Legit or Not? that is the question... - Posted by Dave

Posted by Philly Dave on October 26, 1998 at 08:35:59:

Hello, Soapy and Dave:

I wouldn’t go so far as to say this asset is in reality a liability. Not yet, anyway. Dave, if you have a buyer lined up for this finished property, you’re in good shape. If you don’t, Soapy could be right; you can’t “bank” on the profit 'til the sale proceeds truly are “in the bank.”

You have more information than we do, so gauge your risk according to what you know. But try not to get too excited over the potential profit; better to wait for the fat lady to sing.

Good luck!

Legit or Not? that is the question… - Posted by Dave

Posted by Dave on October 24, 1998 at 11:50:58:

I’m a newbie to the RE game and I’m looking for some constructive responses on this particular investment opportunity…

I have the opportunity to do a flip with a friend and I’m wondering if it is legit or not…

Friend finds a Bank REO property purchases (contract assaignment) it for 25K… The property gets a 65K appraisal (100% legitamate). I get a mortgage for 70% of the appraised value ( approx) 50K. This difference covers closing, fixup and we make a profit… This sounds really good, but is it 100% legit…

Any experienced comments would be greatly appreciated…


Re: Legit or Not? that is the question… - Posted by JPiper

Posted by JPiper on October 24, 1998 at 16:35:38:

I don?t think your post is clear as to exactly what you?re doing here?..and therefore I would diverge from the posters below.

There are some lenders who will loan based strictly on asset value. These are call hard money lenders. You might get 65%-70% of the fixed-up value. They would probably operate the loan similar to a construction loan by releasing funds in stages as the rehab is completed. Costs of this loan will be high?points up to 10 points perhaps, perhaps up to 15% interest. The loan will be short term in nature.

What bothers me about your post is that I get the impression that perhaps what you have in mind is somewhat different than this. Let?s say that what you have in mind is that your friend ties the property up for $25K, signs a new contract with you for $65K?.based on which you obtain a loan for $50K. These two contracts are closed simultaneously. Now you and the friend fix the house and put the remaining money in your pocket. Under this scenario you may well have defrauded the lender. Further no conventional lender (aside from hard money lender) is going to loan you $50K on a $65K house with no down payment from you. What conventional lenders are basically wanting to see is an arm?s length transaction between the buyer and seller, with a downpayment from the buyer of a % dictated by the type of loan.

Perhaps you could post the complete and exact details of what you propose so that you may receive a more complete answer.


Based on what you have said… - Posted by Soapymac

Posted by Soapymac on October 24, 1998 at 14:17:31:

looks like a heckuva deal. But I do have some questions.

  1. “Contract Assignment.” This term is confusing to me. Did you two receive some form of deed securing a $25K loan? Or, was the home purchased from the bank on a land contract? (Your e-mail address does not indicate what state you call home.)

  2. Who did the appraisal? You two? The bank? Or, are you possibly confusing an appraisal with what I call “comps” — a list of comparable homes that are for sale at $65K? Large difference, that.

  3. A 70% loan to value (“LTV”) comes out about $45,500. You mention closing and fixup costs come out of the difference, but you do not give any of us an estimate of what those are.

  4. Even after all this…YOU HAVE NOT MADE A PROFIT YET. If I read your post correctly, there has been a purchase from the bank, but no sale to anyone else. You’ve got the potential for a good bit of profit, but as far as I can tell from your post, all you have is an asset that is in reality a liability.

Can you provide us with some more information so we can provide some good answers for you?



Very legit, indeed! - Posted by Mr Donald (NORVA)

Posted by Mr Donald (NORVA) on October 24, 1998 at 14:14:43:

It’s very legit indeed. As long as the lender feels that their loan is secured (which it is), you should have a problem with this at all.

Just be sure to find the lender who won’t charge you an arm and a leg to fund this for you. Your title/settlement/escrow company can set you straight on the mechanics of this deal, or just ask your RE attorney.