AFS Deal that is currently a rental property.

[travis]

Hi REIN Members,

I have a potential motivated vendor but I need advice on the exit strategy. Or if I should just walk away.

The seller has agreed to an AFS for 390,000 with a 5 year term (appraised value 420,000 - need to confirm). He wants 15k down (which I would make with investor money with accrued int+pmt). He purchased the home with a LOC and his payments are only $550/month. Verbally, he agreed to me making just his payments.

The home is a 3+2 bed and 3 bath, 1500+ sq.ft. Currently it`s a rental house with a separate entrance to the basement suite. I can purchase the property vacant. This property is attractive because of this reason...cashflow.

I would like to lease-option but that would require more cash to make it a single family home from its current rental state, but then it would offer great cash flow and I would recoup a portion of the DP.

If I rented the property `as is` the cashflow is still good and then I could get mortgaged towards the end of the term and re-evaluate.

Any input is greatly appreciated. This would be my first property - I`m new to this game and my plan has been to implement QTRE as well as buy and holds, separately of course.

Thanks,

Travis

 

[BarryMcGuire]

I`ll let other members comment on the exit strategy except for one thought. How about a lease option to another investor instead of an owner occupier ? On the technical side of the AFS, the seller may let you just make his payment on his LOC. That payment is very low now because rates are low. As we all know rates can go up a lot and go up fast. Do some math to see how the cash flow is if his LOC rate goes to 5,6, 8 %. Also, at least slight danger that his bank cancels or reduces his LOC . If that happened you would need plan B to be able to pay him out as his bank would demand to be paid out or paid down. Not sure what if anything you can do about this one. One of the risks of LOC financing.

Cheers

Barry

QUOTE (travis @ Oct 29 2009, 12:45 AM) Hi REIN Members,

I have a potential motivated vendor but I need advice on the exit strategy. Or if I should just walk away.

The seller has agreed to an AFS for 390,000 with a 5 year term (appraised value 420,000 - need to confirm). He wants 15k down (which I would make with investor money with accrued int+pmt). He purchased the home with a LOC and his payments are only $550/month. Verbally, he agreed to me making just his payments.

The home is a 3+2 bed and 3 bath, 1500+ sq.ft. Currently it`s a rental house with a separate entrance to the basement suite. I can purchase the property vacant. This property is attractive because of this reason...cashflow.

I would like to lease-option but that would require more cash to make it a single family home from its current rental state, but then it would offer great cash flow and I would recoup a portion of the DP.

If I rented the property `as is` the cashflow is still good and then I could get mortgaged towards the end of the term and re-evaluate.

Any input is greatly appreciated. This would be my first property - I`m new to this game and my plan has been to implement QTRE as well as buy and holds, separately of course.

Thanks,

Travis

 

[travis]

Thanks Barry,

That`s a great point and one that I didn`t think of. I now know the definition of a motivated seller and how it makes all the difference when negotiating a deal. At first this guy was reluctant to sign an AFS because he "wanted all of his money now", however, after talking to him ( or listening ) for a while he opened up like a can of worms. He currently owns four properties with family members and the relationships with the partners has blown up and he wants out...bad!

As a buy and hold the property would work great. Tomorrow I will make an offer and if he doesn`t accept that is fine.

Exit strategy: If his bank decreases or calls his LOC I will get a personal mortgage on the home, this wouldn`t be a problem. Not a quick turn deal but potentially my first deal none the less.


Travis



QUOTE (BarryMcGuire @ Oct 29 2009, 07:29 AM) I`ll let other members comment on the exit strategy except for one thought. How about a lease option to another investor instead of an owner occupier ? On the technical side of the AFS, the seller may let you just make his payment on his LOC. That payment is very low now because rates are low. As we all know rates can go up a lot and go up fast. Do some math to see how the cash flow is if his LOC rate goes to 5,6, 8 %. Also, at least slight danger that his bank cancels or reduces his LOC . If that happened you would need plan B to be able to pay him out as his bank would demand to be paid out or paid down. Not sure what if anything you can do about this one. One of the risks of LOC financing.

Cheers

Barry

 

[cmattric]

I think there is not too much equity in the house if he wants 15k down. I would walk away or call him in 2-3 weeks later if he says ok for no down.

That would be my exit without entrance, I guess.