Seller’s financing – my experience, process of buying property in Topeka

11 comments so far

As I described in the last post at Buying Property in USA blog, I was quite lucky, because I found a great real estate agent, who presented me with a few investment properties, with possible seller’s or so called owner financing. I have read a lot of things about seller’s financing before, but it was still something really new for me. I had to offer and negotiate the terms before I could again buy house in usa.

I knew that the seller was quite motivated to sell the property, since it was more than 180 days on the market. That was definitely quite a big advantage. Disadvantage on the other hand was that the seller still had an unpaid mortgage on the property, with quite high payments and she obviously wanted me to cover the payments fully.

First, I needed to get all the information possible about the property. I requested details about the leases of the tenants (4 of 5 of the units were occupied), the utility bills (seller was paying all the utilities – this was very important information, possible deal breaker), time period of major repairs (roof, hot water heater etc) and also the information about the owners underlying loan. Marta (my real estate agent) helped me with most of that.

Second, I had to put together an offer. It’s hard to calculate how much the terms of the mortgage matter, and therefore I created an excel spreadsheet, where I could test all different scenarios (various down payment, balloon length, interest rate and amortization periods). I had some kind of benchmark (70%LTV @ 6% 20y) and I have calculated Net Present Value of this financing. Then I was comparing all the other scenarios and I chose one with similar NPV (very good one for me).

Third, I put together the offer, with a closing date in the beginning of the month (2nd or 3rd). This is very important, especially for occupied multifamily properties. The trick is in the fact, that the rents (but also utilities) are always pro-rated. That means, if you close on the 2nd, you will get almost a full month of rent. However the mortgage payments are usually on the 1st of each month (or you make sure they are). So you will have all this extra money at closing, but your first payment will be almost one month from that date.

Then I sent in the offer and waited for the seller. We had a few rounds of negotiations, mainly because the seller wanted ARM (adjustable interest rate) and I wanted fixed. Her reasoning was simple – the underlying loan was ARM as well, and she wanted to be sure that I will be always able to cover it with my payments. In the end I have agreed on the 6% ARM, but at least I got 80% LTV (20% down only) and price under the listing one.

Fourth, Marta gave me contact to a lawyer, where I sent my contract for a check. He found a few little issues. The main one was that he recommended me to insist on having an escrow account with automated transfer of my monthly payment towards her underlying loan. This way the seller wouldn’t be able to take my money and stop paying her loan. My lawyer charged me just half an hour for the work, well worth $125.

Fifth, I had a 10 day inspection period of the property. Marta helped me with arranging that and also went there with the inspectors/handymen. I got right away some quotes for the remaining work and also found out that the only major expenses will be new electric meters and wiring, and rehabbing of the 5th unit. Total costs for about $15,000.

Sixth, I researched a few property managers in Topeka, and in the end I decided for the most recommended one – Travis with Rental Management Solutions. He seemed really fair, and had fair pricing, plus great references. Travis helped me with the work quotes and also got me a great discount with the local insurance company. Property insurance was mandatory to be paid in full for the whole year, by the bank.

The rest was quite simple. I had to do a few calls over Skype and send a few dozens of emails, but I was able to take care of everything from Europe.

So this is how I bought my third property in USA! Here are the numbers (pretty great):

5-unit multifamily property

Purchase price: $55,000

Down payment: $12,000

Immediate rehab cost: $10,000 (rehabbing the 5th unit)

Monthly rental income: $2100 (now) – $2700 (with the 5th unit rented)

In this case the IRR is: 32.81 %

Cash on cash return: 81.90 %

You can see the full analysis report (with the most relevant data) here:

Topeka Property: Real Estate Analysis Report

Just a few details regarding the report – I paid $12,000 down payment, but I am going to spend approx $10,000 in renovating the 5th unit and for some other repairs. In the analysis, I have put it in the “rehab costs”.

Also I have balloon in 4 years and the note is amortizing over 9 years (to reach the same height of the monthly payment as the seller pays). After that I was estimating to refinance @ 5% interest, 20 year amortization.

I know I was so far probably really lucky, in finding such a great agent and then the property, with so high potential. Hopefully I won’t run into too many problems. Anyway, it seems that Kansas can offer some great Real Estate investment deals.

In the next week or two, I will be calculating rental yields for various states, to put together a table of various markets with good price to rent (P/R) ratio. Stay tuned at Buying Property in USA blog.

Saturday, January 22nd, 2011 at 8:04 am and is filed under #3 - Multifamily in Topeka, KS, buy house in usa. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

11 Responses to “Seller’s financing – my experience, process of buying property in Topeka”

  1. Posted by tony 23rd January, 2011 at 2:19 am

    very cool figures. would you do this again? is it repeatable?

  2. Posted by admin 30th January, 2011 at 5:37 pm

    I think it is repeatable. In fact I am just helping my friend to buy a multifamily property in Topeka as well. We will see if he will be able to find similar investment property.

  3. Posted by Alyse 23rd January, 2011 at 3:35 pm

    Big lover of the website, a ton of your posts have really helped me out. Awaiting posts!

  4. Posted by Joel 2nd February, 2011 at 11:40 pm

    Love the site mate,
    thinking about buying a property in Phoenix, Arizona with a couple of mates (all foreigners to the US). Was hoping buying under 20,000 maybe rental, maybe just for capital gain as won’t be much money down. Any ideas?


  5. Posted by admin 6th February, 2011 at 4:25 pm

    Hey mate,
    I am glad you like the site! As you probably read already in the earlier posts, you know that I bought a property in Phoenix as well (for about $32,000). However it was a condo and it took me almost 2 months to rent it out. In the end the returns aren’t that great, since the HOA fees even raised to $190 and I am getting rent of $580. Then you subtract the 10% property management fees and a few repairs (not many fortunately). Still I am glad that I am having sligthly positive cashflow..
    Arizona is having still quite a bit of troubles, maybe you should guys check and compare some other US states as well. I am putting together a table of rental yields for all the states, so that can be some inspiration. I will post it this week!

  6. Posted by Jacob 7th February, 2011 at 2:09 pm


    Great work and information on your site.

    It was extremely insightful. I browse through all of your articles and is now researching.

    Hoping to start buying some property in the states.

    I look forward to your analysis of the various states especially the rental yield.


  7. Posted by admin 11th February, 2011 at 12:44 pm

    Hi Jacob,

    I am glad you like the site. I have just posted the rental yield calculation of all the states!

  8. Posted by suny 16th February, 2011 at 5:46 pm

    Hi, great site! I am moving to DC and giving the hugely expensive rentals (comparable to London!), i am very tempted to buy instead of throwing money on rentals. However I will be on a G-4 visa and my revenue is earned and paid in Europe. Any thought on getting the mortgage sorted out? I am looking at Condos at 350 – 400 k range in the city center. Thanks!

  9. Posted by admin 11th March, 2011 at 10:34 pm

    Hi Suny,
    well you could try to obtain the seller’s financing possibly. I don’t think that the banks will approve you for financing, without living at least 2 years in USA (providing your tax returns and having credit etc).

  10. Posted by Brad 19th February, 2011 at 8:42 am

    Yeah I agree, thanks for the info. I ahve a question.
    What do you think will become of the loans if the US dollar hit significant inflation and they raise their interest rates significantly and quite quickly.

  11. Posted by admin 11th March, 2011 at 10:36 pm

    That’s one of the possible scenarios for the future. In that case many people would default probably, becuase they wouldn’t have the money for the mortgage payments, it would pretty uch crash the real estate market. Hopefully it won’t be that crazy.. ;o)