Preliminary Offers

Over the weekend, I have been running NOI/cashflow calculations on the two properties my RE agent gave me late last week. She sent me a spreadsheet tool called APOD, which helps analyze NOI, cashflow, appreciation, depreciation, taxes, internal rate of return (IRR), etc. for a property. To be honest, the thing is so powerful its overwhelming. There are many things I haven't a clue about with it. I also have a free copy of a NOI/cashflow spreadsheet I got from REIClub that does the same thing. It's a lot less complex and a lot less cumbersome (only one sheet vs. 5 on the APOD tool).

As I probably mentioned in an earlier blog entry, I figured that I would need financing that would not exceed $272/month in order to maintain positive cashflow. What's good about NOI is that once you establish your maximum financing, you can then create infinite options for the deal. Using the maximum of $272/month (per property) and the list price of $69,900 (per property), I can then make offers like these:

Offer #1: All Cash
In order to pay all cash, I would need financing to pay for 100% of the loan(s). Those types of loans usually carry a higher interest rate and some require points. So, I'll estimate 2 points and an interest rate of 7%. Therefore, the maximum cash offer I could allow would be about $37,000 (for each property). I kind of doubt the seller would go from a list of $69,000 to $37,000, but you never know until an offer is made.

Offer #2: Owner-Carry All
If the owner is not motivated to take such a drastic discount on their property, the only other option I would have is to have her carry-back some or all of the financing (with no, or very little, interest). Without actually speaking to her, I don't know what she wants/needs from the sale of these properties. Seperately, I could offer any combination of cash and owner-carry financing - from All Cash to All Owner-carry. I showed the All Cash limitation above, and now I'll show the other extreme.

Since my maximum monthly financing is $272/month, I could then offer to pay the owner $272 (or less) per month for n-months until a point the loan is paid off or to a predetermined point and then offer to pay the balance in a balloon payment. The list price is $69,000, so I'll use that as a basis:

$69,900 / $272 = 257

So, paying $272/month would take 257 months (a little over 21 years) to pay off the $69,900 amount. The seller may be open to this, or they may ask for a yearly interest payment, or they may ask for an earlier payoff date, or they may not be open to any owner-carry financing at all. It is after all just another option. and if nothing works, then I drop it and go on to another deal.

I could offer her $250/month for 10 years with a ballon payment of $39,900 at the end of the term (and hope my REI career takes off to a point that I have $39,900 in cash in 10 years to give her).

Option #3: Mixed Financing
In order to create an option that has some upfront cash for the seller, I would still need to get a loan. I would still need to limit all payouts to $272/month. Therefore, the loan payment and payment directly to the seller could not exceed $272/month in total. For example:

Loan (Cash to Seller): $30,000 @5.25% for 30 years ($165.66/month)
Carry-back Financing: $39,900 ($106.34/month for x-years w/balloon)

These are options I am considering for these properties. Of course, the $69,900 list price is only a basis. When I meet with the agent today and tour the properties, I will need to assess them for repairs, etc. I'll then deduct that amount from the overall price. Also, I've considered that even though the properties have a FMV of $72k-$77k, I will not offer more than 5% less than list, or $66,500, no matter what the properties' condition, financing, etc.