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Hello All,
I have a 4 plex under contract and wanted to brainstorm how to handle it and whether or not to close. The inspection period ends next week and we can walk before then.
We purchased a house from a gentleman with seller financing a few years back and in researching him found he owned 2 other duplexes nearby. We offered to buy all the units but he only sold the house, but on good terms and we stayed in touch with the seller knowing the other 2 duplexes (4plex) could be bought at some point. He did say he would let us know when he wanted to sell and we kept in touch and finally started talking details.
So the shell of the product is pretty good, they are block houses with newer roofs and tile or terrazzo floors in all of them. This is good durable long term flooring we usually love as landlords. They are 2/1 units with their own fenced yards and laundry hookups (not bad for duplexes), BUT the interior of the units need updating badly. They are all occupied and 3 of the 4 tenants are very long term. 5-15 years because they are rented under market. 685 each, they could easily be 825 with a bit of updating but I wouldn’t raise rents right away or much at all and scare off the long term tenants if we purchased them..
So here is my brainstorm question, should w do this based on the price and terms?….price is not great, but terms are….and we are long term hold investors….so….purchase price 285k, this is basically retail pricing, maybe a 5-10% discount. Seller has a 100k line of credit that needs to be paid off, BUT will carry back 175k on a note 4.25% 30 yrs! I want this loan. A lot of opportunity stems from these types of seller carried loans. Huge discounts to payoff early, ability to move and modify terms, etc. And for the 100k needed to pay off the seller’s line of credit we have a 100k private mortgage in place at another house that is selling soon and was going to move this mortgage to the 4plex to cover that. Out of pocket would be 10k max, or possibly 0, he seemed open to financing 185k rather than the 175k. ANYWAYS…
Cashflow numbers could be…
2800 monthly gross rent 2800
-1360 debt pmts 860 (4.25% 30yr) + 500 (5% int only, 5 yr renewable term) non recourse
-400 taxes and insurance
= 1000 instant gross cashflow since all units are occupied
BUT yes there is some deferred maintenance and YES we always calculate repairs and vacancy so $500 monthly cashflow is probably a good estimate. AND we could use some of the initial cashflow to start updating and making some repairs inside and slowly increasing rents. or not, if the long term tenants stay. we really like the long term tenants. one guy has been there since the seller bought it in the 90s and one duplex is a brother and sister and their separate families and they have been there for 5+ years. There is only 1 new tenant.So it being a duplex I imagine we’ll have a bit more management on our hands, but it is close to us and we don’t mind. I had our home inspector do an inspection and although he isn’t an investor, he said it looked like the guy was a slumlord and with everyone home and in his way he couldn’t really get a good look at details. The ac units all run, but they are 20 yrs old. the fencing is coming apart, the backyards have unsafe wooden porches built to cover the laundry area and there is a 220 outlet exposed to rain on one, the posts on others are not secure, etc. These are all very fixable problems and we are going back to negotiate now that we have these details….but I wanted to get some thoughts. Some long term investors I know hear the terms and low out of pocket amount and say do it all day…some don’t like the retail price and now that we have done a thorough inspection it may be overpriced. We will be asking for some concessions, but what are some thoughts from seasoned investors who know the value of seller carried long term financing??
Also, its in a great single family neighborhood and he stayed full through the entire recession because of the lower rents and long term tenants.
Thanks for your feedback!
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About your question: “what are some thoughts from seasoned investors who know the value of seller carried long term financing?”In an era when the currency of a given country has some prospect of keeping a stable value (such as was the case in the US up until 1913), the present and future value of seller financing was much easier to calculate for both sides in a transaction. But when a government’s central bank has free rein to counterfeit (euphemistically called quantitative easing in this era of monetary illiteracy), all bets are off.
If you follow the analysis from John Williams of ShadowStats.com (or even better, subscribe to his fee-based reporting), you’ll learn about how the US government lies right and left in its inflation reports, for very self-serving reasons. If you had sold property about 10 years ago, you’d learn the hard way that the cash you received then (and for example, archived in your mattress) is worth only about half today of its value back then. (After the 2008 crash, the Fed secretly turned on the digital counterfeiting machinery and pumped funny money all over the globe.)
Now suppose you had been that seller ten years ago, but had carried back a note on the sale. How do you think the value of your note would have changed as the currency lost that much value? In fact, what would have happened is that you would have made a present of much of the value of your property to the buyer. The exact amount would have been impossible to forecast at the time you set the terms of the deal, because it’s not possible to know how much and when currency values will drop. That why when economic storm clouds appear that even hint of ugly currency value losses, private seller financing dries up. Government backed lending is a different beast, as long as it can soak the taxpayer for whatever losses might be incurred. You as a private seller don’t have a hand in the taxpayer’s back pocket if the need arises to preserve what purchasing power value you thought you had in that seller carryback payment stream.
The upshot of the above discussion is that if you think the value of the dollar is subject to a big hit sometime over the life (how many decades are you thinking about?) of the seller carryback note you’re trying to negotiate, just remember that IF that big hit (or a series of such big hits over time) shreds the purchasing power of the dollar, then the buyer celebrates Christmas while the seller unintentionally becomes Santa Claus. Which side of that win/loss bigtime transaction do you want to be on, if either?
It’s worth remembering that when FDR confiscated gold early in 1933, and quickly revalued it upwards, he de facto devalued the US dollar. That uncertainty in the future purchasing power of the dollar dried up private seller financing of anything — very quickly. Sellers were not stupid — they realized that such uncertainty could tank the value of whatever payment stream they might negotiate from any buyer.
One classic way of protecting such a seller-carried note was to index it to the value of something stable, like gold, for example. And gold-based contracts were very common before FDR’s confiscation, at which time the government ruled them illegal, and they remained illegal until the 1970s. But with little recent case law history to support them, it remains an open question today whether such a gold-indexed note would be supported in a court test, especially given the widely varying state laws on usury limits.
Could a state’s law with a punishingly low interest rate on dollar-denominated loans be interpreted to govern if a gold-indexed note had to be taken to court to enforce it in the event of a dollar value plunge? That’s a big unknown.
As the result of such uncertainty, gold-indexed notes haven’t really returned to the marketplace. My copy of “The Gold Clause” by Henry Mark Holzer (a law professor emeritus at Brooklyn Law School) still on Amazon tells this story in great detail. Bill Mencarow of http://papersourceonline.com has written quite a bit on this topic, but I’ve not see his articles. I think Jackie may have remained in touch with him.
So just remember in a seller-financed real estate transaction today who might get to celebrate Christmas, who might unwittingly get to play Santa Claus, and who might have to go to court to enforce such a protected note, but with great uncertainty of the outcome.
–Dee
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The numbers look ok except for the $100k part….but… there is always a but… if the landlord is a slumlord, that means he has low income tenants or ever worse, section 8. This is not your ideal tenant!!!! Low income tenants are the worst tenants.. you will have more headaches, more maintenance, more lawsuits, more phone calls able every little thing, and bigger fair housing hassles… especially now with the new law. These properties will be MUCH harder to sell later too.
Plus, read the brainstorming section!!! If there is an economic collapse as bad as many people are predicting later this year, you sure do not want to own anything with low income tenants. And you don’t want to own anything that has debt at full market prices today because for the next 5 years the price of the property could go down down down and you could own twice as much as it will be worth after the collapse.
It would be much better to get single family homes that are just about median price point. You can buy those all day long subject to the mortgage with almost no money down and take over payments.
Actually, it would be much better, AND SAFER, to just master lease a property then sublease it. You still get cash flow.
You can control equity with an option.Better houses attract better tenants who stay, pay their own rent on time ( no government assistance) and who take care of the property.
I would PASS on the duplexes.
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