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Seeking Help to Review Potential AFS Deal

T

TonyMiller

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Guest
Hi, I've found this couple who are interested in an AFS but not sure if the numbers work so any advice or input would be most appreciated!

The home is in a good area and was built in 2012 and nothing is needed except for paint. Great starter home.

Numbers:

Sellers paid $312,547 in 2012 for the property and it's probably worth in the area of $325-330K today. They listed the home last November for $345K and have since dropped the price to $334K. Days on market is over 100. They owe the builder $23K when they sell the home and getting $23K upfront in the form of a deposit would probably seal the deal but this is where I'm stuck.

Oh, they told me they would sell it to me for what they owe on the mortgage.

Principal Balance: $299,248
Rate: 3.04%
Term: 5 Years
Maturity Date: 25 October 2017

Principal Balance$299,248.85
Rate3.04%
Term5 years
Maturity DateOctober 25, 2017
The Sellers are open to giving me 2 months to find tenants/tenant buyers.

Would it be a good idea to give them the $23K and if yes would you give it to them up front or would you stagger the payments??

Thanks, Tony
 

KeithnCalgary

Mortgage Associate & REIA
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Mar 21, 2011
Messages
154
Hi Tony:

I recommend you give Barry McGuire a call or a direct email and ask him. I would say get the offer secured at the value of the mortgage and negotiate directly with the contractor yourself to see what he may be willing to accept for payment. You have no guarantee that they would pay out the contractor when you hand them the money. Has the contractor filed the court documents to get his certificate of lis pendens? If not has his time period for doing so expired? If it ahs then you have better negotiating levelrage.

Keith Uthe
 
T

TonyMiller

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Guest
Hi Keith,

Good questions I will need to find out the answers. I think Barry is down south working on his tan but I will call one of the Ontario lawyers who is familiar with AFS.

This could be my first AFS.

Tony
 

Sherilynn

Real Estate Maven
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Oct 22, 2007
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2,803
Missing a few details:
- what are the monthly payments?
- what is the achievable rent as both a regular rental and an RTO?
- have you confirmed the accuracy of the estimated market value?

AFS is about getting excellent price and/or terms on the property in exchange for giving the seller what he needs (not necessarily what he wants).

If the seller needs the $23k at closing, but you get a property at or below market value with no mortgage qualification and low monthly payments that will equate to high cashflow, then it could be worthwhile to give the seller what he needs in order to get the property.

Your plan for the property plays a part here too. It makes a difference whether you are marketing to tenants or tenant buyers. With tenants (meaning a buy and hold), you will either need to renew at the end of the current term or cash out the seller with conventional financing. With tenant-buyers, it is quite possible they will be able to manage cashing out the deal by exercising their option before the end of the term. The length of your hold and type of tenancy affects the ROI on your $23k paid up front.

It should go without saying you want a property in an area with good growth potential. However, since there isn't much of an equity spread on this property, the property must be in an area with excellent growth potential.
 

Alvaro Sanchez

Ottawa-Gatineau Investor
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Jun 5, 2009
Messages
966
In my opinion there is not enough free equity to get involved unless you get a substantial discount with the contractor which you negotiate directly. And NO, it is not a good idea to give the seller any money upfront or later as "there is no equity here". Also, I will ask for 3-4 months.

As mentioned, you need to verify also if rent payments will cover the expenses (taxes, insurance, property management,etc.).
 

Sherilynn

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[quote user="asanchez"]NO, it is not a good idea to give the seller any money upfront or later as "there is no equity here".[/quote]

Depends on the deal as a whole. If there is a strong upside to buying the property, and the only way to do it is to pay cash up front, then it is doable.

With little or no sellers' equity left in the property, you MUST get power of attorney to transfer title when you cash out the sellers' mortgage.
 

Sherilynn

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The other factor is your time and the related opportunity cost.

Last summer I did an AFS fix & flip where I was reasonably confident I would make at least $15k (using contractors to do all the work). There was the possibility I would make $25k, and there was a slim chance I would make nothing, but there was virtually no chance of me losing money. Plus I knew the deal would require very little effort on my part.

Since the deal only took about 15 hours of my time (from the first phone call to the final sale of the property), I figured it was a good risk. If this deal had taken 150 hours of my time, it wouldn't be worth it.

Time MUST be a factor in all decisions.
 

Alvaro Sanchez

Ottawa-Gatineau Investor
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"If there is a strong upside to buying the property" - There is none on this particular case as far as I can tell... market price is 325-330k... Seller can ask for whatever but other than debt relief I would not offer money. You also need to check if city taxes are owed (most likely) and other debt against the property.
 

Sherilynn

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[quote user="asanchez"]"If there is a strong upside to buying the property" - There is none on this particular case as far as I can tell[/quote]

Free equity is not the only potential upside. (And I was speaking in general rather than specifically about this property.)

I would happily pay full market value on a property that cashflows well that I can walk into for nothing down and no mortgage qualification on a long AFS term.

Infinite ROI with little effort and I enjoy the mortgage paydown while I wait for the property to increase in value before cashing out the seller? Oh yeah!

Even if the property doesn't increase in value, I still receive the monthly cashflow and the mortgage paydown on a property I got for "free." I could later sell the property for the price I paid and still make money.
 
T

TonyMiller

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Guest
Thanks you everyone for the advice!

The seller's mortgage terms are poor and he owes the 25k to a private lender and not the builder. The seller borrowed the $25K as a downpayment for the property. I'm moving onto the next one!

Tony
 

Sherilynn

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Good choice. :)

There are loads of people out there who desperately need or want out of their properties. And some of those will be excellent opportunities.
 
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