Nice Deal or Not?? :input appreciated - Posted by Will

Posted by Brent_IL on January 26, 2004 at 23:45:51:


Nice Deal or Not?? :input appreciated - Posted by Will

Posted by Will on January 26, 2004 at 18:22:23:

Hi fellow investors,

your inputs are greatly appreciated on my next opportunity below. After reading throught the details, let me know if you think I have a sweet deal or a dud. This is a real deal I have under contract.

I am looking for either an affirmation or heads up on landmines in this deal.

2/2 condo 907sq ft.
Current FMV: $275-280k.

Sellers declared bankruptcy 6 years ago, and building back their credit. Current credit is ~575 FICO. Man is a taxi driver, and the lady is a loan processor on commission. She took last 2 months off to study for RE agent exam, so didn’t have any income for last two months. So, they are barely making it, and because they are working on their credit they don’t want to be late on their mortgage and other bills. Can’t get 2nd TD b/c not much equity. Only other option was to refinance the 1st, but there’s $10k prepay penalty on 1st TD until 12/04. The lady tells me they can get 95% LTV sub prime loan, but I am not sure if I can believe her because of their income and credit score… So I negotiated and signed up the following contract.

Acquisition Terms:
Purchase price is $244,000.
Subject to: $219k 1st TD (Monthly is $1900) + $25k cash to owner at closing (I think owner may be open to negotiating how this gets paid out. See below in exit strategy.)
Contingent on doing a lease option with the Sellers. Help sellers to boost their credit by reporting to credit bureaus every month on their timely rent (not on the contract, but told them I’d do it)

Need to close by 1/31/04. But probably can extend a week or so. The Sellers wants a clean break and start the rental agreement starting on February.

Exit Strategy:
1 Yr. Lease Option to the Seller (give them a chance to build back their credit)
Monthly rent would be $2100 ($1900PIT + HOA) - they are okay with this since they are already paying that.
Option price: $290,000 (projected FMV $320-340k in 1 year)

If I need to, I think I can negotiate with them to sign up to following terms for paying out the $25k cash at closing.

  • Have them to pay their 6month rent in advance and apply that toward $25k. That would be $12,600, and then you can spread out the mortgage+HOA payments for next six months.
  • Pay down their credit debt by $10,000. Total now is around $20k. This will help with their credit score. $10k checks will be written payable to the credit cards directly at closing.
  • Have the Seller pay $500 - rent deposit, $500 - non refundable option payment.
  • Pay the balance to the Seller. $1400.

Thus, you only need to come to closing with $13,500.

So if I did the math correctly, after a year I can net ~$45,000 minus closing fees. Worst case, if they can’t get the financing then I’ll pay them couple thousand to move out and do the cosmetic fix and retail it at FMV (at $320k). Upsides would be much more than $45k.

I am deciding whether to assign this contract for a fee or do the deal myself.

Thank you for reading the long post and your feedback in advance.


Re: Nice Deal or Not?? :input appreciated - Posted by E.Eka

Posted by E.Eka on January 27, 2004 at 08:09:30:

I’m sure the others have already mentioned this but I have to as well. I haven’t even read the whole post but i can tell you that you’ll have a couple of issues.

  1. It’s never wise to lease back property to the seller that was purchased sub to. If they are having problems paying their mortgage, how will they pay you?

  2. You said that the couple is barely getting by. Yet you are going to ask them to continue paying the $2100 they were paying before.

  3. You’re relying on what our man Hank FL likes to call “being an appreciation slut”. That’s waiting to get your money on the back end. That involves a lot of speculation. Why would you expect a condo to appreciate by $50,000 in one year?? Unless you live in the greater DC area and the condo is in Bethesda, Georgetown, Chevy Chase or Roslyn, that’s highly unlikely.

I’m sure there are others but I’m kind of busy at the moment.

My head hurts… - Posted by Hank FL

Posted by Hank FL on January 26, 2004 at 23:39:09:

And it could be from thinking about this deal.

I’ll have to look at it w/fresh eyes tomorrow, but is a headache the best way to start the day?

Just thinking out loud here…

Hank FL

P.S. Perhaps I ought to say something usefull instead of whatever it is that I just said.

The deal looks very speculative.

Agree with the other posts, and… - Posted by B.L.Renfrow

Posted by B.L.Renfrow on January 26, 2004 at 21:50:27:

…you wrote, “Help sellers to boost their credit by reporting to credit bureaus every month on their timely rent (not on the contract, but told them I’d do it)”

How are you going to do that? The fees to belong to the major credit bureaus are such that it’s not practical for the small business or landlord to join. From a practical matter, I don’t believe there’s any way an invidudual landlord can report on-time payments to the credit bureaus, so I’d be careful about promising that one.

Brian (NY)

Re: Nice Deal or Not?? :input appreciated - Posted by Rob Ricker

Posted by Rob Ricker on January 26, 2004 at 21:06:36:

A 580 credit score and 2+ yrs out of bankruptcy will get a 100% LTV loan, so don’t be surprised if they can get 95% LTV (if they have the income). I’m certain that they can get at least 90% LTV. No comment on the rest.

Re: Nice Deal or Not?? :input appreciated - Posted by Brent_IL

Posted by Brent_IL on January 26, 2004 at 20:06:14:


This paragraph isn’t just for you. The time to ask about the particulars of a deal is before you sign a binding contract. Good or bad, you sign; you?re stuck.

These are random observations. I read a lot about what the sellers want, but what about you? I think you?re being taken for a ride.

  • It doesn?t take six years to rebuild credit, even after a bankruptcy. $20,000 of credit card debt won?t help.

  • Anyone who actually requires two months to study for a real estate exam has little chance of succeeding as an agent. They are either too unorganized or too dumb.

  • Lenders will not give this couple a 95% LTV sub prime loan. It isn?t going to happen.

  • At 88% of value, you need to find the proverbial ?greater fool? to get a fee out of this.

  • 16%+ is a fast appreciation rate. I don?t know where you are. I?ve heard that condos went up by 17% nationally last year. Will they do it again next year in your location?

You say, ?I’ll pay them a couple thousand to move.? O.K., I?m cynical, but here?s what I?m thinking might happen. You put up $13,500 at a minimum. When you pay off half of the credit card balance at closing, they still have the cards. They aren?t making payments; you are making payments because you applied the credit at settlement. With no monthly payments and room on the credit cards, they haven?t had it this good for years. They deserve the good things of life as a byproduct of existence even if payment has to be deferred. The balances have nowhere to go but up. FICO enhancement is bygones. So is your take-out buyer.

Six months from now the seller?s payments are not forthcoming. They have a good explanation. You make the sub-to payment yet again. Next month you give notice, but if nothing else the sellers have a leasehold interest, so they go to a lawyer who tells them that they were obviously confused when they signed your contract. He files suit. He also files to abate your eviction proceedings until the suit with his clients is decided. After a few months, the happy day comes when you are vindicated and the seller?s lawsuit is dismissed. Eviction is reinstituted. After a few continuances so the sellers could obtain counsel, the wife files Chapter 7 and the automatic stay kicks in. A month later, you move for relieve of stay and it is granted. Back to eviction court. But what?s this? The husband has filed Chapter 7. Another stay. Another motion for relief. Eviction court, again. What was that? The couple has filed a Chapter 13 petition. Stay invoked one more time. They have no more unsecured debt, so the Judge approved a plan that gives them 60 months to repay you for the two-and-a half years that you have been making payments without receiving anything from them. This gives the tenants five years to prepare a case to have your L/O adjudicated to be unconscionable. At that point, your L/O is unenforceable, and they might just be awarded damages. No cosmetic fix necessary.

If you haven?t locked this arrangement down, I?d surely go back to the drawing board on this one.

Re: Nice Deal or Not?? :input appreciated - Posted by Sean

Posted by Sean on January 26, 2004 at 19:35:42:

Ok, lets think about this, you have a couple who is having trouble making their mortgage payments… yet they are not going to have trouble paying you $200 MORE than their existing mortgage payment a month?

Second where are you getting the extra cash from? If they agree to take 12k in future rent in lieu of the cash at close… That’s fine and dandy, but you still have to set that cash aside to make those payments over the next six months so I am not seeing this as any sort of gain…other than the spread.

Also, looking at a 21% year over year appreciation?? That definately is HIGH, and only realistic in very few markets. I don’t know your market so that might be realistic… but I’d definately want to check that.

HOnestly, I am not a fan of the buy/lease back program, it is rife with claims of “mr investor taking advantage of desperate owner and tricking them out of their home…” The worst case is they can’t get mortgage, and you try to get them out and they contact legal aid who gets them in front of a friendly judge and throws out your agreements etc etc etc… Or you for one reason or another fall behind on payments (even if its because they stopped paying you rent) and sellers sue you for the fact the bank forecloses on thep property because you didn’t make the payments like you said you would etc etc etc…

It is VERY difficult to take a person who is an OWNER of a property and make them accept they are now a tenant… I don’t care how many times you explain it and how much they agree… Once the immediate problem is resolved memories fade.

Now if I could get aproperty for 244k worth 280k just in general would I get excited… well 36k sounds like a nice little spread, and if I knew I had a few buyers waiting in the wings I might get involved, but that’s still nearly 90% of the max value of the home today… so I wouldn’t call it a home run.

Not a Guru, but those are my initial thoughts on this.

17% – – Good Memory Brent - Posted by Hank FL

Posted by Hank FL on January 26, 2004 at 23:31:20:

Re: Nice Deal or Not?? :input appreciated - Posted by will

Posted by will on January 26, 2004 at 22:50:48:

Oh also, I always use a weasel clause to back out the deal, so I always tried to lock in the contract first. If I decide risk is too heavy compared to reward, then of course I will back out the last minute.

Re: Nice Deal or Not?? :input appreciated - Posted by will

Posted by will on January 26, 2004 at 22:47:50:

Thank you very much for your thoughtful post. Exactly what I am looking for. My worst scenario is not set. Time to manage the risk. Thank you for your input. Sincerely. Will

Re: Nice Deal or Not?? :input appreciated - Posted by will

Posted by will on January 26, 2004 at 22:56:31:

Thank you very much for your thoughtful response. My sentiment exactly on trying convert an OWNER into a TENANT. Bit skeptic on how well that may work out. Starting to feel bit more skeptic of their promises and seeing the risk increasing.

BTW, I am in San Diego, so a double digit appreciation is not abnormal for this market. I did very similar L/O deal that will net well over $50k because of the appreciation, except in that case the owner actually moved out. This is first case where I am entertaining renting the property back to the Seller, but so far I haven’t received much affirmation from the investor community. Thanks again for your reponse and good luck your investment!