help with my first deal!!

[mmartin 0]

I am a newbie and I may have my first deal. any advice would be helpful. here are the numbers:

 

house price - 76,000

appraisal - 80,000

loan - 30 yr. fixed @ 5.5%

bedrooms - 3

offices -1

stories -2

central air - yes

baths - 1 (newly remodeled)

new kitchen floor with and light fixture/fan

dishwasher and window treatments stay

partly finished basement with plenty of storage

nice closet space upstairs

new deck and side porch

fenced yard in a quiet neighborhood

monthly payements - 640.00 including taxes and insurance.

owner will pay closing costs

owner will pay this and next months mortgage

 

owner will allow me to take over payments. I am thinking of a sandwich lease option. I will pay 640.00 a month. find a person for a lease to buy. charge them 1-2 thousand (negotiable) down payment. have them pay 650.00 or more a month (again negotiable) with the option to buy for 83,000 at the end of the year. if they buy at the end of the year they get their down payment back. I know there is not any monthly cash flow however i could make 4,000 or so in the back end with a sale!!

 

what do you think?

 

thanks for all of your help,

 

Michael Martin

[MichaelC 160]

Hello, Michael, and welcome to The Naked Investor.

Reading the details of your potential first, a few thoughts, and questions, come to mind.

First, you make no mention of any option consideration going from you to the homeowner. Is this the case? If so, excellent beginning.

Second, what is the length of the lease you and he have agreed to? 12 months, 48 months? Longer is better. What is the seller's feel on this?

Last two questions: when would your start date with the homeowner kick in? In other words, how much marketing time do you have and how would you describe your local real estate market? Sellers market? Buyers?

Now, a few concerns.....

charge them 1-2 thousand (negotiable) down payment.

Regarding the option money you should receive from the tenant/buyer. Don't "charge them" anything, and don't be too quick to let 'em know you are "negotiable". Let them tell you what they can afford to put down. My aim is for an amount equal to between three to six months rent. That puts this deal at $2K to $4K. This seems fair and reasonable. Less than $2K and all you've got is a tenant.

have them pay 650.00 or more a month (again negotiable)

Don't guess the rental rate. Do your due diligence and know the FMV for the neighborhood rents. Keeping in mind what you are agreeing to pay the homeowner, and keeping in mind that you can usually receive a slight premium for offering a rent to own deal versus a straight rental. You said "again negotiable" but you really can't be. You're only working with a $10 spread here based on your preliminary numbers. I think you need to bet a better feel for the rental market.

Finally, you are agreeing to pay $76K to the homeowner, and then optioning it for $83K. That's only a $7K spread which will rapidly vanish once you factor in any option money you receive, and any rent credits you apply. Where did that $83K figure come from? Can you get $89K? Have you run the comps yet?

As for the back end profit, you will learn very quickly in this business not to count on it. Many things can happen between now and the end of the lease period and it may very well never materialize. My approach is to ignore it for the most part. If it happens, it's an unexpected bonus. My concentration is on the option money I can receive upfront, and the monthly cash flow. That's cash in hand today. Real, spendable income today.

Bottom line: based on your preliminary numbers I don't see this working as a sandwich lease. Not enough reward to risk ratio in it for me. If you can answer some of the questions I posed, we may be able to work a different angle with this property and its owner. I'm thinking of an assignment, but some more details will help.

In the meantime, don't be discouraged if this one doesn't fly. There are many more opportunities out there. As a newb, you just need to remember not to be the motivated buyer.

[-Tony- 0]

mmartin,

new kitchen floor with and light fixture/fan

why would they put and lights/fan on the floor?

 

Now what MC said is true but don't get panicked. Here are some tools that might help, for comps try Wells Fargo it works well for my area (this is of course if you don't have a rea connection). Here is a national assessors page that has links to hopefully your area. you can use that to compare your comps. you may find the house may be worth more than you think....

 

Lastly I still have a problem with market rents but I try to use the 1% rule, which is 1% of the cost of the house ie 80k=$800.00, check on that to make sure.

[mmartin 0]

ok, here are the numbers i came up with - tell me what you think.

 

house has 76,000 left on mortage

seller will owner finance 100%

my monthly payment including tax/ins is 640.00 @ 5.5%

seller will pay next two months

I will set up a 45 day protection clause

 

I lease/option to buy

no rent credits

2,000 down w/ option to get back if they buy the house w/in 1 yr.

cost of house 85,000

85,000 @ 8% = 624.00

taxes/mon =100.00

ins/mos = 25.00

total/mos =749.00

mos/cashflow =109.00

back end profit = 9,000

 

take a look and tell me what you think!

 

thanks,

 

Michael Martin

[MichaelC 160]

Michael, I'm confused. As I read the details I see what appears to be a combination of a lease purchase and a 100% seller financed deal. Are you taking title and becoming the new owner?

And the same question on the other side with your tenant/buyer. You are quoting a purchase price of $85K at 8%. If you're financing the deal, then you're not setting up a lease purchase. The t/b's are only tenants until they exercise their option to purchase. And at that point the terms of their financing are between them and their lender of choice.

Clarify this for me if I'm misunderstanding something.