Posted by Bill - Ga on April 04, 2003 at 19:39:19:
After dealing with the Boston real estate market for years which also is enjoying huge runups in price I can say that a seller in a market that is appreciating 25% annually does not need to deal on their home. They can sell it any day of the week to anyone unless the FMV is no where near 300k then I can’t see the seller going for it. I sold my last two homes that I lived in the first day it was listed…one for full asking price and one for 1k more than asking price.
If the market is as you say it is then I would be pretty surprised if their are very many “Creative” deals going on your average home. Sellers just dont have the motivation because they can sell any day of the week.
I really need help putting together my first deal. Here are the numbers and my theoretical strategy:
2/2 SFH in area appreciating at 20-25% annually
market price: $300,000 asking: $300,000
my offer: $245K-$285K seller owes: $130,000
I will finance about $171,000 (60% of $285K appraisal), pay off the $130K loan, give seller $41K cash, and ask seller to carry back a 2nd for the rest of his equity ($74K-$114K)at 14% annual simple intrest to be paid in one balloon payment at the end of 2 yrs. My PITI will be approx $1500/mo. I would lease/option for $2000+/mo for 2 yrs with an option price of $350K which would give the buyer a great deal and facilitate his easy financing. This deal provides a nice positive cash flow and back end profit for me provided the tenant buyer is able to get the needed financing. Worst case scenario, he can’t and I have to refinance to pay off the seller.
My questions are:
Is this strategy realistic?
How do I specifically create the note/mortgage or both for the seller? I understand the theory, but where do I get the documents and how is it structured?
I have very good credit and a very secure $85K income. Will my lender of the $171K require me to put up some of my own money?
What is the best way to find out what the property will appraise for? Like I said, market value = $300K.
Thanks to any and all who respond and come to my rescue!
Posted by Jack Kurtz on April 03, 2003 at 16:26:02:
First, it doesn’t sound like your seller is very motivated. If the current value is $300,000 and that’s what they are asking, they need a motivation for selling to you at a discount. Are they in foreclosure? Job transfer? Divorce? Probate?
That being said, if you’re in an appreciating market and you want to buy it at market price, there is still a chance for you to make money doing a lease/option deal. But again, it helps if they’re motivated. You shouldn’t put any cash if you can help it on a lease/option. Your goal is to solve their monthly payment problem and commit to buying at today’s full price on an option. Then you can get a tenant/buyer to agree to buy it at tomorrow’s price, come in with upfront option consideration as cash to your pocket, pay above market rent so you can get cash flow, and then do a simultaneous closing between your seller and your tenant/buyer when the tenant/buyer is ready to exercise his option (and you make money on the back end). You can do this type of deal without using your own money. Check out William Bronchick’s lease/option course at http://www.legalwiz.com.
But if you do go ahead and put up a bunch of money to buy the property and have the seller carryback a note, is there any chance that the seller would be willing to sell to you “subject to” the existing loan on the property? Having the seller carryback a mortgage would be a good negotiating point if they don’t go for your first offer, but don’t suggest a carryback up front.
Thanks for responding. In this market, this deal has the potential for a large back end profit when selling on a lease option. The way I want to structure the deal with the seller is to take out a loan for 60% or less of the market value of the property, then have the seller carry back a 2nd for the remainder of his equity so I don’t have to come up with any money in the transaction. He is not a motivated seller, but that does not prevent me from realizing a large profit if he goes for the deal. Problem is, I was talking to a mortgage broker who says that any lender will want me to come up with money out of pocket for the sale and that 6% is the most that the seller can contribute to my purchase. A “subject to” deal is not a consideration because of the large amount of seller equity and no motivation to sell. I hope this clarifys my situation and thanks again for any input.