Contract for Deed

a.I have an apartment complex for sale with an asking price of $3.1M. The appraised value of the property is $2.95M. I have not been able to sell the property since listing it on 4/1/2014 and my mortgage payments are really starting to hurt as the remaining balance is $2.0M at 5.875% Interest Only.

However, recently I was approached by a buyer looking to enter into a Contract for Deed. The offer price on this contract is $3.0M with a down payment of $300,000 and an Interest Rate of 6.5%. If I enter into this contract it would be for 6 years.

What would be my before tax internal rate of return and should I do this (justify your answer)?

b.The buyer of the property above is interested in the property and believes they can turn a profit under the right circumstances. Their perceived rental income would be $175,000 in year 1 with an increase in rent by 3% per year after.

However, in order to garner the return the buyer believes is possible it will take an upgrade of the interior immediately costing $300,000 followed by small renovation projects of $50,000 per year thereafter.

The buyer believes that if they can put forth this effort they will be able to sell the property for $4.25M at the end of the 6th year with a sales commission of 1.5% of sales price that will need to be paid (sales commission is deducted from the sales price).

Is this a good investment for the buyer on a before tax basis (calculate the internal rate of return and justify your answer)?