My first deal… (Help!) (LONG) - Posted by Martin Engelking
Posted by Martin Engelking on July 10, 2001 at 05:00:08:
Hi, my name is Martin and I’m a beginning real estate investor. I became interested in real estate about two and a half months ago after watching (yet another) late-night infomercial. I think it was Carleton Sheets. Coincidentally, I had just finished reading Poor Dad, Rich Dad by Robert(?) Kiyosaki and I decided that real estate was the perfect vehicle to generate cash flow. Right now, however, I’m focusing on generating quick cash NOW so I can survive (I’m not very well off financially…).
Since I didn’t have enough money to buy the Carleton Sheets course, I did what I could to find out as much as I could. I spent days at Barnes & Noble sitting on the floor reading every real estate book they had. I bought a book entitled ‘How To Make Millions In Real Estate In Three Years Starting With No Cash’ by Tyler Hicks. I was grossly disappointed; the book consisted of a series of contrived and biased examples and what-if’s and absolutely no how-to practical information. It’s sitting on a bookshelf right now–I’m keeping it handy in case I run out of toilet paper. What a waste of $14.95. I searched the internet for real estate investing information (and found a lot of bs). Finally I found you guys and it was a dream come true! I found a wealth of information here and spent the next couple days reading everything. I attended a “free seminar” by Russ Whitney about two weeks ago and it was a huge disappointment. There was no Mr. Whitney at the seminar; just a pushy and obnoxious salesperson trying to push a real estate course for several thousand dollars and a business opportunity for $500. Well, at least I was one of the few lucky people who received a free book. I got ‘Reducing Property Taxes.’ It’s a very amateurish work with lots of misspellings and a crappy layout. The only reason I didn’t leave during the first 10 minutes was because the salesperson promised a $500 gift at the end of the ‘seminar’. Turns out they were giving away free certificates for a mortgage restructuring service to turn your existing mortgage into a bi-weekly mortgage. I (almost) told the nice people to shove the certificate up their a** and left the seminar feeling used. I went through a period of discouragement (“I don’t know if I can really do this”) but I finally got my act together. Last week on Friday I was driving around the local neighborhood, just checking out the condition of houses in the area, trying to spot fixer-uppers and I stumbled onto a real gem. It’s a 3/2 with all the right things wrong. The owner and her boyfriend bought the house about 6 years ago. They started a major remodeling project and completely stripped the inside. Everything came to a stop when the owner’s boyfriend left her about 4-6 months ago. She is currently 4 months behind on her mortgage and just wants to be out of the house. She owes $98K on a first mortgage and $22 on a second and pays around $1,300 a month (high APR???), which is killing her. She told me she is planning to file bankruptcy in the near future. The house is grossly unfinished. About 15% needs drywall, another 40-50% needs compound and paint. You can see the bare studs in several places and one interior wall has not been finished. They started a very nice project with great-looking lighting, soffets, and other extras. All the construction work is done and the house only needs a good finish. Probably the hardest work will be installing drywall. I have a very good friend who will help me do all the work cheaply.
The asking price is $125K. By the way, I’ve been told that the property has been on the market for 8 weeks.
Here’s the financial situation:
Since the house is in a distressed condition, it’s worth around $50-$60K. This is way below what the owner owes on her 1st and 2nd mortgages. (1st = $98K, 2nd=$22K).
Her real estate agent (who is supposedly a good friend and is trying to help her get rid of the property) told me that we can forget about the 2nd mortgage b/c if the bank forecloses the 1st lien has to be satisfied first.
He also told me that the bank will compromise on the purchase price. He was supposed to send them some photos of the house last Sunday. (I’ll check with him later on this morning). All I need to do, he said, is submit a written offer to him and he will run it by the bank.
I know that it will take about $5,000-$15,000 to fix up the house and it will be worth about $100K-$125K.
I made an offer yesterday for $55K for the house and a $45K construction loan. This way the bank turns a delinquent $98K note into a (hopefully) good $100K note.
I was crunching numbers this morning, however, and I discovered a problem with the proposal: although the bank turns a $98K note into a $100K note, they will still show a net cash loss of about $43K. I’m going to call the agent back and tell him not to submit the proposal b/c I have a better offer for him. Now my question is, what is the best way to structure this deal, knowing that the bank might be flexible on the purchase price?
I understand that the only way this deal will work is if the 2nd mortgage is eliminated or grossly reduced, and the 1st mortgage’s principal is drastically reduced.
I don’t know if I can obtain conventional financing with my credit. Maybe the bank’s motivation will help. If I can’t get this deal financed, I am ready to flip it. Where can I download all the required forms? (I’m in Florida)
Thanks a lot everyone! I’m so happy to have found this wonderful site.
Sincerely,
Martin Engelking
If anyone wants to make a comment, suggestion, etc. You can also call me at (954) 668-5080.