After sharing that we have finally closed on the three properties a lot of you guys had lots of questions about the deal and how we pulled it off. I’m going to do my best to answer all the questions that you guys had and hopefully provide a clear picture on how this deal went down! Of course, if you guys have any other questions feel free to reach out to me and ask.
I keep saying “we” closed on the properties, when I say we I mean my father and I. We are 50/50 partners on the deal.
I think it’s important to understand a little bit of the history about the properties and between the seller and us. All of the properties are located in a small village very near to where each my father and I live. The seller lives a few hours away for about half the year and lives across the country for the other half of the year. My father has known the seller for something like 25 years. My father is a contractor/carpenter, the type of guy that can fix anything or even build a house from the ground up. Knowing this, the seller always hired my father to make any repairs or updates to the properties. This got to the point where my father was basically the property manager. I have helped my dad with “side jobs” for as long as I’ve been old enough to work and even before that point, really. Repairs to these properties always fell under that “side job” category for us both because we both got paid, of course.
There has been not entirely serious talk about my father taking over the properties from the seller for quite some time now. But, my father and my mother have two rental properties already as well as their home. My mother simply doesn’t want anymore properties as she has enough on her plate. My father didn’t want to take on such a responsibility on his own, so this talk of takeover has always been swept under the rug, until now. My father knew I would be the perfect partner for the deal so when talk of the takeover came back up past summer, I was all over it.
The initial offer from the seller to us was for five properties, 11 units in total, this was May 2017. The negotiations took place between the seller and myself, that isn’t my fathers forte, so he left it to me. The initial offer from the seller for the 5 properties was $400k @ 7% interest, 0% down, 20 year term, he would be holding the mortgage. I negotiated down the price before he got me all the information I requested. We were down to $365k @ 6% interest, 0% down. I had some leverage to negotiate because I knew how badly he wanted out of these properties. He’s owned them for 40 years and was just plain sick of them. He’s also quite wealthy, so the income didn’t mean too much to him. He also knows what it would take to list the properties and sell them that way and I knew he absolutely did not want to deal with that. This deal was already looking much better at the new negotiated price, but then he got me the rest of the information I requested. This information included annual home owners insurance, how much we was paying per month in utilities, rent, water and sewer bills, etc. Well, two of the properties were so intertwined that they were basically just one property. They are side by side on two different lots, but all the services are connected. They also shared a septic tank and the taxes were outrageous. Not to mention, one of the properties needed a ton of work and the other needed a roof which the seller was unwilling to pay for. I took those two properties off the table. I told him the deal just wasn’t going to work out with those two properties included in the deal.
Now we were left with three properties, 7 units in total. After extensively running the numbers I decided that I thought this could work out for the right price. After thinking it over, his new offer was $250k @ 6% interest, 0% down, 20 year term, for the remaining three properties. I tried, believe me I tried, for $180k @ 4% interest with 0% down. Eventually, we settled on $210k @ 6% interest with 0% down, 20 year term. I couldn’t get him off the 6% ( better than the original 7%) but I did manage to talk him down $40k. I was happy with this and after explaining all the numbers to my father he was too. This must have been early June 2017 by now.
The Next Steps
Since we weren’t using a bank for this deal we all expected it to go rather quickly. By mid June we had established an LLC and were ready to close by our initial estimated close date of July 28. The seller is the kind of guy that just expects things to get done and wants to do things his way and not necessarily the right way. To top that off, his attorney is near the end of his career and was very sick throughout the entire process. Our estimated close date of July 28, 2017 turned into an actual close date of January 10, 2018. In the time in between three of the seven apartments went vacant and we got them ready to be rented and found new tenants as well, with our money and for no pay. Given the relationship that we’ve had with the seller, we knew that we would at least be reimbursed for the work and paid. It was a slight risk that we took I suppose, but we weren’t too concerned with it.
Closing Costs – $13,828.70
I wanted the three properties to have separate mortgages so if we wanted to pay one off early we would need a lesser amount of money. The split was $50k, $80k and $80k. All at 6% interest and 0% down, 20 year term.
Our total out of pocket cost including the cost of the LLC and the repairs that we made to the properties was $13,828.70. What that number doesn’t include is rent and the security deposits. The remainder of January’s rent that would be due to us as well as the security deposits were credited, so instead of receiving checks for that amount and paying more out of pocket we received no checks and payed less out of pocket. We decided this would be a little bit easier for us. Since my father and I are 50/50 partners on this deal it cost us each $6,914.35 to close on these properties. I personally think that’s incredible for three properties and I doubt I will ever see another opportunity like this again.
This spreadsheet shows the three properties referred to as North, East and South. North is a 3 unit, East and South are both 2 units. The totals are all annual numbers. This chart assumes a best case scenario with no vacancies and no repairs, which we obviously don’t expect. In a perfect world, we could net $20,407.00 per year or $10,203.50 each. We are planning to raise the rent of two units at the North house so that should help some too.
I’m really happy with the deal we got and I think with such low closing costs it was a pretty low risk endeavor. There’s a very good chance that we recoup 100% of our money in the first year.