Deal or No Deal

My partner, Keith, found a nice duplex that was For Sale By Owner. He called for additional information and discovered that the property was being sold for $355,000 and that the seller would be willing to seller finance everything at 8% with a $10,000 down payment. The 2 units were renting for $1,380/month. The property was intriguing so we set up a time to preview the property and before the showing we had a chance to do a little research.

At 8% (interest only) the mortgage payment would be about $2,367/mo. The rents total $2,760/mo. Figuring a 20% expense rate we'd have $552/mo going towards insurance, maintenance & repair, vacancy and other miscellaneous expenses. So our cost of running this property is approximately $2,919/mo. This creates a potential $159/mo negative cash flow with $10,000 out of our pockets to get into the deal. While the property is in average condition and the basements have been finshed good, we'd have some initial costs for upgrading, maintaining and bringing the property into conformity with the city ordinances. The interesting thing is that the seller was promoting this property as a $200/mo cash-flowing property and as a turn-key operation disregarding the city and the landscaping & maintenance issues.

Our thought going into the discussion was that we could do a twin-home conversion on the property to increase its value. Our researched showed that the property was be worth about $350,000 upon completion of the conversion, $175,000 per unit. Our conversation with the seller revealed that he had done marketing as individual units and had received several (3) offers at $175,000 which confirmed our research numbers. So after we invested money into the property it would be worth less than the purchase price?!

Needless to say we haven't even written an offer. As I stuggled with this property I couldn't find a solution or upside to make this deal work. The seller owes about $325,000 and has a fixed payment (for 5 years) at about $2,600/mo. He lived there about 6-7 months to get the 100% owner financing and now he can't refinance or get out without a sale. We can't purchase the property for more than $280,000 (80% of future value) assuming no additional costs or repairs. We might pay more if the property would cash-flow using seller financing but that doesn't work either. I keep wondering if there was another approach that might work for this property. So far I haven't been able to figure one out.