Making an Offer on 8 Unit Multi Family with Seller Financing - YouTube

We get a lot of questions that come through my  email about seller financing. We did a video  

where we talked about how I'm pretty big on buying  multifamily properties. Actually, it was probably  

a podcast interview where I'm pretty big on buying  multifamily properties because I like mom and pops  

and a lot of those mom and pops, like to seller  finance and there's no better way than buying  

a deal on seller finance. So today I'm going to  talk to you a little bit about an eighth unit  

I have an offer and on and how we're structuring  the seller finance and why we're using the prices  

that we're using to purchase it. My name is April  Crossley welcome to my YouTube channel. I'm a real  

estate investor in Berks County, Pennsylvania, I  flip houses here we buy and hold multifamily. And  

we also do a little bit of private lending. Make  sure you click like and subscribe to our channel,  

if for no other reason. So you can find out  if I actually do buy this eighth unit that  

I'm going to talk to you about today we have an  offering, we're waiting to hear back. So let's get  

started. So we're looking to seller finance this  eight unit when the seller first contacted me,  

he had an asking price of 110,000. And I always  asked sellers for all their income and other  

expense information, I'll run the numbers before  even go look at the multi unit. I don't want to  

disrupt tenants and waste my time looking at a  property if the numbers don't make sense. And  

I'm not close to the sellers asking price. So  in this case, the seller sent me all the rent,  

all the expenses, I ran all my numbers, he was  asking 110,000. And I said to him, if it needs  

work, the only way I'm going to be able to  get your 110,000 is if you sell or finance,  

believe it or not a lot of people own multifamily  property. And these small mom and pops, they don't  

know what seller financing is. So seller financing  is basically when the owner acts like the bank. So  

they hold the note which lays out the terms of  repayment and they hold the mortgage. So instead  

of going to a bank for a loan, you're getting  the loan from the seller, they're not giving  

you any money, okay, they're just holding their  mortgage, and you're making payments to them works  

the exact same way with the bank, I only do it  if sellers don't owe anything on the property. So  

they own the property free and clear, which is  the case with this seller. So the seller said to  

me 110,000 On seller finance, sounds good. If you  can get me back come out and take a look at the  

property. So we went and looked at the property, I  ran some numbers, I'm gonna take you through those  

numbers right now. So the income on this property  is a little bit variable. And here's what I want  

you to know about buying smaller multifamily units  and how we run our numbers. The income right now  

is 46 Five, which is great. But when you're  looking at your numbers, I'm big on what my  

exit strategy is going to be always. And I want  to know if there's any room to increase income  

or any room to decrease expenses when I look at a  property because that way I can add value to it,  

I can buy it for less, make it worth more. So  in this case, the income is 46 Five, but it has  

the potential to be 48,900. And for those of you  that are experienced in Maltese, you're probably  

thinking for eight units. That's a pretty low  income. But in this area, rents are really low.  

It's like beyond a tertiary market. It's way out  there, but still in an area that's well populated,  

and people live there and commute to the more  expensive area. So rents are probably like in  

the four and five hundreds per month, which is a little low. But it has the potential  

to bring in 48 Nine, but here's where we're at now. 46 Five,  

I'm not going to run through all the expenses with  you or this video will take forever, but you can  

slow it down or pause it and stare at the expenses  and blow it up real big whatever you need to do  

to Sam. But here's a list of the expenses on the  property. And I want to point out some things to  

you. The first thing is when you're looking at  the maintenance and vacancy numbers, we always  

factor in vacancy maintenance Pm is property  management and CAPEX which is what we factor in  

for like larger repairs. So in this case, the roof  is a little older and the heaters a little older  

might be like three fourths of the way through  its life. So we set aside some money every year  

for bigger expenses, bigger repairs. That's what  capex is. When he first gave me all his expenses.  

The first thing I noticed is his insurance expense  was $7,645 a year for insurance on an eight unit  

that's not in a floodplain. For those of you that  are experienced when you buy a property and it's  

in a floodplain insurance can be really expensive.  I own another eight unit also in a way out there  

tertiary market, and my insurance is $1,700 a year  on this eight unit. So when I ran the numbers on  

this one, and he told me his insurance was $7,000  a year. I actually emailed him back and said,  

Can you double check your insurance number?  It seems really high and he said to me,  

it does seem high. I've been thinking about that  for a few years now. Oh, now he's on this property  

forever. It's not just a little high. It's  wack that is. I know, I don't understand it,  

but that's what he's paying. So immediately right  there, there's room to add value because I don't  

think the insurance has to be this expensive. I  don't he's paying for the creme de la creme or  

maybe he's paying for the whole neighborhood.  I'm not really sure. But I insurance,  

I'm just ballparking will come in somewhere around  2000 My offers actually contingent upon verifying  

an insurance rate. Okay. So I can bring down  my insurance costs, I can increase my rents,  

based on the current rents and what my expenses  come out to I figure out my net operating income  

for those of you that don't know, that's your  income, minus your expenses, but not including any  

debt service. That's the fancy term investors like  to use for mortgage payment is a freakin mortgage  

payment. Okay, when I first started and I was  a newbie, I was like, Oh, what is debt service,  

they like to call it tip service. It's a freakin  mortgage payment. Okay, so this is without  

your mortgage payment in there, she didn't net  operating income income minus expenses is 16,004  

93. The reason I need to know my net operating  income is because I want to figure out what the  

value of the building is. And we use cap rate to determine that we will do a whole  

nother video on cap rate, okay. But to figure  out a cap rate for an area just call a real  

estate agent or broker in that area and ask them  what the cap rate is. I use a nine cap. Why do I  

use a nine cap? Because I know my market and I  know from running numbers here, I'm gonna buy a  

building and I want it to cashflow what I want it  to cashflow. I need to buy it in a nine cap. Okay,  

so I run my numbers in a nine cap. So if you take  your net operating income divided by your cap  

rate, it's going to give you your current value.  So currently, the building's value at the current  

income. With the expenses with the insurance  lowered, the value is $183,256. He's asking me  

for 110. He's asking not for me for the property.  That would be weird. He's asking $110,000 for the  

property. Okay. Right now it's worth 93. So you  see why I was like, Okay, let's take a look at  

this thing. I went and looked at the property and  then understood why he was asking 110, okay, the  

property needs at least $50,000 in work for me to  get it to where I want it to be. So that it's more  

appealing for tenants coming in, it needs at least  50,000 and work, there's three apartments with a  

fourth that are going vacant out of the eight  units, okay? People that have just moved out and  

some people that he had to evict, okay, so he's  kind of at a point where he's motivated, because  

a lot of his apartments are vacant, and nothing  makes a landlord more motivated than when we have  

vacancy, trust me. Okay. So it needs about 50k and  work. So let's hop to the next sheet. So with the  

value right now at 183,000, then I go back and I  figure out at the new rent, what's my value? Okay,  

so with the new rents, once I ran up those vacant  apartments for what they should really be rented  

for my value, and my mind cap with the increased  rents is 2099 22. Who cares? Why do I care what  

it's worth at the new rent, because I'm all about  my exit strategy. Even though the seller is going  

to finance it, I'm gonna have to get the  seller out of the seller finance, eventually,  

I have to be able to get him out of it. He's 75  years old, he's not gonna want to be holding the  

note mortgage forever. Because he won't be around  forever. It's just how life works. Okay, circle  

life. So I need to know the current value because  I need to know what my bank is going to give me  

when I cash him out. So whether that's a year down  the road, five years down the road, whatever the  

case may be. So if I can get the rents up and get  the building worth 209 22 I feel that while I know  

my bank currently refinances me at 80% of the  value, but times they are changing, okay, we're  

about to head into a market correction, we're  already in the beginning of it, I feel thanks  

for getting a little more stringent with what they  give investors, so they probably won't give me 80%  

of the value. They might only give me 75. So if  it's worth 209, and they'll refi me out at 75%  

Say the seller finances it for a year or two years  or three years. I know when the bank refinances  

me out, I can get about $157 But you know me,  not $157 Sorry 100 Let's try that again. I run  

$57,000 Little With the rhythm 157 I'm not buying  a quarter of an apartment, I'm actually buying the  

whole building. Okay, so $157,000 You know me,  and you know, I'm conservative. So in my mind,  

I'm like, what if, what if, what if the market  correction really freaks out banks, and they only  

want to give me $150,000. So I've run my numbers  off $150,000, because I'm always looking at, like,  

what my worst case scenario is gonna be. So if I  want to buy this property with 00, to little of  

my own money, okay, I don't want to come out  of pocket with a lot of money. I say little,  

because I might come out of pocket for the  closing cost, but I don't really want to come  

out of pocket for any money, then my cash offer  is going to be based on $150,000 What the bank  

will refinance me at minus 50,000 it needs in  rehab. So I'm going to offer him $100,000 Cash,  

okay, that way, I'll offer him 100 I'll pay for  a cash, I can put 50,000 cash into it, but the  

bank's gonna give me 150 So I'm gonna get all my  money back out if I buy cash. Now, because offer  

him 100. And I'm an investor, and we're cheap, we  always want to get a really good deal. I didn't  

offer him 100. I offered him $90,000 For currently $183,000 property that he's asking  

110 for. So he's asking 110, I offered him 90,  now we're going to your highest and best because  

I want to leave room to negotiate. So he might  come back to me and say, my knees not really  

good enough. But I take 100. And I'd be like done.  Let's sign the contract. Okay, so I'm going in at  

90 Hoping that counter back at 100. I'll let you  know I just put the offer in yesterday. Now he  

said he would sell or finance it. So all I'm going  to do when I sell or finance it is base everything  

off of what I offered cash. So let's hop over  and talk about what that seller finance looks  

out looks like. So I figure if he seller finances  at 90,000 what I offer him at 7% for 13 years now  

people are gonna say, how'd you come up with 7%?  Did he want 7%? Did he ask for 7%? Why 30 years  

bla bla bla bla bla, a bank is usually going to  finance me on the 20 year term, the perk of seller  

financing is a seller can finance you on a 30 year  term, or 40 year term or whatever term you choose.  

But usually you choose 30 years, which stretches  out payments and makes your payment a lot smaller.  

So you're building cash flows a lot better.  Okay. So the 7% is just a random number I picked,  

I can ask him what he wants to finance that he  might finance it six, he might finance it five,  

I just randomly picked seven to try and make it a  little more appealing for him. And then I'm gonna  

balloon him out in five years, or one year or two  years or three years, I have enough fat in there  

to do it whenever but whenever he wants to be paid  off, I'll pay him off. So what I'm doing when I'm  

making this offer, and I tell the seller, this,  everything is negotiable. I'm just trying to get a  

starting point. So we can go back and forth with  numbers. So he wants to balloon out in a year,  

which by balloon out I mean, I'm going to pay  him off and get a loan with a bank, the seller  

finance will stop and now change some of these  terms. Okay, so it's just a starting point to  

get discussion rolling. So on these terms, my  monthly payment to him is going to be $5,598.77  

A month or about $7,000 a year. Okay. So you have  to make sure the property cash flows that that so  

I take my old income 46,500 Why am I using the old  income? Because I'm conservative, and I'm what if,  

what if, what if, what if I can't increase the  rents? What if I can't, so I'm just basing it  

off the old income, my expenses with my mortgage  payment to him. And the property would cashflow  

$96 A unit at the old rents worst case scenario  $96 unit. This is what the sellers gonna net after  

one, year two, year three or by net. I mean I'm  paying them interest on top of the 90. So after 90  

cash or he can hold financing for a year and after  a year we'll make 96,000 If he holds financing for  

two years, we'll make 102 If he finances for three  years, we'll make 108,000 member the discussion I  

had the beginning with the seller, you really have  to know what your seller wants. I said I can get  

you close to 110,000 but you're gonna have to sell  or finance and he said great. Let's do this. Okay,  

so I'm getting him what he wants on a seller  finance, but he's gonna have to hold it for three  

or more years at this point, okay. At the end of  the first year, I'm gonna owe $89,000 That's what  

my mortgage balance is going to be and The bank's  gonna refinance me 150. That's what we talked  

about back here. On the second page, the bank's  gonna refund me 150. And I'm only going to owe  

89. So what does that mean? I can cash out and  take the rest of that money. So I can refinance  

for more than that and actually pull money out  of the property. Okay, so I have wiggle room  

to off him offer him more. If he counters back all  these numbers in case you guys don't have the app,  

or you want to look it up online, I use the  Brett whistle emiratization That's like the  

worst word in the whole world. No one can ever  say it Replicel amortization schedule that lays  

out all your principal and interest payments to  the seller in a nice beautiful little chart, so  

that you can show the seller your pay down so you  can see what you're going to follow at the end.  

And what they're going to net every year. Okay,  you just take what you're paying them an add on  

all their interest, you'll see a little interest  column so you can download an app for that I  

just found out they had an app never even knew  I've just been going on my computer, which is of  

course amazeballs because then it's right on your  phone. I draw this up for your seller so they can  

see it in black and white. Okay, so that's our  seller financing offer on the eight unit throw  

below prayer for me, I hope I get it or at least  get a counter back or something's I really want  

this property. I really want it. If you guys have  any other questions about this or any questions at  

all, feel free to submit them to us. Make sure you  click like and subscribe to our YouTube channel.  

Because a lot of your questions that you send in  we're answering in YouTube videos. You can also  

check us out at www.lazygirlrei.com You can follow  us on Instagram at April Crossley and you can also  

follow us on Facebook at Lazy Girl Real Estate  Investing. Thanks for hanging in there with me  

for the super long seller finance video today. Transcribed by https://otter.ai