Posted by stan on August 27, 2004 at 11:29:16:
Thanks for your thoughts and future consideration
1st Deal - Posted by stan
Posted by stan on August 27, 2004 at 10:20:22:
I’m looking at a 150K property that’s free and clear and the seller wants 25K cash and is willing to take the rest over time. I’m trying to figure out how to raise the 25k. I’m looking for options. Here’s what I’ve come up with to date.
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25k out of my IRA
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25k on a credit card – not sure if this is a good option because it keeps me at high interest rates and forces me to sell for cash to get relief
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25k from a hard money lender – this is not a fixer upper and needs no more than paint and carpet. Like the credit card option, the cost of the money seems high – am I thinking correctly?
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Create a 35K note (depending on investor yield requirements) and sell it to an investor for 25K cash to give to the seller – I have never done this before and I don’t have the contact for the investor. How much seasoning is usually required before an investor will buy the note? Also, is it safe to assume that the 35K should be in first position?
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25K from a private investor, like a friend or a neighbor, who wants to make 15% on his/her money. – This option
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Have the seller take out a home equity loan for 25K to get his/her money.
Are these options viable? Which are the best in terms of ease, time and risk? Have I missed any?
I’m concerned about boxing myself into a certain exit strategy. If I go for short term money, is there a way to structure it for a long term payback?
Re: 1st Deal - Posted by Torrey Williams
Posted by Torrey Williams on August 28, 2004 at 18:48:55:
Take the 25K out of your IRA account. You can use your IRA (if it is self -directed) to invest in real estate without incurring any penalties.
Re: Where’s the beef ?.. - Posted by Ed Garcia
Posted by Ed Garcia on August 27, 2004 at 11:23:04:
Stan,
You crack me up.
You ask a question and then give 6 answers to your own question.
I guess what you want us to do is choose one of your multiple-choice answers.
Matt hit the nail on the head. What is the profitability of the deal?
To be honest with you, your 6 choices are lame and seem to focus on how to get the down payment to set up his financing, rather then the best way to structure the deal.
On a bad day this deal could be a 90-5-5 meaning you could purchase it with 90% financing, 5% down and 5% seller carry-back. 5% down would only be $7500 + closing cost. On a good day, we could do 100% financing.
The question is profitability, which determines Risk/Reward.
Sorry Stan, we need more info. We need to know the Profitability, your financial strength, and the motivation of the seller. Then we can start to formulate what strategy, technique, or combination there of we could use.
Ed Garcia
Re: 1st Deal - Posted by Matt Christensen
Posted by Matt Christensen on August 27, 2004 at 10:35:50:
First off how much is the house worth? He wants 150k but what can you sell it for after you get the paint and carpet done on it?
Re: Where’s the beef ?.. - Posted by stan
Posted by stan on August 27, 2004 at 11:41:46:
Ed,
I’ve not negotiated this with the seller yet, that happens on Monday, so I’m not sure where he stands on his price, which is why I’m vague on details. My minimum profit is 20K and if he doesn’t like it, I’ll let him cook for another 30 days.
I’m a trying to avoid using the banks and taking on the debt personally – that was my goal when thinking of the strategies.
I don’t get a sense that the seller is ‘want’ to sell and not quite a ‘need’ to sell. For those properties that look good (like this one because of the amount of equity and the location), I’m willing to follow up every couple of weeks until the property is gone.
In terms of listing the strategies, I didn’t want to come to the board empty-handed, looking for a handout – I wanted you ‘all’ to know that I’ve commited to putting my time in on solving my own situation. However, my solutions, are mostly book-knowledge and I don’t necessarily know the cost/benefit implications of each of them.
Thanks for your response.
Stan
Re: 1st Deal - Posted by stan
Posted by stan on August 27, 2004 at 10:54:58:
Good question. The seller is saying that the house is worth 150K. I am going to try to get him down to about 125K so that I have a reason to get involved – I don’t work for free :). Then I want to make a 3 option offer. I’m trying to formulate those offers now. The seller wants to raise 25K to put down on piece of vacant land so he can later build a house.
Thanks for the response.
Re: Mental Masturbation… - Posted by Ed Garcia
Posted by Ed Garcia on August 27, 2004 at 12:12:10:
Stan,
In your original post your concern is on how you?re going to obtain $25,000 for a down payment to purchase the house.
Now you tell us,
((I’ve not negotiated this with the seller yet, that happens on Monday, so I’m not sure where he stands on his price, which is why I’m vague on details. My minimum profit is 20K and if he doesn’t like it, I’ll let him cook for another 30 days.)).
You then say,
((I don’t get a sense that the seller is ‘want’ to sell and not quite a ‘need’ to sell.))
What you?re doing is what we call ?Mental Masturbation???.
You?re playing with your own brain with no rhyme or reason.
While you?re trying to make chicken salad out of chicken $hit, there are people out there finding deals.
One of the main ingredients we need in doing a good deal is MOTIVATION?
In my opinion what you are doing is a form of procrastination. Stan, it?s obvious that you?re a Newbie, so here what I tell Newbies starting out.
First, is to evaluate how much time you are going to be able to commit
To Real-estate? If your approach is hit and miss, so will be your result.
Second: Go to the street. It is the best teacher. Rather than talk about
Doing deals, reading in the library, getting courses, JUST DO IT.
You’ll find in the long run, the street is the best teacher. Not only
that by getting out an doing it, you’ll learn your MARKET, meet people to build a
NETWORK, learn the demographics as well as the geographics of your area, and of course you would have over come the biggest obstacle in getting started,
PROCRASTINATION.
We need to do what we call, penciling out a deal. When doing that, we
ask ourselves a battery of questions necessary in structuring a deal.
I’m going to give you 5 steps to get you started.
(1) How much do we want to make?
So many times I hear someone act as if they are afraid of loosing a deal
because of the profit they put into it. Forget about it. I’d rather be sorry about the
deal I did not make, rather than the one I did. The profit is what protects you in a deal.
Don’t be afraid to make it.
When doing a deal I want to make at least 30% and believe me when I
tell you, when I structure a deal with 30% in it, I never get it. Some how the profit always
dissipates, even after I thought I figured it to the penny.
Would I do a deal with less profit? Yes but I would do it as a flip,
lease option, or as a leveraged deal with positive cash flow.
(2) Determine the Value of the Property.
The next thing I must do is determine what the property is worth. The
obvious thing to do, is comp it. Don’t let the seller or real-estate broker tell you what it is
worth. Get it compted yourself.
(3) Deferred maintenance.
Usually I figure my profit after taking off the deferred maintenance,
otherwise it distorts my profit. So it must be figured in the beginning to determine your profit.
(4) Game plan.
What do I want to do with the property? Do I want to fix it and sell it?
Do I want to keep it long term or short term? When I buy a property, I have a plan for it.
And usually I buy it with that plan in mind. This part is so important, I’m going to go into more detail by giving you an example.
Remember, you make your money on the buy.
GAME PLAN.
Each deal speaks for it?s self. For example, if I bought a house for
Lets say $50,000 and had to put $10,000 into it for fix up. I?m in this deal
$60,000. Now what would that house have to be worth in order for me
to feel comfortable to buy it, and debt service it on my line of credit.
$70,000? No I don?t think so. I have no room in this deal for error.
What if after a month or two I don?t sell it?
Now remember, we can play the what if game, all day. I can create a fast
Sale for the purpose of this posting to make myself look good, but
that?s Not the answer. So remember we have to always be careful with
hypothetical questions and answers. The profit structure on this deal is
not good enough for me to do the deal.
$80,000 ? Were getting better, but No. I have to keep in mind that
things can go wrong with my deal. What if I sell it after 2 months, and then
the sale falls through after being under contract for 45 days because of
financing.
Now I have had the property for 31/2 months, and have to put it back on
the market again. Also what if the market changes or slows down ?
Even though I show on paper that I have a $20,000 profit, that?s not
so.
For the fun of it, lets take this so call $20,000 profit and structure a Game Plan around it.
(1.) I plug in 6 month worth of debt service on my deal. I?m in the
deal $60,000. Interest, depending on the interest of your credit line,
Let say for the benefit of our example is 9.5%. Our payments would
Then be $475 per month. 475X 6 = $2850.
(2.) What ever the market value you come up with, always cut it 5%.
Because realistically, the potential buyer is going to want you to
Discount your price. Now if you don?t have to, great. But lets face
It. If you were trying to sell it for $80,000 and someone offered
You $ 76,000, you know you wouldn?t want to wait for another
Buyer. You would still be debt servicing the deal. With you luck,
You wait another month or two and the next buyer would make
The same offer. Terry Vaughan will tell you, that the first 10% of
a deal is water. I agree with Terry, but for the purpose of this
deal we?ll just keep it at 5%. So lets take off another $4000.
(3.) I always plug in a realtor. Now I know that there are a lot of
Geniuses out there that don?t need them. They are so great that
they can sell the property themselves. Great, you plug in a
Realtor. 76,000 X .06 = $4,560.
Lets recap. A sale of $80,000, gives us on paper a $20,000 profit.
$20,000
-$ 2,850 Debt service
-$4,000 5% Discount
-$4,560 6% Sales commission.
Potential Profit $8,590.
As you can see the profit dissipates quickly. And personally I don?t
think It?s enough to take the risk your taking with your line.
How about $90,000? Now all of a sudden the deal can make sense.
We have between a $17,500 and $18,000 profit.
Lets look at our LTV (loan to value). 60,000 divided by 90,000 =
67% LTV.
So you see the deal speaks for it?s self, but the structuring of a deal
with a Game Plan is what will let you know if you should do the deal.
(5) Financing.
How am I going to take my deal down? Am I going to create a seller carry
back, and use a lender to give some money to the seller? Will the seller carry back the whole deal? Will I have to buy it with a combination of down payment and financing? Or will I pay cash and then refinance it later, getting all of my money back.
These are just a few basic fundamentals of doing a deal. I hope this is some help to you.
Ed Garcia
Re: 1st Deal - Posted by Matt Christensen
Posted by Matt Christensen on August 27, 2004 at 11:19:22:
First off is to MAKE SURE the house is worth 150k. If your going to get him 25k somehow and have a 100k note and the house is only worth 125-140k it might not be worth doing the deal. So pull some comps around that area and make sure that the value is as listed. Then you can procced from there. He can pull a mortgage on his house for $32,000 giving him about $25,000, then do a note for the rest to you. That of course gives you less to work with and I would use this at a later resort but just keep this in mind. Let me do some thinking and I’ll get you some more ideas
Re: Mental Masturbation… - Posted by voldaddy
Posted by voldaddy on September 07, 2004 at 18:16:27:
wow-i saw this title and had to read it, there is a TON of information here, I have read Sheets program and still cloudy on how to get started, I think I am learning more just by reading all of these posts. Us newbies really do appreciate all of the advice given to us. Keep up the good work!