Please help! First deal - Posted by Sandy

Posted by JohnK(CA) on March 30, 1999 at 11:12:39:

“Where’s the Beef?” How do you make any money here? It looks like you are paying about what the seller wants (FMV?), and then trying to find a way to make some money on it. Wouldn’t it be a better deal to do the same thing with a much lower offering price on your part? Try 65K
Good luck

Please help! First deal - Posted by Sandy

Posted by Sandy on March 30, 1999 at 24:08:05:

I first want to thank you for your great insight and valuable experience!

This is my situation: I am wanting to buy an older home that is priced at $84,500. Seller is very flexible, he owes $50,000 on a first, and he is willing to take back a second for the rest. I am wanting to offer him $82,000, do a wrap-around mortgage, including a note for $32,000 with a balloon payment in 3 yrs. My first question is does this deal make sense? And if it does, I’m not sure if I would be better off L/O to someone or just renting it out? If I do L/O, can I still refinance if someone takes the option, so I can pay my balloon payment? And also, what forms will I need for this transaction? I’m sorry I have so many questions, I want to make sure to cover everything before I take the plunge into ownership! Thank you again, it’s greatly appreciated!

Sandy (Maryland)

Re: Please help! First deal - Posted by Jim Beavens

Posted by Jim Beavens on March 30, 1999 at 12:58:20:

I know I’ll sound like a seminar junkie, but I have to quote Ron LeGrand here:

If you don’t know what your back door is, don’t go through the front door!

In other words, you have to know your exit strategy. As John said, how will you make money? To answer this question, you need to answer more questions:

What is the full market value (FMV) of the house?
What are the market rents?

In other words, what could you rent or sell it for after aquiring it? Without knowing this, there’s not much help anybody can provide. If the FMV is $85,000 and he won’t go much below that, then you don’t have much of a deal.

Even if you were to answer these questions such that you’re getting a good deal (ie, say the FMV was $100,000), then I still think you should walk from this, because based on your post it doesn’t sound like you have a very good foundation of knowledge from which to work from (for example, you don’t seem to understand the concept of lease-options; if somebody exercises their option, they BUY the house. There’s no refi on your part because you’ve sold it, and you use all the proceeds from the sale to pay off the underlying loans and whatever cash the seller has coming. So as you can see if you buy it for $82,000 and then lease-option it for $85,000 then after you sell it you’ve got a paltry $3,000 coming your way after one or two years…that’s hardly worth your time. And what if the value goes down and the tenant walks? You’ve got nothing).

I would look at this as a learning experience, step back and make a list of all the questions and other things you’re not sure about this deal, and then go make an attempt to find the answers by reading books or buying courses from this site. Many of the learning materials out there will have a much stronger effect if you have this real-life example to refer to as you learn new concepts.

Having said all that, as a newbie I can’t help but analyze all of the deals that are thrown up on this board, so I’ll throw some possibilities out there (assuming that the FMV is $85,000):

  • Purchase price $70-75K, with the seller either holding a wraparound mortgage for the whole amount, or holding a 2nd with the buyer taking over the existing loan ‘subject to’. Either way, title would be taken in a land trust to hide the transaction from the lender. A small down payment of $2-4K could be given to the seller if necessary. Then sell on a wrap-around land contract with $10K down, purchase price $90-95K, and a higher interest rate than you’re paying.

  • Lease-option it with an option price of $75-80K, with as low monthly rent as possible, and sub-lease-option it to a buyer/tenant who will pay $3-5K in option money, with an option price of $90-95K. The rent should be 10% above market rents or so, or even higher if they want significant rent credit. If the seller wants a higher rent himself, then give it to him in exchange for a lower option price, thus decreasing your cash flow but increasing your back end.

There are several more possibilities here, but the general idea is that there are 3 ways to profit: your up-front profit, your cash flow, and your back-end profit. If you can’t make significant money on at least 2 of these 3 profit centers, then it’s probably not worth your time.

Keep in mind I’m a newbie that’s never done one of these deals, so don’t bother asking for details on any of this, because I’m still studying all the courses I got at the Dallas convention to find some of them myself. =) But hopefully this will give you an idea of how much you DON’T know, which is just as important as knowing how much you do know. The biggest revelation at the convention for me and many others was how much I didn’t know about this stuff. Once you figure that out, then you’ll realize how worth it is to invest in your education so you’re better prepared when deals like this come along.

End of sermon. Back to work now.