 3 bedrooms up renting for 2 bedrooms down renting for $2100/month total. Utilities included (~300/mth) and taxes run ~$2100/year.



The deal would be an agreement for sale for ~1 year, purchase price of ~395,000.



Would you do this deal?



Regards,



Michael

 

[Lucas]

Hi there,



What would the monthy AFS payment be? What is the property worth if sold today, considering all selling fees (i.e. Realtor, Mortgage penalties, legal etc...)? Does the seller want you to put money down on the deal?



I have done a few AFS deals successfully and my prime considerations are equity and monthly cashflow...As well, you want to consider what will actually happen when you attempt to either finance the property and/or sell the property at the end of the AFS term. It is a good idea to consult a Realtor that is very active in that particular community/area and a mortgage broker. The Realtor will give you accurate sales data for the area and the broker can review you as a client (basically a pre-approval) and the existing mortgage to let you know what issues may arise when you attempt to get financing.



As a straight rental property, $2100/month (less utilities, taxes, insurance, vacancy, maintenance, advertising etc...) and a purchase price of 395,000 (assuming you are getting a conventional mortgage, 4.5% rate, 30 yr amort.) runs a deficit of $369.46/month, not including sales costs.



Personally, the equity would have to be quite substantial (i.e. 30k to 40k) for me to consider purchasing that property for the negative cashflow reason alone.



I hope that helps...



Lucas Fausak

Realtor, Remax Excellence Edmonton

780.965.7029

780.965.7029

 

[invst4profit]

As a rental income property I would definitely not do the deal, aside from utilities included being a deal killer for me, the income to purchase is way off base. I can not buy groceries with negative cash flow.

 

[bizaro86]

Thanks for the comments guys, it's outside my area of competence anyway, and the numbers don't work as a straight rental. I was wondering if anyone thought an AFS adds value to the buyer, but maybe not...



Anyway, to turn the question around, how much would you be willing to pay for this property? It's in Mountview, the neighbourhood north of 16th Avenue between Centre Street and the Elks golf course.

 

[Lucas]

Hi Michael,



As mentioned, it really depends on what the property is worth and what you negotiated as your monthly AFS payment.



If there is an equity buffer (i.e. more than 20k) and your monthly payment + expenses (AFS payment + Taxes + insurance + management + maintenance + Vacancy + advertising) is less than the monthly income you receive (whether it be a straight rental or a Lease/Option) then I would pursue the property.



You may want to consider assigning the deal to a person looking to buy a house without qualifying for an assignment fee (5k to 10k). Just get the property under contract conditional to you assigning it within 3 months to a new buyer and collect the assignment fee from the buyer.



I hope this helps...



Lucas

 

[cmattric]

Why does he sell it with AFS? Is there a closed mortgage? What's his motivation? Does he have problems with tenants? When does the tenancy contract expire? Does he have financing problems? Is he currently in bankruptcy process? How much deposit does he want?

In addition to question related to owner,

What is your exit strategy? Do you have tenant-buyer ready? If not, how long can you hold on to the mortgage? Can you qualify for a mortgage? Do you have a down-payment in case your tenant buyer doesn't close? Do you have a lawyer and mortgage broker understand this process?



These are the question you have to clarify first.



Regards,

Mehmet

 

[bizaro86]

[quote user=cmattric]Why does he sell it with AFS? Is there a closed mortgage? What's his motivation? Does he have problems with tenants? When does the tenancy contract expire? Does he have financing problems? Is he currently in bankruptcy process? How much deposit does he want?

In addition to question related to owner,

What is your exit strategy? Do you have tenant-buyer ready? If not, how long can you hold on to the mortgage? Can you qualify for a mortgage? Do you have a down-payment in case your tenant buyer doesn't close? Do you have a lawyer and mortgage broker understand this process?



These are the question you have to clarify first.




The seller has a closed mortgage with a payout penalty he wants to avoid, but wants to sell now because he's concerned about the real estate market. I haven't discussed price/terms in any significant way. That's what I'm asking about. Given the situation, what would those who have done this be willing offer for such a property?



As for me, I could buy/qualify if I was so inclined, but this doesn't fit well with my expertise/plan. I don't think you'd put a tenant buyer in it, since it's already tenanted. If I do pursue it I'd be looking for someone to assign it to.

 

[Lucas]

Mehmet raises quality points...Clearly understanding your sellers motivations is key to creating a solution that will benefit both parties. As well, properly planning your involvement in the deal is vital in ensuring your success...and consequently the sellers.



If you intent on finding a buyer for the property, I strongly suggest that you have a marketing plan BEFORE you discuss your intentions with the seller. Also, once you make promises to the seller and he decides to trust you, follow through on those promises.



If you are planning your business correctly, you are intending on becoming a geographical specialist and within small geographical regions, word travels...fast!! There is nothing that will harm your business more than a bad review of your business/service.



Good luck!!



Lucas