I’m always cruising around, looking for good deals on properties. In late 2008/early 2009, I had seen the above property listed on CraigsList for $80,000. The interior was partially gutted. The commercial space (on the ground floor) was originally a church, then was the post office, and most recently had been used as a strip club (keep in mind, this is in the heart of Amish country in Centre County).
I lost track of the building and purchased a few of my own UFUO’s. Last year, the building came on the market again, this time at $215,000, with four apartments and unfinished commercial space (the mirrors and poles had been removed…I’m not lying).
$215,000 was way too much for me to afford. With the commercial loans I am able to use to finance my properties, I need to put a minimum of 20% down (my current bank actually requires 25%). This is $43,000 at 20%, or $53,750 at 25%. I had $20,000 borrowed from friends. I decided that the next time this property came on the market, I would try to purchase it.
Well, no one bought it. The current owner decided to drop the price to about $190,000. Still too salty for me. I forgot about it and focused on my duplex. The building still didn’t sell, so the owner dropped the price further, this time to about $150,000. I felt it was just out of reach, but getting tantalizingly closer.
A little over a week ago, the owner dropped the price to $125,000. This would be a long shot, but would probably be within reach for me. The down payment would be $25,000 at 20% down. I am in the process of refinancing a few properties, and had hoped the two properties would yield enough appreciation to give me the 20%. Well, if you followed my post, you would know that I had a rough week and the first property came in SIGNIFICANTLY shy of any ‘good’ appreciation (post is here).
I decided that rather than get too down about the appraisal, I just need to exercise some creativity when I submitted my offer. The same day my appraisal numbers came in, I read the blog post “Why I Often Pay More than a Property is Worth” by an author I really enjoy, Ben Leybovich of Just Ask Ben Why.
Many times, when two parties are negotiating a deal, an adversarial atmosphere begins to develop. One party doesn’t want to pay full price for the house the other party is selling. Sometimes these reasons are well thought out, other times not so much. Ben’s post outlines many times when he decides to pay more than the asking price for the property.
Why? Ben actually does a great job laying out the reasons to offer MORE than the asking price. One of the reasons to ask more than the asking prices was if the owner could offer owner financing and take a lower down payment (the light bulb went on inside my head).
What if I could offer more than the seller is asking but ask the seller to carry the loan until I can get ‘regular’ financing? To get the normal 20% down, I could ask investors to invest in the building, I could pay down the debt, if the building appreciated I would ‘own’ the 20%, or lastly and most likely: simply saving every last cent I own.
So, the day I learned I wouldn’t have the cash for a 20% or 25% down payment on a $125,000 property, I pulled up my spreadsheet and went to town working on my numbers. I came up with an offer for the building of $135,000 with 5% down, the owner to hold the mortgage for 5 years at 5%. With this offer, the down payment would be $6,750. Between my appraisal and some stock I own, I can scrape together $6,750.
I wanted my offer to really stick out (beyond the financing). I decided to send a cover letter along to the owner. The property had been a mess when he purchased it. He fixed it and the property now looks great. Rather than try the (fairly) standard, “Well, the paint is a little off. You used plywood for the kitchen islands rather than stone. Etc”, I would tell the owner that he did a really nice job with the property and that I really liked it. In fact, I liked it so much that I felt it was worth more than he was asking. See my letter here: Letter for Blog_Owner Financing.
On the way out to view the property, my Realtor and I discussed the offer and how to make it as strong as possible. When we stepped inside the property, the improvements were so nice, my Realtor was actually quite surprised that a) I was interested and b) the numbers worked so well and no one else was interested.
As soon as I got back from the showing, I immediately emailed my Realtor the details of the offer. I asked her to hold off on actually submitting the offer until I had rerun my numbers.
On Friday evening, I confirmed the numbers and asked my Realtor to prepare the offer. Saturday, we reviewed the offer and made one final tweak, we asked the seller to carry the loan for two years at 5% rather than 5 years.
I scrapped my piggy bank (literally rolled quarters) so that I had enough for the good faith money. We submitted the offer at about 3pm on Saturday. On Saturday evening, I updated my rent rolls and my personal financial statement. I sent these updated numbers to my Realtor in case the seller requested additional information about my financial situation.
Then we heard nothing. And nothing on Sunday. And nothing on Monday either, until about three in the afternoon. My Realtor called to make sure the seller’s agent had received the offer and to see if the seller needed any additional information. Apparently, the seller’s agent was out showing the property to someone else.
At first I was a little miffed that the seller was showing the property to someone else, but because of my offer, I understand the desire to want more ‘traditional’ financing. However, by the end of the day, the seller’s agent told my Realtor that the seller had submitted my proposed mortgage to his attorney. I think means that my offer is at least being taken seriously.
We’ll see how this all goes and I’ll keep updating the progress.