Seller carry on a 12 room house, but the carry note has an occupancy covenant I've never seen

Managing this type, 75% occupancy looks like a comfortable floor in a normal quarter. It's a very real floor in January and in the month after any resident dies or gets arrested, which happens more in this asset class than people writing spreadsheets expect. We run a portfolio of rooms and our worst month in three years was 68% in a 14 room house after a stretch where three people left in the same fortnight.

Eight rooms of twelve is 66.7%, so his number is basically drawn right at our worst month. I'd want seven.

Also, harrow is right about inspector driven vacancy but there's a second version of it. Some jurisdictions require a room stay empty for a set period after certain incidents. Ask your attorney whether anything in your local code does that, because if it does, the covenant and the code can conflict directly and you'll be the one holding both.

Your numbers say the covenant is doing work your DSCR doesn't need it to do. 7,600 gross at eight rooms, 4,900 opex, 2,900 debt service, that's a negative 200 a month. You wrote positive. Check it again.

At nine rooms you're roughly 8,550 gross, so about 750 a month of cushion, which is a 1.26 coverage. At eight you're underwater by a couple hundred. So his nine room floor is approximately the point where you stop covering him, which means his attorney did the arithmetic and you rounded.

That reframes the negotiation. You're not asking him to accept default risk he isn't already taking. You're asking him to accept two months of you dipping under coverage before he can act, which is a normal thing for a lender to accept if there's a reserve behind it. Offer an interest reserve, six months of debt service, 17,400, held back at closing or in an account he can see. Then the floor question matters much less because he's paid either way during the dip.

That also gets you the repair carve out cheaply, because the reserve answers the same worry the carve out worries him about.

Naive question, when a room goes vacant here, how fast does it actually refill? Everything I've read about screening says the pipeline is what protects you, and if a room refills in nine days the covenant is almost decorative. If it takes six weeks then eight rooms is genuinely dangerous.

sextant beat me to the coverage math, and I want to add the part that bothers me more. Interest only for four years at 7.25% on 480k means you owe 480k at the balloon. Nothing amortizes. So in year four you need a refinance on a 12 room licensed boarding house, and the lenders who write that are a short list in most markets. If the license has any transfer or renewal issue at that point, your refinance options narrow further.

The occupancy covenant is a four year problem. The balloon is a one day problem. I'd spend some of my remaining negotiating room on an extension option, say two twelve month extensions at a quarter point each, with the condition that you're current. That's usually cheaper for a seller to give than a covenant loosening, because it costs him nothing today.

The linen service line is missing from your expense build or it's buried. Weekly linen across 12 rooms is either a contract with a commercial laundry or it's your labor. If it's a contract, it's a real number and it scales with occupancy. If it's your labor, self managing 12 rooms plus linen plus turns is not a spare hours job.

We run route based service work and the thing that kills small operators is counting their own time at zero until the month they can't do it. Price a manager at 10% of collected rent now, even if you don't hire one, and see whether the deal still clears. If it doesn't clear with a manager in it, the covenant is not your problem.

I want income without a second job, so the covenant is almost beside the point for me. Twelve strangers, shared kitchens, a license to keep in good standing, and a seller who can call the note if two people move out. That's a job with a mortgage attached.

Not saying don't do it, arbor. Saying that if you're pricing this against a boring duplex you should put a real salary line in.

I'd look at the land and the zoning before the note. If the rooming house use is legal nonconforming rather than permitted by right, then a lapse in the license or a long vacancy can extinguish the nonconforming status in some jurisdictions, and the rule on how long a lapse is fatal varies by state and often by municipality. That's a question for a land use attorney in the actual town, and it's worth asking before you spend another week on section 6.

Because if the use is nonconforming, then the covenant isn't the seller being greedy. It's the seller knowing the thing that turns the property from a 690k boarding house into a very large single family house.

orchard's point is the one I'd chase first. When I was working through the licensing side in my market, the renewal application asked for continuous operation and there was a line about substantial discontinuance. Nobody could tell me what substantial meant. The clerk said it had never come up. That is not a comforting answer when your note has a default clause pointed at the same thing.

arbor, do you have the actual license in hand or just the seller's word that it's current and transferable? Those are different documents and in a lot of places the license doesn't ride with the sale at all.

Twelve rooms, a covenant that can default you while you're paying, an interest only balloon in four years, and a use that might be nonconforming. Any one of those is fine. Stacked, it's a lot of ways for a good year to end badly.

What would the deal look like at 640k with a smaller carry and you bringing more cash? Fewer moving parts might be worth more than the price.

I had to reread the covenant three times before I understood you can pay every month and still be in default. That's genuinely new to me. Following this one.