Help!! How do I structure this deal???? - Posted by Kevin(OK)

Real Estate Investing
1

Posted by Jimbob on December 15, 1998 at 16:59:17:

Dave,

You’re right, you dont get if you dont ask, let me ask you this, would you sell someone your property, let them put a hard money first at 10%LTV and put you in second position at 90%LTV? Of course you wouldn’t. Now the lady just might do it depending on her motivation however, if the buyer presents this kind of offer to her, the buyer may lose all credibility with the seller and lose the deal all together.

Another disadvantage to the buyer in this scenario is the headaches they will have to go through to get the hard money, especially only $10,000. Regardless of what they say about hard money, one reason they call it that is because it’s hard to get.

Based on my experiences, I dont like to present what I consider to be non feasible deals to sellers, it just wastes my time.

If you feel like trying, you never know you might get one though.

Jimbob

2

Help!! How do I structure this deal??? - Posted by Kevin(OK)

Posted by Kevin(OK) on December 15, 1998 at 09:54:32:

I posted this deal a few days ago. The lady is an out of state owner, house comps at $100K, is rented for $800 (below market rent), the lady wants to carry the mortgage for 20 yrs (doesn’t want the tax hit), she still owes $10K on it, she can still take a few more years of depreciation, so she was open to L/O. She wants whoever buys it to put down “enough” for her to be assured that the house will not be trashed out. She wouldn’t tell me how much she wants to sell for, just for me to make an offer and she will decide if it is good enough.

My plan is to offer $86K (this is tax appraised value, I dont think she would go below that). Then I will sell it on a L/O for $100K, $3K - $5K down, $1000 per month on a 1 yr term (unfortunately the current tennants will probably have to be let go).

So what is my best purchase option here? I could buy it on a wrap around, Contract for Deed (I need these forms, does anyone out there have them?) or L/O, but the down payment is going to kill the deal (I have to put it on a credit card). I could offer $10K down (hard money) in the form of a first mortgage and have her carry a second for $76K, but I think she will realize that I am putting no money down. What kind of a deal can I structure that requires little out of pocket, allows me to sell on a L/O (if the tennants exercise their option, this lady is not going to be happy with the tax hit), and gives her the sucurity that she needs?

Thanks

Kevin(OK)

3

Re: Help!! How do I structure this deal??? - Posted by JimB (OR)

Posted by JimB (OR) on December 15, 1998 at 17:16:38:

Normally I wouldn’t respond to questions like this asking for advice, because frankly I’m still a vastly underqualified newbie to alot of this stuff, but this is such a wierd twist I had to respond. I think we’d all like to find buyers who view cash as a BAD thing. =)

I think purchasing this house is going to be the hard part, and will depend on if she cares where the down payment is coming from, and if she’s willing to carry subordinate financing. I’ll leave this to the folks who have already responded below, and to any others who wish to chime in. I will make one note: if she’s concerned that no money is coming out of your pocket, make it clear that you are not going to be living in the house, and that therefore you will not “trash” it. Likewise, when you rent it out to others through a L/O, you will require a substantial option consideration fee, thereby helping to ensure that they won’t trash it.

As for what to do with the house once you get it, here’s the first thing that popped into my mind: If the seller carries a mortgage for, say, $76K, then make it assumable, and write up the L/O paperwork so that if the tenant exercises the option, then they HAVE to assume the existing financing. Hell, write up your sales agreement with this seller so that any transfer of title over the next X number of years will require this loan to be assumed, if she’s so worried about the tax hit (assuming all this is legal of course; I’m shooting from the hip here ;).

So now if you do a 3-year L/O with a purchase price of $100K, then you can ask for $5K up-front option consideration, and give $300/month rent credit toward the purchase price, with a rent that provides a nice cash flow to you (you can charge above-market rent since so much is going towards purchase price). At the end of the three years, with the up-front option consideration and the 36 months of rent credits, your buyer will have amassed over $15,000 in equity, and will need to come up with another $10,000 in cash to buy out the remaining equity and assume the mortgage from you. You get paid up-front, in the middle, and at the end.

You could actually set a higher selling price since you’re doing a L/O, for example $110K. However you need to use your judgement about the likelihood your tenants will exercise their option, or if you even want them to. Since you know up front how much the financing will be, then you will know how much cash they will need at the end of the lease agreement, and can then figure out how likely they will be to exercise the option (or, as the seller put it, trash the place and leave). If a tenant says they can only afford $5K now, but will have $30,000 in three years, then go for it and set a $120K purchase price! =)

A situation like this would be a dream to market to potential buyers. “Mr. Buyer, I am holding in my hand a mortgage for this house that can be all yours. No approvals, no bank fees, no credit checks. All you need to do is come up with the balance of the purchase price in cash. And you know what? I’m going to help you with rent credits”. Seems like you’d have folks knocking down your door.

I wish I could get away from my 60 hour/week job to look for deals like this myself.

Good luck, and let us know what happens!

4

Re: Help!! How do I structure this deal??? - Posted by Jimbob

Posted by Jimbob on December 15, 1998 at 12:03:34:

Kevin,

There are a bunch of different ways you could do this one. I would not be inclined to ask her to carry back a second mortgage for $76,000 in front of a new hard money first for $10,000, she would need her head exmained to go for something like that. I would also not try to do a contract for deed, those are dicey and the buyer usually ends up getting ripped off one way or another.

You did not mention the condition the property was in, assuming it needs work, I would ask her for a lease option with very little ($1,000) down and give you the right to sublet or assign it to another person when you’re done with it. Fix the property up, and try to flip it to another buyer with the new buyer giving you $10,000 or whatever makes sense, to assume the lease option, and you’re out of the deal.

The seller may be reluctant to give it to you on a lease option with so little money down, explain to the lady that the property needs work, and you are willing to go in and do the repairs, in exchange she gives you the lease option that way she does not have to relinquish title to the property and she maintains the tax and depreciation benefits. You in turn gain control of the property for minimal qualifying, and little money down.

Personally if I were you, when I was done fixing up the house, I would just put it on the market and try to sell it retail to a regular old buyer for a straight cashout sale, pay off the seller and keep the difference. If you are not able to go the route because of a slow market, then fall back to assigning your lease option to another buyer for your fee. If worse comes to worse, put a renter in there and refinance it after a year or two to cash out the original seller.

Always have at least one backup plan when buying or selling property, because things dont always go as planned.

Hope this gives you some ideas…

Jimbob

5

Maybe, something like this. - Posted by David Alexander

Posted by David Alexander on December 15, 1998 at 11:40:26:

Get Hard Money for say 20k, payoff her underlying
and put 10k in her pocket. Have her carry back a
a second for the rest. You need to find out her best price for all cash. Once you’ve established price
it rarely goes back up. You, would then sell on Contract for Deed, or with a L\O, but if you do, I would selling for more than what the comps say.
I would raise the price by at least 10%, at least that
works for the Dallas market. With a Contract for Deed
your selling financing, with a L\O your selling Future Value. You could also run an ad to get the 20k and probably get a better rate than Hard Money lenders give. A 20-50% position on a nice house should have
people waitin in line. You, don’t want to buy on Contract for Deed unless your risk is very minimal,
because your out of control. But, if you do, make sure
the documents are recorded, theres now DOS clause, and I’m sure theres more. There is a thread below where
Irwin has given me some advice on buying when there is a CFD.

David Alexander

6

If you have them assume the existing… - Posted by David Alexander

Posted by David Alexander on December 15, 1998 at 18:04:57:

mortgage, then one of your profit centers would dissapear. If the lady would finance at 7% or so and
you keep as much intact as possible, you would wrap it,
because, offering Owner Financing you can charge a higher interest rate, like 10-12%. You would effectively make 3-5% on the whole amount why would you want to give this up?
Also, Hard money can be come by
easily if its below the 50% mark, it’s just expensive,
that’s why its called hard money. It also usually balloons in a year or two. But, something like this you could run an ad in the paper and get money because
it would be so well secured. Also, Kevin check out
Alex’s Success story, Money now, Money later.

Bottom line until you talk to the lady, you want know what to offer. You got to find her price and her needs.

David Alexander

7

Why Not? - Posted by David Alexander

Posted by David Alexander on December 15, 1998 at 16:06:22:

Ok, Jimbob, I’ll bite
Why not ask? If you don’t ask you don’t know. If you legitimately plan on paying what’s the problem. Remember, the lady doesn’t want to be cashed out.
So that leaves you with Cash Flow.

David Alexander