How to structure this deal?? - Posted by Benjamin

import · November 9, 2006, 10:20pm

Posted by Don (VA) on November 13, 2006 at 15:49:56:

You ask: “In your guys experience an ad in the paper that read” No qualifying, Low Down Payment, Call xxx-xxx" wouldn?t get some people that could qualify to make that down payment." Maybe for some properties in some areas of the country at some point in the economic cycle. But I recently had a property I was trying to lease-option and ran those ads for 3 solid months in everything from the Sunday Washington Post ($100 per ad) to CraigsList (free, bless 'em). This was for a $275,000 condo in the Virginia suburbs. I didn’t get one person with more than $3,000…most didn’t even have enough for the first month’s rent. And the reason they couldn’t qualify for a conventional loan, of course, was that their credit was lousy.

Technically, too, your ad is wrong. It’s not “No qualifying.” You’d better make sure you qualify them. It’s “No bank qualifying.” And it’s not “Low Down Payment.” If it’s a lease-option, they’re not making a down payment. It’s an option fee, which they forfeit if they don’t exercise. Maybe “Only 3% moves you in!” or “Only $6,999 moves you in!”

As for your question: “And in the deed to them have a clause “deed in leiu of foreclosure” if the default on a payment to you? So if they cant make the monthly payments, you evict them and get a new person to make the down payment.” For gosh sakes, don’t give them the deed! At most, you give the tenant-buyer an option. Maybe less: At least one guru recommends just giving the tenant-buyer an “agreement for option.” It can’t even be recorded. If they comply with all the conditions of the lease and the agreement, then when they want to exercise, you give them the option. What you don’t want to do is give them any equitable interest in the property. If you do, then you’ll be faced with foreclosing on them, rather than evicting them. If they don’t make the monthly payments, you want as simple an eviction as possible. That means no equitable interest, and that means a lease document totally separate from any option or agreement for option.

Finally, the seller may not be motivated enough at this point to make a $700 a month contribution. But for every month he pays $2,100 on an empty condo, he could have covered three payments under your arrangement. What’s the average days on market for his sort of property? Around Northern Virginia, 100 days isn’t unusual. There are condos (and not just the one I mentioned above…that one has now been on the market for about 270 days) around here on the market for 150-200 days. That’s six months! Give your guy a call after two months and see if his level of motivation has changed.

import · November 9, 2006, 10:20pm

How to structure this deal?? - Posted by Benjamin

Posted by Benjamin on November 09, 2006 at 23:20:42:

Thanks in advance to any and all help you guys provide : )

Detail:
Condominium Unit
Existing Loan: $310,000 (Conventional Loan)
Monthly Payment: $2100
Comps in area: $350,000

His motivation for selling is that he has just opened up escrow for a home near by. He called my “We Buy Houses” sign because he explained that he realizes the market has slowed down and it is very hard to sell RE these days. He doesnt want to get into a position where he is paying 2 mortgages. I would like to know how you guys would structure the deal in order to make everybody happy. What I was thinking is, take property subject-to, ask him to make payments for a month or two. Then when I find buyer, do a (owner financing- ME)wrap around mortgage for $350,000 with 10% down and maybe 8-10% interest, and the give the seller $5,000-$10,000. This will give me a positve cash flow of about $300, and I walk away with a nice chunck of money. My concern is he may not agree to letting me take it subject to, may not pay for the ectra 2 months while I look for the buyer. Anybody with any other ideas on how to structure this deal would be great. My meeting with him is Nov 14th so I want to be as prepared as possible. Thank You!

-BEN

import · November 10, 2006, 12:34pm

Re: How to structure this deal?? - Posted by BTI

Posted by BTI on November 10, 2006 at 13:34:59:

Ben

Does the $2100 include the homeowners fees, the insurance, the taxes? Remember you have to quit using full fmv, if that is going to be the fmv when you try to sell. The top 10% doesn’t exist, think like an investor, your seeing supposed comps and $40k equity but is there really $40k eqiuty.

Your a broker, find a buyer and present a contract with a full brokerage fee to be funded by the seller but paid by the buyer under a buyer broker agreement, it will be easier and cleaner. but as a flip forget it, not worth the risk.

BTI

import · November 10, 2006, 9:01am

What Deal? - Posted by Don (VA)

Posted by Don (VA) on November 10, 2006 at 10:01:38:

I agree with dealmaker. I just don’t see a deal here. The guy is upside down on his condo when you take into account any transaction fees from selling…assuming the comps really are $350,000. In today’s declining market, in some areas (such as where I live in Northern Virginia), what sold for $350,000 a year ago might be lucky to get an offer at $300,000 today. But let’s say, generously, that it’s really worth $325,000. As dealmaker says, you can go out today and get a mortgage for far less and still for little or no money down. So you’d ask 10% down when anyone who can fog up a mirror can get a mortgage for 5% down…10% interest when the going rate is, what, around 6%?

And I share your reservations about his being willing to do a subject 2 and pay for a couple months of mortgage at the inception of the deal. On the other hand, to protect yourself, if you were to enter into some sort of deal with him, you’d have to protect yourself.

Maybe consider a non-exclusive option, giving you the right to market the property and try to find a buyer, but allowing you to get out of the deal if you can’t.

Or…(and I know lots of other posters here don’t like lease-options)…lease-option the property from him for some very affordable rent about. Maybe $1,400…or whatever is at least several hundred dollars under market rent for your area. Yes, he’d have to make up the difference, but a $700 a month hit isn’t nearly as bad for him as a $2,100 hit. Then try to find a tenant-buyer who’d be willing to pay market or above, with at least some contribution to an option fee. You might be able to get $8,000-$10,000 as an option fee (maybe not, depends on your area) and a monthly rent/option payment above what you’re paying the seller. (Remember, you negotiated a below-market rent with him.) Fall-back scenario: You don’t find a tenant-buyer, but you are able to rent it at market rent…still giving you a slight cash flow. As for the purchase price from the seller, consider a split equity. Something like: “I’ll pay you $310,000. Plus, if I’m able to sell the property for more than $330,000, I’ll give you half the difference between $330,000 and the sales price.”

Advantage to seller: He receives an option from you to buy the property for what he owes. Plus, if it really can sell for $350,000 (ha!), he’ll pick up another $10,000. And he’s cut his negative cash flow from $2,100 to $700.

The same sort of deal can be structured in a landtrust, giving you some additional protection. And, if the deal’s structured properly, you might be able to get an investor to cover some of that $700 contribution.

But you have to make the deal work for you first. And you need a contingency plan if your first approach doesn’t work.

Be careful.

import · November 10, 2006, 7:06am

Re: How to structure this deal?? - Posted by dealmaker

Posted by dealmaker on November 10, 2006 at 08:06:40:

I think you need to take off your rose colored glasses, if the market is slowing, are the $350K comps still accurate.

In what world are you going to find people with $35K for downstroke willing to pay above market interest.

Good luck on this pig, I don’t see a deal here.

dealmaker

import · November 10, 2006, 9:18am

Re: What Deal? - Posted by Stan

Posted by Stan on November 10, 2006 at 10:18:42:

Just to be quick. Please respond as I am sure there are others out there with similar deals. If he is having a hard time selling, what are you going to do different? That he hasnt done. What I am getting at, is if he hasnt sold until now, why do you think that you will be able to?

import · November 10, 2006, 12:48pm

Re: What Deal? - Posted by Don (VA)

Posted by Don (VA) on November 10, 2006 at 13:48:48:

Like I said at the beginning, I’m not sure that there is a deal to be had here. Certainly not at $350,000…not now at even $310,000.

What I suggested could be done is to bring monthly payments down so it can cash flow. You bring those payments down with the seller’s monthly contribution (or possibly an investor’s). Once the payments are low enough–and due dilligence will indicate what the “right” number is–you’re picking up some cash flow every month.

As for selling the property, you negotiate the purchase price down to where it has some chance of selling at some point in the future. It probably won’t sell today for $330,000. It may not sell in 12 months for $330,000. But it might in 24 months…or 36 months. Make that option for as long as possible. I know you’re supposed to make your money going into a deal and not banking on any appreciation. But the question was: “How to structure this deal?”

So–what I’m doing different is controlling the property, not buying…I’m reducing the monthly payment enough (to whatever number is sufficient) so, at the least, I can rent the property with positive cash flow…and I have the opportunity to buy the property significantly below what he’s been offering it at and even have the ability to sell it in several years for less than he’s offering it at…with no obligation to actually buy the property if it doesn’t appreciate.

import · November 14, 2006, 2:17pm

Re: What Deal? - Posted by Stan

Posted by Stan on November 14, 2006 at 15:17:43:

Actually I am agreeing with Don. I acccidently placed the response under his. My response was actually in direct response to the poster. I do not see anything remotely close to a deal. I try to always ask a new investor what do you plan on doing differently than the seller. Just getting a house under contract and increasing the price by 25k is a sure ticket to disaster. Now it may get sold, but not by virtue of their plan. You have to have a sound plan to make these work.

import · November 10, 2006, 8:10pm

Re: What Deal? - Posted by Benjamin

Posted by Benjamin on November 10, 2006 at 21:10:44:

Thanks for the replies. I know that the seller is definitely not motivated enough to make a $700 a month contribution to something he doesn?t possess. He still wants to live in this place for a month longer until his escrow closes on his new home. He called me before a realtor because he is afraid that his place wont sell in a timely manner.

Here?s the thing that confuses me. Everything that I have read on lease-options / wraparound mortgages says that you can usually get FMV from a person when you offer good terms. They always say that many people have the money but do not qualify for a conventional loan due to one reason or another. In your guys experience an ad in the paper that read" No qualifying, Low Down Payment, Call xxx-xxx" wouldn?t get some people that could qualify to make that down payment. And in the deed to them have a clause “deed in leiu of foreclosure” if the default on a payment to you? So if they cant make the monthly payments, you evict them and get a new person to make the down payment. Once again all replies are very much appreciated.

-BEN