Posted by JT - IN on May 30, 2001 at 24:44:33:
28 pitch @ usctrojans; wanting to protect your assets; have had things taken from you before; you didn’t mention anything about hiding in the bushes or wearing Bruno Mali shoes, but I think you must be…
why you must be OJ Simpson!
My First Deal - Need Advice - Posted by Brian (CA)
Posted by Brian (CA) on May 27, 2001 at 22:12:55:
Newbie here looking to finally pull the trigger.
The owner responded to a letter I sent out. He owns this house free and clear, has an old family friend in the place that he said he would feel really bad kicking out, the tenant is paying very low rent. He feels his only way out is to sell it. Though he did tell me that he is not super ?motivated? since it is producing a positive cash flow. I told him I would get back to him with a few different options.
He told me that he has done basically nothing to the house in 25 years except for some minor plumbing work. The place looks ok, overgrown yard, needs new roof but basically in good shape. I estimate $15,000 in repairs. Comps run $60,000 - $70,000 for these neglected properties. Once fixed up I can sell it for $110,000 or rent it for $850/mo.
What different ways can I structure an offer, or several different ones for him to choose from?
Thanks!
Re: My First Deal - Need Advice - Posted by JT - IN
Posted by JT - IN on May 28, 2001 at 19:05:22:
Brian:
It would be wonderful if Seller will sell the property to you subject-to; but very doubtful. Most subject-to situations are not on properties with NO mortgage and a not-to-motivated Seller. It could be one of your options that you present, and if you get the Seller to agree to subject to, you will go far in this business, my friend.
This situation appears to one well suited for a CFD, (contract for deed) sale. In this transaction, you will not get the Deed, but the contract stipulating the terms of payment, interest rate, term in years, etc, and when you will cash out the Seller. The advantage to the Seller here, is that he will not need to take out a mortgage, and he will begin getting a larger monthly cash flow, since his rents are so low. This transaction qualifys as a sale, so he can tell his tenant that he has sold the property, without fudging on the facts. You should be prepared to explain the Tax Benefits to the Seller, which Seller will receive (in an installment sale) over a cash out offer, if he prefers that method. Make an offer something like this:
$ 60K purchase price, 0 down, but submit a detailed list of improvements that you intend to make, and estimated retail costs; (which demonstrates that you will be making a contribution to the property, which equals security in the Sellers mind). A monthly payment of $ 400, (which is what 60K amortizes out at 7% for 30yrs), with $ 100 per mo going toward principal (on the amort chart, only $ 50 per mo goes toward principal, so if you can get him to go $ 100 mo, so much the better),
Set up the paymt for 5 yrs, if he will go that long.
Wherever you need to be flexible on your price and terms, do so, but your real $$ to be made here is on the purchase price, so if you could raise pymt and not price, so much the better. Make the offer, and based upon the Sellers reaction, you will know where you stand, and what needs to be negotiated from there.
Good Luck, and please report back your experiecnes with any offer made and results.
JT - IN
Re: My First Deal - Need Advice - Posted by charlie from getthedeed
Posted by charlie from getthedeed on May 28, 2001 at 24:09:12:
Since I only buy “Subject to” I will tell you how I would structure the deal. I would tell him I could give him $60,000 for the property IF he went to the bank and got a loan on it for that amount. Now the price is because that is what they are comping out in that condition. If there has been no work done for 25 years then it is pretty neglected. Use that when you are negotiating the price. At closing he gets cash and you get the payment book. And I would also tell him that you can help him but you will need him to help you. Have him get the loan for $75,000 and you can use the difference for the fix up of the home. You will be paying the payments. You will also get cash at closing. That will pay for the repairs and you will still have $35,000 equity in the home. I only do this if there is alot of equity in the home. You do not want to over finance the home. Have an appraisal done on it for the after repaired value. The mortgage company will take care of that. As far as the tenant. If you are getting money at closing PAY HIM $500 or $1000 to move if you want him out. Or tell him you are the new property manager now and his rent is going up and let him stay. Put the cash from closing away for future repairs.
I know this is scarry for your first deal but the very most the seller can do is say no. He might be thrilled to get cash and get rid of the house and the tenant. You don’t know till you ask.
Charlie
Re: My First Deal - Need Advice - Posted by Brian (CA)
Posted by Brian (CA) on May 30, 2001 at 11:36:22:
JT -
Thanks for your response. I have one question for you.
Much of what I read here says “Get the Deed”, that gives you the strongest position in case something goes wrong. I have been thinking along those lines until I read your reponse.
My question is why not “get the deed” from the seller and have him be the bank so to speak and secure the note with the property I am buying. That way I own the property and pay him monthly, if I default he gets his house back. What am I missing here, why the CFD method over this?
Thanks for your help.
Brian
Re: My First Deal - Need Advice - Posted by Pete
Posted by Pete on May 28, 2001 at 22:13:55:
>you will not get the Deed, but the contract
>stipulating the terms of payment, interest rate, term
>in years, etc, and when you will cash out the Seller.
So its essentially an owner-financed purchase with a balloon loan. You’ll then take over the existing tenant’s rental, assuming you’ll raise that to cover your payment to the owner.
Re: My First Deal - Need Advice - Posted by Pete
Posted by Pete on May 28, 2001 at 01:16:32:
>At closing he gets cash and you get the payment book
But it’ll be the seller’s credit on the line, right? And how does it works when it comes to the tax on the interest. Who will get the deductions?
Re: My First Deal - Need Advice - Posted by JT - IN
Posted by JT - IN on May 30, 2001 at 18:07:05:
By all means, get the deed, if your Seller is willing to give it up. Btu lets analyze yor deal, for a moment. You mentioned that the Seller owns the property “free and clear” and that Seller is “not very motivated”. Now this just doesn’t sound like a Seller that is going to fork over the deed.
The reason that they usually won’t execute the deed, but will sell on CFD, is security. If they give you deed, and you fail to pay, then the Seller has to foreclose on the property, just as any other lender; (expensive and time consuming). Now, as a Seller of property that I own free and clear, if a potential buyer aked me to sell Subject to, I would say subject to what? I would have no mtg and politely tell them to take a walk. Comparibly, I do sell on CFD, and when a Buyer does not pay, they have little enough equity, (in Indiana), I just evict them, much like a Lease eviction; not too costly or time consuming.
My opinion here, is that if you talked to 100 Sellers in the situation that you described for your Seller, that you may be hard pressed to get one to execute deed to you, unless they are plain uninformed about the market, or desparate to get rid of the property; but now that doesn’t sound like a “not very motivated” Seller, does it?
My other question for you was, How are you going to borrow the 35K? What will you use for security?
Please explain how you plan to structure this, because I see a problem here, and I am not entirely sure that you do. Please explain…
JT - IN
Re: My First Deal - Need Advice - Posted by JT - IN
Posted by JT - IN on May 28, 2001 at 22:29:22:
What I recommended is essentially, a CFD; Contract for Deed. You could call a Chevrolet a “Car”, but I prefer to call it a Chevrolet! So in this case the “owner financed purchase with a baloon” is a CFD.
I wouldn’t necessarily be taking over a tenant, as I’m sure there is NO lease. I would likely raise the rental beyond the scope of the existing tenant’s ability to pay, if there current rent is so low.
I would prefer to start with a new T/B, or sell the property outright, in it’s rehabbed condition.
Just the way that I view things…
JT - IN
Re: My First Deal - Need Advice - Posted by charlie from getthedeed
Posted by charlie from getthedeed on May 28, 2001 at 01:56:20:
You will get the deductions because you own the home. Yes it will be on the guys credit but he gets all his money. Just tell him the way your company works is he gets the loan. I explain to them if I had 1 million dollars I could only buy 10 houses. I need them to help me, help them. Charlie
Re: My First Deal - Need Advice - Posted by Brian (CA)
Posted by Brian (CA) on May 31, 2001 at 11:32:52:
Ok, I understand now thanks, I will go for the deed but if he tells me to hit the road which sounds like he is most likely to do I will fall back on the CFD. If I go the CFD route, do you advise to get an escrow company to hold the documents and once the obligations of the contract are met they release the deed? If so do you have any idea what a escrow company would charge for this?
I don’t understand your question about the 35K, I know Charlie in a reply post to my original question mentioned getting the 35K in equity by doing a subject to deal, I don’t feel that I have the experience yet to even try and pull off a subject to deal like the one he explained.
All I have out of pocket in to this deal will be to finance are the fix up costs ~$15,000. Perhaps I can negotiate with him to accept monthly paymets 60 days out, so that way I have 60 days to get the house fixed up without having to pay my installments.
Brian
Re: My First Deal - Need Advice - Posted by Pete
Posted by Pete on May 28, 2001 at 02:25:05:
>You will get the deductions because you own the home.
But wouldn’t the 1099INT from the bank sent to the seller at the end of the year instead?
Re: My First Deal - Need Advice - Posted by JT - IN
Posted by JT - IN on May 31, 2001 at 19:40:21:
I must have converged several posts, regarding the $ 35K. I went back to see that Charlie (who is a female) had originally posted the bit about the 35K, and not you, so I now understand your situation that you will need appx $ 15K to do the rehab; (which I assume you are capable of funding). Submit a detailed format of necesary repairs, and estimated costs, the source of the funds to complete the work, any experience you may have in accopmplishing this type of rehab. approach this as if it was a job interview, for a position that you really, really want, and
SELL, SELL, SELL yourself!
If I was this Seller, and I liked you, your presentation, and had confidence in your plan (well thought out and attainable), then I would seriously consider doing a CFD; but not a subject-to.
It seems that you have a grasp on what you are tying to obtain here, and I wish you much success in this quest. Please report back with any details of your experiences with this offer, (and hopeful acceptance).
JT - IN
Re: My First Deal - Need Advice - Posted by Bud Branstetter
Posted by Bud Branstetter on May 28, 2001 at 10:06:22:
The 1099INT will be reported to the IRS with his SSN. One way to handle it on your tax return is attach an exhibit in which you state you are the owner but that the interest is reported under the other SSN.
I do the deal differently because I use Pactrusts. The resident beneficiary gets to deduct the interest and property taxes because in this arrangement they are responsible for paying them. I only report the positive cash flow if I take it personally.
Re: My First Deal - Need Advice - Posted by charlie from getthedeed
Posted by charlie from getthedeed on May 28, 2001 at 08:46:25:
When you take over the payments you will send a letter to the Mortgage Co. or bank. This is a letter you will have the seller sign that says you are going to manage the property and please change the address to your P.O. Box and send all correspondence to you. So you will receive everything pertaining to that loan from then on. This letter will also be sent to the insurance company saying to change the insurance to a landlord policy, etc, etc. Charlie
Re: My First Deal - Need Advice - Posted by Pete
Posted by Pete on May 28, 2001 at 21:46:55:
>This is a letter you will have the seller sign that
>says you are going to manage the property and please
>change the address to your P.O. Box and send all
>correspondence to you.
Well, I think you’ll need to have the mortgage to change the SS# on the loan. Because that’s what they file to IRS. But if you request for a change of SS#, the mortgage company will know there is something going on behind their back.
Re: My First Deal - Need Advice - Posted by Charlie from getthedeed
Posted by Charlie from getthedeed on May 29, 2001 at 07:35:06:
O.K. Pete…Quit worrying. The mortgage company doesn’t want the house. They only want payments. You will have their s.s.# but you do not send in anything but the change of address. When my dad got sick I paid my parents bills for years and no one sent the checks back to me. They were happy to have someone pay them. Yes the mort co sends the interest statements to the IRS but they are claimed by who ever is making the payments. If I made your Mortgage payment next month, I would be entitled to write off that interest for that one month next year on my taxes. Anyway the IRS does not have time to keep track of that. You are showing that property on your taxes therefore there is no question. You will have the documentation to back it up for the mortgage co because you did the change of address. When the seller deeds the property over to you just remember, YOU OWN THE HOME, THEY OWN THE LOAN.
Charlie
Not exactly, Charlie… - Posted by Traveler
Posted by Traveler on May 29, 2001 at 10:18:29:
You couldn’t make anyone’s mortgage payment next month and take the mortgage interest deduction. IRS requires that you have an equitable interest in the property, or a beneficial interest in the land trust that owns the property, in order to qualify for the mortgage interest deduction. You can write off anything you want on your taxes, but under audit this would be disallowed.
Your father’s situation isn’t exactly a true endorsement either. Your folks were still living in the property I suspect. Had they passed if the property inured to you the bank couldn’t have called the loan under Garn-St. Germaine anyway.
It’s a little brash to say the bank doesn’t care as long as they get the payments. For the most part that is true and dealing with sellers that are reluctant because their loan is “not assumable” is probably a bigger issue. Banks do call loans, though. I know of rookie and experienced investors that have had loans called (and worse) through either stupidity or providence. As an investor you just need to be positioned to handle it if it happens. Your stance is understandable, however, since you promote a course and workshops teaching methods which which would benefit from minimizing or down playing banks ever calling loans. I just wish one time all the guru’s out there would acknowldge the risk in what they teach rather than say it’s nothing and can never happen to sell a danged course. If you are afraid of losing one sale then go buy a property with your techniques that are easier than falling off a log to give you a buffer. That risk is part of the reason we make the returns that we do. Acknowledge it, embrace it, and manage it. It isn’t a reason not to invest, just something to be aware of as a contingency.
Re: Not exactly, Charlie… - Posted by Charlie from getthedeed
Posted by Charlie from getthedeed on May 30, 2001 at 24:10:42:
I read your post quite a few times before answering. I am fine with everyone having their opinion, even if they don’t have enough confidence to say who they are…
I was wondering how many homes you have purchased Subject to and how many times have you had a loan called due? I was fine with your response, as I said everyone has a right to their opinion. That is what is so great about places like creonline. You get alot of ideas from different people. Some good, some bad. Yes banks do call loans due but if you are prepared and willing to take the chance (just like any investment) it should not be enough to keep someone from buying houses. Thank goodness there are risk takers in this world.
Now the thing that got me was when you made the comment that I would say anything just to sell some books and tapes. I am sure as you said you have purchased a few courses, and I am sure like you said, you have probably returned them also. But lets talk about the geru’s who are on this site taking their time to give advice and their opinion about certain topics because we want to help other people. I for one have over 60 homes in inventory (purchased subject to) and have alot to do with my time but choose to spend some time on this site. As do alot of others out there. There is such a thing as giving back and wanting to help people. That is the entire concept of this business. Yes we make money, but it is only because we are helping people. The people we purchase homes from are in a situation where they need someone’s help. If all you see from this business is the money you are afraid guru’s are going to make then you have a long way to go. Thank goodness for the guru’s of the world from the Lou Brown’s to the Ron LeGrands. Where would alot of people be without their sharing, making mistakes, and letting others learn from those mistakes.
As far as the comment “If I am afraid of losing one sale then I should go buy a property with my techniques.” Well…my last deal the seller got a personal loan for $10,000 and paid me that amount to buy his home, that he deeded to me. Do you think a $700 course is what I am living on? Do you think all the guru’s are sitting home worried that you might not buy their course? Like I said before it is a way of sharing and helping others.
I am sorry if someone reading these posts has gotten confused or this back and forth offends them. I only want to let you know that the main reason most of us are on this site is to help other investors. After all we are all Guru’s of one level or another. Please read all the posts because there is a vast amount of knowledge and good will to pass on to the people out there who just like you are trying to make a difference in your life and the lives of others they meet. Charlie
Good post - Posted by B.L.Renfrow
Posted by B.L.Renfrow on May 29, 2001 at 10:45:37:
Too bad you didn’t sign it so your very articulate, well-written message could be properly acknowledged!
Brian (NY)