Hi Folks, some feedback on a deal I'm working on is needed . . .
There's a 4 bedroom house that has been tenanted and neglected (and some damage) over the past 5 years of rental.
The owner has put it on the market at $195,000.Generally, in this part of the sth coast, 4 bedroom homes within major towns rent for $300 to $350 per week and are valued at $280k to $350K even without a unique selling characteristic. Throw in views of the ocean or pasturelands and you can add considerably.
The reason for the cheap listing is that virtually every room requires renovation. The kitchen & bathrooms are all original and over 20 years old (prob closer to 30)
Every room has plaster damage, stained carpet etc.
I am confident that the property could be purchased for possibly as low as $180K with a quick settlement but even at full cost of $195 it is a good buy.
It is the worst house in the street, other properties are owner occupied and street / house proud. It offers ocean views (approx 2 kms away) and scenic bushland. The land is relatively flat and lawn/landscaping/gardens are easily added to improve street appeal. ( no rocks, boulders or protected bush habitats)
My calculations are that with less than $40k of work, the property should revalue at $300k+
Because we are already committed to purchasing an acre elsewhere in July, we cant divert our savings from the land, to put down as a deposit to purchase this one.
However, given that we have good incomes of around $80 – 90K pa ( by country standards) with no debt (own our cars, boat etc) and if we were owner occupying the property we could pay $750+ per week towards a mortgage./ finance deal if we needed to in order to "buy" equity and secure the deal.
So, if we offered the vendor 2 years interest only payments at 7.5% ( based on 180k purchase) = $13,500 pa ($1,125pm)
and
10% deposit ($18,000) payable by December 31st, 2011
and
Vendor's Equity in capital appreciation of $25,000, payable at time of settlement (plus the $162,000 balance)= $211,975 at settleement on a $180k property purchase then worth over $300K
Is that a good offer that would be attractive to an investment property owner
The idea is of course that over the two years, we use our strong cash flow to fully renovate and improve the property, as well as saving a larger deposit, so that when we approach a bank / lender, we have significant equity, as well as a cash deposit, to ensure the loan to pay out the vendor is improved.
Keen to know if its any good, or which parts need to be improved.
Thanks
Andy
G'day OB 1
It sounds like you are wanting to do an 'Option to Buy' agreement young paddo-wun!
Option Agreements are great when drafted correctly, for both the Vendor and Purchaser, however, the biggest hurdle one usually faces with Option Agreements is finding a Vendor who not only undersatnds how they work but, more importantly, wants to utilise one. May I suggest that you can do all the figures and interest rate calculations you like but if the vendor isn't interested in an Option Agreement then it isn't worth pursuing. Ask the venor first and then work it all out.
I hope this has been of benefit to you.
KInd regards,PS: The figures stack up nicely and you know the Investment Property modicum: "It is always best to own the worst house in the best street".
I hope this has been of benefit to you.
Kind regards,Hi Alf 1 (Anthony)
Firstly, thank you for getting the forum handle joke, ( I was worried about obscurity).
Based on what you said about it only works if the Vendor is interested, I figured the best approach was to submit the offer, showing the benfits to the Vendor, and then hope he (a) agrees with the benfits and finds them desirable, and (b) is in a situation where they can wait for full payment rather than requiring an immediate sale and settlement.
You suggest finding (b) vendor then discussing (a) to reach agreement.
I suspect that may be very hard in the much smaller RE markets of rural towns.
Am I putting the cart before the horse to try putting the offer on the table first to gauge interest?
Also, You said the figures "stack up nicely" – can i take this to mean I'm not offering too much ( selling my profits to the Vendor) but also not offering too little (thereby failing to trigger his profit buttons)
I was worried the $25K vendor equity at the end of the deal may be too small, or the interest rate too low. (and I would have had to use Jedi mind tricks on 'em)
Thanks for your input in this.
regards
Andy
OB 1
Had a read or 10 and find it fairly interesting, haven't seen anything like this before.
Correct me if i'm wrong but you obtain a vendor to finance the purchase, pay a 10% deposit and the interest on the loan then pay them out after 2 years with a $25k bonus?? Simple terms but only way i can understand it without having the force.
Let me know if i'm on the mark
Matt
Hi Mark (Fully)
Yep. . . you got it nailed.
The issue for us is that while we can service a loan right now with payments of up to $650 – $750 per week, particularly if we are able to owner occupy while doing the renovations ( makes it easier to work afternoons, evenings and weekends around the property so its quicker too) we have just put our available investable cash into purchasing the 2 lot acre of land.
The land was cheap, scenically attractive, and economically future prosperous for either rental or future sale. I don't regret buying it even though it is too far away from where we live to be suitable for us to develop a family home on it. ( I have 3 children and they are well settled in H.S / P.S and community organisations – St Johns Ambo / Rep Sports etc to move out of the area)
The result is that we have only a few thousand in savings at this time and no debt ( literally, no credit cards, pers loans or other debt.- we own our cars, boat etc).
After being out of the property market for the past 3 1/2 years after moving from Sydney to the quiet of the far sth coast, we now are ultra impatient to get off the rental treadmill and stop paying damn near $20k a year to the Landlord.
( here's a funny thing – the trigger for our impatience was we met the Landlord – lovely bloke, very funny and friendly – BUT we found out he's an Italian fruit grower from nth victoria who, along with his two sons, now own 23 properties around Victoria, NSW and Sth Australia.
23 !!TWENTY THREE !!
Bugger !
So, instead of sticking to our savings plan for another year to 18 months, I began to investigate how we can try to speed up the process.
We know we can pay a mortgage (we have before very successfully) but without 20% deposit (at least 12-18 months away), we cant access bank or non-conforming lenders.
Both my wife and I work in F/T employment, and we have a sales & distribution business selling caravan & camping products as well that brings in some very tidy cash proceeds.
Anyway, I began to search for low cost easy entry properties that satisfied 3 criteria:Ability to live in while renovating / rebuilding ( to allow rent money to cover interest or building costs)
Significant capital gain within a short timeframe (< 3 years)
Low enough purchase cost to enable interest / finance costs to remain low enough to allow us to purchase equity / maintain savings without hardship or stress. Remember, we need to pay interest to the finance, and have enough money left over to pay for the renovations and capital improvements that provide our equity and the financier's security ($350pw easy – $450pw requires planning& discipline – $550pw requires 2nd job and sale of 1 child )Later, I realised that to an extent that doesn't inhibit our own goals for equity value, I need to share the profits of the project with an investor to ensure that his (or her) risk is suitably rewarded so that also narrowed the potential property field a bit.
So far, this is the only project that meets all the criteria and is less than $200k.
How the deal is structured will depend a lot on the investor / finance provider. They may have capital gains tax issues, they may want a loss on paper, they may have the cash, or they may borrow it from a source. Loan to (or from) a trust, a company, an individual. Caveat on the property, registered charge over company, guarantee on individual, some or none. ???? and ?
As you see structure is less important than project objective agreement – we get 40 – 60% equity in a house, they get rewarding profit and we ALL feel good at the end. (After all – what's the point of anything if the "love" isn't shared hehehe)
Interested to know how you would structure it and how you think we could approach it.
regards
Andy
OOOPS !
My sincere apologies MATT, I was so focused on typing I didn't read your name properly.
(unforgiveably bad form screwing up a man's name – shows no respect)
SorryAndy
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