How Can I Defer Payments Unitll I Have Cashflow? - Posted by Erich ( CA)

Posted by Tom(Dallas) on November 30, 2001 at 22:22:36:

Let him try if he wants. Whatever happens, he can only benefit from the outcome.
What’s funny is it reminded me of a comic strip I saw years ago where the husband runs home all excited and tells his wife,“Honey, they dropped the price of our dream home on Elm Street to $495,000!!” In the next frame, they both look dejected as he utters “The only problem is, they want a $500 deposit.”
I guess I’m just in a light mood tonight.
Happy Hunting Everyone!

How Can I Defer Payments Unitll I Have Cashflow? - Posted by Erich ( CA)

Posted by Erich ( CA) on November 30, 2001 at 12:35:44:

My wife and I are looking for a house in the 550K range in Carmel California. Recently we found a dream house. But, its 750K. I am expecting to be able to afford payments on the 750K in 6 months to a year, but not now. Silicon valley has caused the price to drop to 750K from 1.2M. I am expecting the market to come back in the spring. I believe I could make some serious equity if I can buy and hold.

I asked for a lease option but seller is sick of being a landlord and just wants out. Says she is desperate but needs cash

Any other ideas would be greatly appreciated?

Thanks Erich

Thanks Everyone For All The Imput! - Posted by Erich

Posted by Erich on December 04, 2001 at 13:17:10:

Three years ago, I moved to Monterey County and was amazed at the low price of ocean view property…120K for a 3bed/2bath. I began buying anything with a positive cash flow, fixing them and renting it out. I started with a credit card and NO MONEY of my own, just good credit.

Then Silicon valley huge expansion caused appreciation in my area. Overnight, I saw my properties double in value. Fearing a econimic slow down, I began looking at Central Valley (CA) multifamily to exchange into.

Last spring I exchanged and now own two complexes with 92 units total in the Central Valley. In the last six months, I have been through a wild rollercoaster ride as I have renovated my complexes, watching eagerly as cash flow began to develope.

At the same time, the most expensive second homes in Montery county especially Carmel have taken a huge dip in price. I figure now is my window of oportunity.

So…Heres how I structured the offer: Seller wouldn’t take a L/O so I made the purchase offer similar to one. I offered 700K with reduced payments the first year of 3%, 6% second year, due in 3 years, interest only. Seller carying an entire 675K first, 25K down. In six months I will put my house on the market and pay down the first by 100K.

If it works, I will have a reduced payment of 1687/month, and get a shot at my dream home. Seller has a couple of days to respond.

I know it’s a big stretch, but what a neighborhood and view!

Give me a break! You guys listen but not hear. - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on December 03, 2001 at 22:53:10:

Erich asked “how can he defer payments”.

What’s not clear about this? Yet there’s only one person, Dave (CA) who heard the question and provided a valuable answer that leads to the solution for Erich.

Common, the guy wants to leave in the (ex)$1.2 M house for the cost of $500,000. Wonderful, smart! My hat goes off to you Erich, if you can pull it off. If $500,000 is within your means, why not?

Why are you guys jumping on him and calling him “spoiled”?

One of the most important qualities of the investor is not just listening but hearing. I hope you not only listen, but hear when you talk to YOUR clients, buyers and sellers. If not, putting deals together can be extremely difficult. When the client is asking you a dirrent question, he wants to hear a direct answer, or at least something along the lines of what he’s asking.

Erich doesn’t want to hear 10 different reasons why he should not buy the house, or “how spoiled he is”, or how he needs to go and try to convince sellers that they should sell on lease option to him.

In fact, seller doesn’t want to hear about lease/option - it was made perfectly clear, he wants a cash sale. What’s a point of trying to sell him on this. To try and sway him over to Lease/Option is an uphill battle, at least at this point of his sales process. His prospective may change in 6 months, but probably not now.

Why not try to give him something much closer to what he has in mind - sale with a large chunk of cash involved. We already know Erich can and is willing to qualify for $500,000.

As Dave suggested Erich could get his $500,000 and have seller carry the remaining $250,000 on a second mortgage with deferred payments and no accrual of interest.

Yes, there was potentially a flaw in Erich’s assumption about the quick market recovery which may take quite a bit longer than he estimates (hopes for?). But this can be easily corrected by negotiating a longer term on the start of payments on the seller carry 2nd. Say, 3-5 years or even longer.

That’s much safer than a 6 months bet.

Negotiating something like this is easier than a lease/option, has an obvious immediate cash benefits to seller and some deferred payments and cash in the future.

Re: How Can I Defer Payments ?[very long] - Posted by Ronald * Starr (in No CA)

Posted by Ronald * Starr (in No CA) on November 30, 2001 at 22:16:58:

Erich----------------

As others have commented, and I agree, this is a risky venture.

This sounds like an ideal situation for a lease option, so I think your move in that direction makes a lot of sense. I wonder if you could structure the deal as a lease option and still get the owner to agree to it? I am thinking of what is probably a “sales” job on the seller. Talking about the negative aspects of property ownership that are motivating the owner and trying to handle those, even though she is still a property owner. You will take over all maintenance of the property – or all but heating/AC and roof, to limit your liability some. You will pay regularly and have a big penalty for not paying as agreed. This sort of thing. Now, it is possible that the seller has seen this big price decline and thus fears still more to come. If this is so, it may not be possible to reassure her. And she may be reluctant to mention this notion for fear of scaring you off. She might open up about this if you ask her directly and assure her that her view will not deter you.

That sounds like a very sharp decline in the value of homes. Do you have substantiation of this? Typically, I might expect 10 or 15% decline in a year, but you are talking about a 40% decline. How long is this?

Wait a minute! I just did some analysis of sales of homes in Carmel. I compared the sales prices of homes that sold in both 1997 and 1999, the last year for which I have available data. I found 42 such sales. The price range for the sales in 1997 was $275K to $1.995Mill, for 1999, this range was $390K to $2.275Mill. Every single one of these houses sold for more in 1999 than in 1997. The average increase was right at 50%. From this, I know that 1999 was an up-year.

Oh-oh. I don’t really know that do I? I only know that in a two year period prices increased an average of 50%. They might all have doubled between 1987 and 1998 and then dropped down to 50% gain over 1997 in the period 1998 to 1999. Sorry for the error. I could have just left out that section and made people think I don’t make mistakes. But I left it in because I remember somebody once advicing beginners to notice how “gurus” think. Well, then here is how I think. Check to be sure that you know what you think you know.

Alright, I ran the analyses again with properties which sold in both 1998 and 1999. I found a total of 31 of these sales. Sales prices in 1998: $44K to $1.85Mill. The 1999 sales prices ranged from $200K to 1.850Mill. This time, we see 28 of 31 selling for more in 1999 than 1998. The average increase in selling price is about 72%

Boy that looks strange, a greater increase in price from 1998 to 1999 than from 1997 to 1999? We must have a lot of rehabber projects coming in here. With properties selling for more not because of natural appreciation, but from forced appreciation. This is probably so. I see one property selling for more than 4 times as much the second time, two selling for over three times the earlier sales prices, and three selling for over double their prior price. Those are not appreciation numbers.

Well, ok, so we can’t really judge how much appreciation there was was naturally between 1998 and 1999. But, the point is clear, there is appreciation. Thus, we can now say that 1999 was a year of high prices, higher than prior years.

So, now to the point. How could property values drop 40% since 1999 to now? I doubt seriously that they have.

So, my point is that I wonder about the source of that $1.25Mill valuation in the past for this property. I also, therefore, worrry about the prospect of it ever getting up to that value in the future. If it has never been there in the past – which we don’t know for sure, but certainly looks reasonable from the above analysis–there is more doubt that it will ever get there in the future.

Well, we saw high appreciation rates in the late 1990s, so I guess it is possible that there might be fast depreciation rates in the 2000s. But my observation over many years is that the appreication tends to go up fast and depreciation down slowly, as sellers tend to welcome appreciation and resist depreciation.

So. I think you better have very good reason to think that the appreciation will be there in the future, since you are betting your wealth on it.

Do you want to submit your analysis that leads you to expect high appreciation soon? Maybe others here could comment on that number-crunching or number-hunching, as the case may be, and give you some feedback. I think people here are worried that you may take a financial bath and might well want to help you keep from doing so. Certainly, that is how I feel.

Good InvestingRon Starr**********

Re: How Can I Defer Payments… - Posted by GregNY

Posted by GregNY on November 30, 2001 at 17:50:22:

Hello,

And I quote: “I asked for a lease option but SELLER IS SICK OB BEING A LANDLORD and just wants out.”

Did you explain to him that he will just have to accept the payments and the rest is up to you?

Talk to the seller a little more and explain the advantages of the lease option.

Try and get him at 725K for 4 years, 2 months rent (security + 1).

Check this: http://www.creonline.com/mm_26.htm

There’s another by Matt B but I can’t seem to find it. But this should get you started.

Good Luck,

GregNY

Re: How Can I . . . - Posted by Dave (CA)

Posted by Dave (CA) on November 30, 2001 at 14:42:10:

Get a loan for what you can afford and have the seller take back a second for the rest. Tell her you can’t afford to start making payments for 1 year. Hopefully there is enough equity for her to get some cash.

How spoiled can you get? - Posted by GL

Posted by GL on November 30, 2001 at 14:30:05:

How spoiled can you get? A $500,000 house isn’t good enough for you, you’ve got to have the $1,200,000 job though you can’t afford it even at the bargain price of $750,000?

You are playing a dangerous game trying to get into that place.What happens if the big raise doesn’t come through 6 months or a year from now? Will you be the next don’t wanter, expecting someone to bail you out?

Re: How Can I Defer Payments? - Posted by Ms. Leigh

Posted by Ms. Leigh on November 30, 2001 at 12:46:45:

You could use the equity on other properties, or on the house you are in now to create a mortgage for a down payment. But if you can’t make payments on a mortgage of what is left, try extending the mortgage in years if you can to lower the payments. But you don’t know if you can make payments on the house as it it. I would buy other property to make that income pay to keep up the new house. But that is just me… The house you live in now, could you keep it and rent it or lease/option it?

Any other ideas anyone? I am curious how others will look at it.

Ms. Leigh

Is this what was asked for? - Posted by MikeD

Posted by MikeD on November 30, 2001 at 16:22:15:

GL - Lighten up, will you. We are here to help one another, not take potshots at each other.

Re: How spoiled can you get? - Posted by smilin_mark

Posted by smilin_mark on November 30, 2001 at 15:07:07:

My sentiments exactly! You are making some HUGE bets on this deal: 1) That you will have a large increase in income and 2) That property values will shoot back up. If either bet doesn’t pay off, you will have a SERIOUS problem.

Mark

Re: How Can I Defer Payments? - Posted by Lor

Posted by Lor on November 30, 2001 at 20:40:14:

Interesting assumptions being made about the house. I also own a home on the CA coast in that price range but it’s just a 2bd 1 ba. Believe me, no hot tub or pool - but lot’s of dry rot! The problem is Erich’s assumption that there will be a recovery in the spring and he will make a ton of equity. It could take 2-3 years. Though a ways from Silicon Valley, Carmel is directly affected by the Valley’s economy and my friends and neighbors are still being laid off. If he’s worried about payments he can always get roommates at $800 a room. No ideal if your married but if it’s truly his dream house then the sacrifice is worth it.

Re: What do you mean spoiled? - Posted by Ms. Leigh

Posted by Ms. Leigh on November 30, 2001 at 16:50:14:

Why are you so sour that you don’t have the money and he does? Jealousy gets you no where, bud. The guy is just asking a question. “How to obtain this property?” Give help where it is needed, and leave the rest alone.

You astound me. - Posted by GL

Posted by GL on December 01, 2001 at 07:43:19:

A 2br 1bath house with dry rot for $1.2 million? Around here that would be a $50,000 or less property.

How can prices be that high? How can people pay them? Does everyone make $500,000 per year? What about convenience store clerks? Do they make $500,000 per year or do they sleep in cartons in the alley? This whole situation baffles me. Or are there beach front locations that make one house worth 10 times as much as another 1 mile away?

I live in an 1880 era brick farm house, 2 stories with 3 bedrooms. It came with 3.5 acres of land, a big 3 car garage, and a barn. It also has a creek running through it and lilac bushes in the front yard. I have a beautiful view of Lake Ontario and the beach is 1/4 mile from my yard. I paid $62,000 in 1997. Now how do you like that?

Here is what I mean - Posted by smilin_mark

Posted by smilin_mark on December 01, 2001 at 10:23:31:

Ms. Leigh,
I’m not sure if your message was aimed at me or GL, but I thought I’d give a response as well. I am not jealous of his situation. He asked for advice, and I gave him some advice. I would not put my entire financial future at risk to buy a house I KNEW I couldn’t afford at the moment. I would do a few more deals first to generate some more income and/or capital, and then buy my dream home.

Best wishes,

Mark

Here is what I mean. - Posted by GL

Posted by GL on November 30, 2001 at 17:46:08:

If I was really jealous and had a grudge against anyone with money, I would tell him how to get into that mansion and laugh my a** off watching him go bankrupt.

Sorry if I came on too strong. But someone needs a dope slap, if they think it’s a good idea to go that far in the hole to buy a home they can’t afford, hoping it will all work out, when they already have a perfectly good home.

Maybe it’s “California high finance” but it’s still crazy to me.

Re: You astound me. - Posted by Lor

Posted by Lor on December 01, 2001 at 18:24:04:

Sure a beach front in California can be worth 10 times as much (and worth every penny) than a house a mile away. It’s a very different economy here. Service people are paid very high. $25 an hour for a house cleaner. Plumbers and tradespeople often make much more than white collar workers. My brother is a framer and makes more than his best friend who is an American airlines pilot.

Re: Here is what I mean. - Posted by Ms. Leigh

Posted by Ms. Leigh on November 30, 2001 at 18:10:22:

Some people like that kind of thing. Maybe what you could suggest to the person in question is that they reconsider. Perhaps, reading material like Robert Kiyosaki’s Rich Dad Poor Dad. (I love the Kiyosaki series.)

But then, not everyone can change their way of thinking about financing. I try, though.

Ms. Leigh

Re: Here is what I mean. - Posted by GL

Posted by GL on November 30, 2001 at 18:09:44:

By the way we already know he can’t afford the payments on a $750,000 house because he said so.(He was looking for a $550,000 house which I assume he can afford).

Now he wants to buy a $1.2 million dollar house (for $750,000).

Do you have any idea what the upkeep is on a place like that? The taxes and insurance will be double for a starter. So will everything else. They probably spend more to heat the pool and hot tub than I do to heat my house.

And what are they going to use for furniture, curtains etc?

What is going to happen when the bills come in and they are suddenly twice as big as what he is used to? And he can’t even afford to pay the mortgage as it is?