Potential Quick Turn Deal - analysis needed!

[BenSanderson]

Hey everyone,

I`ve had a potential deal come my way and I`m wondering if I could get some advice on what might be the best plan of attack.

Here are the details:

- 2 houses located out in a small town, just outside of London Ontario. Population about 3000.
- Both are rental properties that have long term pensioner tenants in them.
- They were recently inherited and the new owner hasn`t got the time or the patience to deal with them. He would rather get money out of them so he could buy his own house (he rents himself 2.5 hours away)
- House 1: Tax assessment: $78,000 Mortgage: $29,000 Pmt: $338/mo P.I. Rented out for $600 per month, so a little positive cash flow
- House 2: Tax assessment: $123,000 Mortgage: $87,000 Pmt: $431/mo P.I. Rented out for $650 per month, again a bit of positive cash flow
- Neither house is listed, and the owner doesn`t like the idea of using a Realtor

Together I`m guessing these houses might have a market value of about $200K - $220K combined.

Talking with the new owner tonight, I was able to get him to offer both of them to me for $180,000 total, but I don`t think this is low enough. He`s trying to get to me to spill a number, but I`m not budging yet. I think he could probably accept something lower if I pushed a bit more.

He`s also looking for some money up front, about $30,000. With there being so much equity in the houses, would I have him refinance for that amount and I`d take on the extra payments each month?

My biggest concern is my exit strategy. In a small town like that (and heading into the winter), there is no market for Rent To Own, which leaves me considering selling with owner financing, or flipping/assigning the contract to a London investor. I kind of like the idea of working with another investor, preferably a London REIN member.

Also, this would be my first time working with an Agreement For Sale, so if there is anything I can do to build an `escape hatch` into this document, it sure would help put me at ease!

I would be grateful for any thoughts you folks could share as to how I might best proceed!

Thanks!

 

[EdRenkema]

QUOTE (BenSanderson @ Nov 18 2010, 07:55 PM) Hey everyone,

I`ve had a potential deal come my way and I`m wondering if I could get some advice on what might be the best plan of attack.

Here are the details:

- 2 houses located out in a small town, just outside of London Ontario. Population about 3000.
- Both are rental properties that have long term pensioner tenants in them.
- They were recently inherited and the new owner hasn`t got the time or the patience to deal with them. He would rather get money out of them so he could buy his own house (he rents himself 2.5 hours away)
- House 1: Tax assessment: $78,000 Mortgage: $29,000 Pmt: $338/mo P.I. Rented out for $600 per month, so a little positive cash flow
- House 2: Tax assessment: $123,000 Mortgage: $87,000 Pmt: $431/mo P.I. Rented out for $650 per month, again a bit of positive cash flow
- Neither house is listed, and the owner doesn`t like the idea of using a Realtor

Together I`m guessing these houses might have a market value of about $200K - $220K combined.

Talking with the new owner tonight, I was able to get him to offer both of them to me for $180,000 total, but I don`t think this is low enough. He`s trying to get to me to spill a number, but I`m not budging yet. I think he could probably accept something lower if I pushed a bit more.

He`s also looking for some money up front, about $30,000. With there being so much equity in the houses, would I have him refinance for that amount and I`d take on the extra payments each month?

My biggest concern is my exit strategy. In a small town like that (and heading into the winter), there is no market for Rent To Own, which leaves me considering selling with owner financing, or flipping/assigning the contract to a London investor. I kind of like the idea of working with another investor, preferably a London REIN member.

Also, this would be my first time working with an Agreement For Sale, so if there is anything I can do to build an `escape hatch` into this document, it sure would help put me at ease!

I would be grateful for any thoughts you folks could share as to how I might best proceed!

Thanks!

Ben those payments seem quite high for such small mortgages. If he could agree to get the payments down (with your help) and you get it under contract, then sell to another investor for superior cashflow. I have similar payment on properties with over $100K mortgages so he must be able to do better...
But I`m sure there is another way depending on the motivation of the seller.

 

[GaryMcGowan]

The key with any transaction is you need to know what your exit is before you buy. It would appear that the exit here is very limited. You also mentioned that the current owner inherited the properties. Have the properties passed through probate yet? Depending on the circumstances this can take a couple of weeks to up to a year or even longer. We bought one this summer and had it through probate in a couple of weeks because it was really straight forward.

He may not be in a position to refinance the properties because of his financial situation. You may be able to find a private money lender for the 30k and register it as 2nd on the properties. However it would seem at this point they would not cash flow.

Ask him what is the lowest price he would accept if you closed with a cash offer within 14 days. Then work from there. Again, I would not hand out 30k here to receive negative cash flow.
I think you could negotiate a lower price and simply assign the contract. If we are just talking cash flow here I wouldn`t pay anything over 150k but there are many other factors like the current state of the properties. What repairs have been done? What repairs are needed?


At the end of the day I`m not sure I would proceed with this acquisition but use this as good learning opportunity.

 

[gwasser]

QUOTE (BenSanderson @ Nov 18 2010, 07:55 PM) Hey everyone,

I`ve had a potential deal come my way and I`m wondering if I could get some advice on what might be the best plan of attack.

Here are the details:

- 2 houses located out in a small town, just outside of London Ontario. Population about 3000.
- Both are rental properties that have long term pensioner tenants in them.
- They were recently inherited and the new owner hasn`t got the time or the patience to deal with them. He would rather get money out of them so he could buy his own house (he rents himself 2.5 hours away)
- House 1: Tax assessment: $78,000 Mortgage: $29,000 Pmt: $338/mo P.I. Rented out for $600 per month, so a little positive cash flow
- House 2: Tax assessment: $123,000 Mortgage: $87,000 Pmt: $431/mo P.I. Rented out for $650 per month, again a bit of positive cash flow
- Neither house is listed, and the owner doesn`t like the idea of using a Realtor

Together I`m guessing these houses might have a market value of about $200K - $220K combined.

Talking with the new owner tonight, I was able to get him to offer both of them to me for $180,000 total, but I don`t think this is low enough. He`s trying to get to me to spill a number, but I`m not budging yet. I think he could probably accept something lower if I pushed a bit more.

He`s also looking for some money up front, about $30,000. With there being so much equity in the houses, would I have him refinance for that amount and I`d take on the extra payments each month?

My biggest concern is my exit strategy. In a small town like that (and heading into the winter), there is no market for Rent To Own, which leaves me considering selling with owner financing, or flipping/assigning the contract to a London investor. I kind of like the idea of working with another investor, preferably a London REIN member.

Also, this would be my first time working with an Agreement For Sale, so if there is anything I can do to build an `escape hatch` into this document, it sure would help put me at ease!

I would be grateful for any thoughts you folks could share as to how I might best proceed!

Thanks!

Are the mortgages about to expire or is there some time to go? What penalties does the seller have to pay if he terminates the mortgage. This may be an argument to lower the purchase price.

 

[BenSanderson]

Thanks Ed, Gary and Godfried, for the great advice!

There are still a few unknowns that I`ll have to uncover, such as the mortgage termination dates. The new owner isn`t very old, and barely understands what he`s just inherited, so it`s difficult getting some of the info out of him. I`ll make sure to explain to him the various challenges associated with the area, the properties and how I might be able to offload them later. Once he understands how difficult these properties may be to sell, that could get him to lower his price quite a bit more.

I`m in no rush to grab these, so if I have to let them go, no sweat. Like Don says, there`s always another bus that will be along before you know it.

I`ll keep you posted if anything interesting happens!

 

[JimWhitelaw]

I`m concerned about the limited exit options as well. It sounds appealing to get some properties for well below "market value", but if you can`t actually access that market, then the discount/profit can`t be realized. It`s a fictional discount...

If you want to try without risk, get an option for the houses, then market to other investors with seller financing. Only go ahead with offer/purchase once you have your end buyer in place.

 

[BenSanderson]

QUOTE (JimWhitelaw @ Nov 22 2010, 09:57 AM) I`m concerned about the limited exit options as well. It sounds appealing to get some properties for well below "market value", but if you can`t actually access that market, then the discount/profit can`t be realized. It`s a fictional discount...

If you want to try without risk, get an option for the houses, then market to other investors with seller financing. Only go ahead with offer/purchase once you have your end buyer in place.

Hi Jim,

Good idea regarding the option to purchase. I`ve given the seller a verbal offer of $160K for both houses, using a 6 month option. He said he`d consider it and get back to me in a few days. I won`t hold my breath, but if he`s up for it, I think I could probably move $220k worth of property for $180K - $190K. I`m not desperate for these, so if it works out - great! If not, I`ll chalk it up to more education...