Question using Agreement For Sale

[GordonDaniel]

Here`s an interesting situation that I`m trying to figure out...

I have a seller who is willing to finance the sale of his townhouse to me. It`s currently rented out to some tenants but he just wants out (tired landlord). Rented for $1300/month and cost of mortgage, insurance, taxes, condo fees is $1250.

Value is $340,000
Seller owes $340,000

He`s willing to sell to me for $320,000 and let me just take over his mortgage payments ($900 monthly) using an Agreement For Sale. But he doesn`t want me to pay him out in full until his mortgage paydown brings the loan balance down to $320K (otherwise he`ll owe the bank money out of his own pocket). We expect this will take around 3 years.

Any suggestions on how to stucture this? He`d like some security that I won`t pay him out too early. Perhaps a pre-payout penalty equal to the difference between $320K and his loan balance at time of payout?

Thanks in advance,
Gord

 

[Thomas Beyer]

QUOTE (GordonDaniel @ Feb 15 2010, 06:34 PM) Here`s an interesting situation that I`m trying to figure out.....
Any suggestions on how to structure this? ..
You use an agreement for sale for a value of $320,000 for 3 years from now.

The bigger question is: why do you wish to buy a TH for $320,000 that rents for $1300 ? This doesn`t make sense to me !

 

[GordonDaniel]

Thomas,

Thank you for your input! The reason this appeals to me is that there`s $20K in equity already, the rent pays the expenses, and I don`t need to qualify or put any money into the deal up-front. My take is that it`s about the financing the seller is willing to give me. The rent could be higher also (was rented to a previous tenant for $1600/month). Am I missing something here?

Gord



QUOTE (ThomasBeyer @ Feb 15 2010, 06:08 PM) You use an agreement for sale for a value of $320,000 for 3 years from now.

The bigger question is: why do you wish to buy a TH for $320,000 that rents for $1300 ? This doesn`t make sense to me !

 

[Thomas Beyer]

QUOTE (GordonDaniel @ Feb 15 2010, 08:50 PM) .. Am I missing something here?
yes:

no cash-flow (as your expenses are too low and vacancies will creep in), HIGH RISK due to possible overpaying .. possibly no equity upside ..

rent to price ratio seems out of line .. the only way to make money here is a short term flip IF the property is worth far more than you state in 2 months or 12 months .. is it ??

 

[GSI]

Gord,

Heed Thomas` sage advice here. Rents DO drop, condo fees DO rise you WILL have vacancies. I have done many a deal this way and your profit should be made when you buy. Waiting around for the equity is a waste of time if you don`t have CF to support it. If you can make a healthy reserve to combat double what you think you need in costs, then maybe. But - try to flip it or rent to own it is a better route.

Todd-

QUOTE (ThomasBeyer @ Feb 16 2010, 11:07 AM) yes:

no cash-flow (as your expenses are too low and vacancies will creep in), HIGH RISK due to possible overpaying .. possibly no equity upside ..

rent to price ratio seems out of line .. the only way to make money here is a short term flip IF the property is worth far more than you state in 2 months or 12 months .. is it ??

 

[GordonDaniel]

Thank you Thomas and Todd for your comments and advice. It`s very much appreciated!

Upon further digging, the property appears to be valued far less than originally thought (making matters worse). I`ll pass on this lead, on to the next one... the seller has multiple properties for sale.

Cheers,
Gord

 

[TodorYordanov]

QUOTE (GordonDaniel @ Feb 16 2010, 11:10 PM) Thank you Thomas and Todd for your comments and advice. It`s very much appreciated!

Upon further digging, the property appears to be valued far less than originally thought (making matters worse). I`ll pass on this lead, on to the next one... the seller has multiple properties for sale.

Cheers,
Gord


Good decission, there is a reason why he is a "tired landlord", there is no cash-flow in the property and the rents do not support this high price.

 

[Pheenix]

Hi Gord
It is a question of whether the landlord is offside all over (I suspect). Look hard for the real motivations and desires here. Tired landlord maybe old, sick, or lost operating partner etc.

My question is whether you have/can get a clear picture on the `other properties`? This one is clearly upside down but if others have had a longer hold with good LTV`s . . .

You might be able to do a sort of hedge play, properly discount this one to market, and buy a good one with similar degree of offsetting unrealized upside on value, leverage and cash flow. On purchase revalue each property individually, to market, and re-finance accordingly. Vendor gets offsetting gains/losses (hopefully), and gets out clean, and you the current values based cash flow.

You might, and I say that again so nobody mis-understands, might, have a lead into a portfolio situation. If the landlord`s properties are all in a similar state financially forget it.

If other properties are strong enough, and you can`t pull it off yourself, then look into a syndication to purchase, based on total package. After re-arranging the portfolio; assess for what you want to keep for the longer term and if you have done a good job get rid of the less desireable, at new values - but factor in acquisition and disposable costs.

I suspect this is not the case or they would probably be less willing to look at an Agreement of Sale, but you never know.

Hope this sparks some ideas.

Brad