Post for Johnboy - Posted by Deb

Posted by Deb on July 15, 2002 at 17:23:14:

Yes, I definitely see the power of interest rate?
Can I build a 5% appreciation clause for each year of the L/O? Then if the tenant/buyer exercises their option , the price is $110,250. I’d like to keep up with the FMV as re is appreciating quickly in our area? Overall, I like Merle’s plan. Has anyone else tried it and been successful?
Sorry, there was a delay in my response…had to work.
Thanks ,

Post for Johnboy - Posted by Deb

Posted by Deb on July 13, 2002 at 19:29:32:

I figured the right person to ask would be you Johnboy as I’ve read many of your posts and am at ease to say you are very informed and very helpful.
I’ve read hours of the posts from Merle Woolley to find out his system for finding private investors and how he runs his business…Well, after I thought I finally found the right thread, the link is no longer there. Also, I couldn’t find anything Alan(from Baltimore ) ever posted.
Can you point me in the right direction?

Re: Post for Johnboy - Posted by Terry Vaughan

Posted by Terry Vaughan on July 13, 2002 at 22:11:49:

Johnboy is right - I’m working to remake the indexing system to include the missing (not really missing) posts.

For some reason (working on it) the indexing part of the program is not picking up the new posts. I’ll get it yet!

Re: Post for Johnboy - Posted by JohnBoy

Posted by JohnBoy on July 13, 2002 at 20:53:00:

Type Alan Baltimore in the search function. I had 8 posts come up from typing in his name.

There seems to be a number of posts in the archives that aren’t coming up when you click on their links. There is a problem with the archives. Terry Vaughn is suppose to be working on it and I think he said the posts aren’t lost and that they will be able to be read again once he fixes the problem.

Re: Post for Johnboy - Posted by Jim Kennedy - Houston, TX

Posted by Jim Kennedy - Houston, TX on July 13, 2002 at 20:34:45:


I’m not JohnBoy, but I might be able to help. If you’ll post the link that you’re trying to get to, I MIGHT be able to shed some light on how to modify the URL to reach the post you’re looking for.

Best of Success!!

Jim Kennedy,
Houston, TX

Re: Post for Johnboy - Posted by Deb

Posted by Deb on July 14, 2002 at 09:58:03:

Thanks for responding johnboy. And thanks to Jim K. and Terry. I sent a link to Jim , he’s going to try to help. I’ve read about every post from Merle and Alan on getting private investors. What I’m stuck on is what do you do after you get the $$ ??? Buy low with all cash and then what…Anybody want to take a shot at the details?

Re: Post for Johnboy - Posted by Deb

Posted by Deb on July 14, 2002 at 17:37:50:

I tried it again, you’re right it works, all I do is increase the next to last by one number!

Re: Post for Johnboy - Posted by JohnBoy

Posted by JohnBoy on July 14, 2002 at 10:06:29:

Merle pays all cash for the property. I think he pays 85% of value. Then he will L/O to someone at full value.

He only buys property in good condition. No rehabs. Only minor things acceptable, such as paint and carpet.

So if the home is in good condition just needing some basic clean up, I think he offers to pay 85% of what it is worth. If its worth $100k, then he will pay the seller $85k cash. Then L/O it to someone for $100k creating a decent cash flow between the rent he charges his tenant vs. the mortgage payment, taxes and insurance he has to pay on the property.

Re: Post for Johnboy - Posted by Deb

Posted by Deb on July 14, 2002 at 17:10:14:

Can you take this a step further and explain how it is done using these figures? Does Merle create a note for the investor paying him 9% each month on the money he borrowed for 5 years? If the tenant refinances in 3 years, how is the investor paid off? What if the tenant does not refinance, how is the investor paid off?

Re: Post for Johnboy - Posted by JohnBoy

Posted by JohnBoy on July 14, 2002 at 17:40:34:

It’s been awhile but if I remember correctly, he uses the investor’s cash to pay for the property. He gives the investor a 1st mortgage on the property at 9% interest, amortized over 30 years with the balance due in 5 years. At the end of 5 years the investor can either pull their money out or commit to another 5 years by leaving it invested. I think Merle said they almost always leave the money invested. But if they want to pull the money out then he just replaces them with another investor. If the buyer cashes out the deal early then the investor is paid off or the money is used to buy another property.

When he lease options the property to a buyer he gets about $3500 option money, takes the balance and figures out what the payments would be on that based on a 30 year loan at 11% interest, adds taxes and insurance to that, and that is the amount he charges for RENT. Usually that creates $200 - $250 per month in cash flow for him. Plus the $3500 he got for option money, plus the spread on the back end from what his buyer owes to buy the property minus what he owes to pay off the investor.

Re: Post for Johnboy - Posted by Deb

Posted by Deb on July 14, 2002 at 18:33:59:

I’m with you so far. How does he give the investor a first mortgage, does he write his own note for his company?
Also, would the 9% and 11% work in today’s market?

Re: Post for Johnboy - Posted by JohnBoy

Posted by JohnBoy on July 14, 2002 at 19:56:13:

I don’t recall if Merle has a mortgage he uses drawn up by his attorney or if his title company has one or where he gets his from. But you can use any standard mortgage.

I would think 9% would be really good today considering how low interest rates are. Using 10% - 11% on the sell side for buyers with credit problems is pretty standard. Most contract for deed sales are structured at 9% - 12% with 10% and 11% being the most common. But you wouldn’t actually charge your buyers 11%. You would just use that to determine your rent amount. Anytime you have a 2% - 3% spread on the interest factor you are going to create decent cash flow.

Lets say you have a property worth $100k.

You use $85k from your investor to buy the property which at 9% interest amortized over 30 years would be a principal and interest payment of $683.93

Then you L/O to your tenant/buyer getting $5k down. If they exercise the option they will need $95k to purchase the property. So you figure $95k at 11% interest amortized over 30 years and the principal and interest payment would be $952.34

$952.34 - $683.93 = $268.41 difference which is your monthly cash flow.

But you need to add in the taxes and insurance.

So if the taxes and insurance came to $150 per month add that to those numbers.

You would pay your investor $683.93 plus $150 for taxes and insurance for a total of $833.93 per month which is your total debt service you have to pay.

Then add the $150 to the $952.34 which is a total of $1102.34 you would charge your tenant/buyer for RENT.

So might round that off to $1100 per month as RENT that you charge your tenant/buyer.

Then when they pay you the $1100 RENT each month, you would take $683.93 of that to pay to your investor, plus $150 to pay towards the taxes and insurance for a total out going debt of $833.93 and the difference you would keep as your cash flow.

$1100 - $833.93 = $266.07 per month in positive cash flow.

Then at the end of 5 years your balance owed to your investor on the $85k you borrowed would be $81,498.02.

Your tenant/buyer would owe $95,000 to exercise their option from you.

$95,000.00 - $81,498.02 = $13,501.98. This would be your back end profit.

So you would have made,

$5,000.00 up front in option money
$266.07 per month cash flow x 60 months = $15,964.20
$13,501.98 back end profit.

$5,000 + $15,964.20 + $13,501.98 = $34,466.18 Total Profit over 5 years!

Of course you don’t want to just give your tenant/buyer a 5 year L/O term. You want to only give them 2 year terms at the most. Then if they need more time just renew their L/O by giving them a new contract. If they went 5 years to exercise their option then the above amount would be your profit over 5 years based on the numbers I used.

See the power of what a few percent difference can make on the interest rate?

Re: Post for Johnboy - Posted by Deb

Posted by Deb on July 18, 2002 at 18:43:18:

Just wanted to make sure I thanked you for all your posts on this thread!!!You’ve been a great help.