Posted by royland on December 06, 2002 at 12:28:55:
Thanks Nate. Sounds plausible. I have this feeling that newbies when they start out are more interested in flipping a property than the rental prospects. The reason being they are afraid of the legal ramifications if something goes wrong.
Seller financing for a duplex? - Posted by royland
Posted by royland on December 04, 2002 at 11:26:30:
Hi,
I am still getting used to all the options attached to creative seller financing.
I am about to see a potential buy (see below) and would appreciate your advice and help in understanding the offer and improving the offer. I will try to explain the situation clearly:
A duplex, relatively good shape with following features:
CASH FLOW:
Apparent appraisal: (need to confirm:) $250,000. This is what a similiar unit across the road solde for.
Their desired price: Around $235,000
What they want out at closing: About 5%-10%
Their equity: About 60% - they have taken out from time to time.
Occupancy: According to the owner, the units are easy to rent and they are currently generating about $500 in + cash flow.
Their spin: They are more experienced investors than me but seem genuine. They are willing to TAKE NOTE and help me in a low money down deal.
They say they could possibly do the following: Get the duplex appraised for a higher value than it is and then kick back the excess to me (They will list these as building repairs?) which I can use as a down payment and allow me to take title.
Now, I would appreciate your views on this scenario. At the moment I have a problem understanding these two things offered by the seller and would appreciate some specific advice and guidance:
When they say they will HOLD NOTE - what does this actually mean?
I only partically understand the logic of higher appraisal - can someone explain this to me?
Conclusion: I have a possibly motivated seller on my hands with what seems like a good property (I will view on Saturday). But I am not sure the best route to take or what they exactly mean by HOLDING NOTE and the suggested method of using a higher appraisal. They want to get rid of the property and do not seem interested in Leasing. They want to pass title.
I would appreciate any focused advice on my next steps and how these sellers (- creative sellers!) are thinking!
Many thanks in advance
Royland
More info :: Coin operated dryer etc ? good or bad - Posted by royland
Posted by royland on December 06, 2002 at 12:46:32:
Hi - just some more info on the property I will be seeing tomorrow morning.
DUPLEX
2300 sq feet
First unit:
1 Br / 1 BATH (bedroom is very big)
Dining room, etc
car port
SECOND UNIT
2 bedroom, 2 bathrooms
cover patio and fenced yard
car port
Big family room
There is a shed in the back with coin operated washer and dryer.
How do experienced REIs feel about that? Are coin operated dryers/washer good income or just extra hassle?
Thanks
Jason
Re: Seller financing for a duplex? - Posted by James Harris
Posted by James Harris on December 04, 2002 at 14:00:44:
Royland,
I agree with the concept of having the owners refinance the property. If they are motivated, then they would do this. Yet, since you are not very well versed in the language of this business as of yet. May I suggest that you do some studing before you go out making deals. i.e. I was taught that in order to do flips that you should pay no more than 85% of the property value then sell for full value.
One last point; when seasoned investors make the comment “not enough money to flip” has always erked me. Maybe things have always worked out for those people where they always get what they asked for($10k, 15k, 20k) per transaction. Which it’s all good, IF they get it. My philosphy is “Don’t kill the Deal”. At this point in time, 3k-5k per deal is a lot to me. And as I do and get better my fee will go up as I make better deals. Hope this helps. God Bless.
You are buying this to hold? - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on December 04, 2002 at 12:12:21:
They are not going to give you enough equity to flip or make a killing. Can you afford the highly leveraged payment if for some reason it is vacant for more than 1 month? Let them do there creative thingto help you get this if you want it. If they were to sell it to you for 250k you would need 50k + closing costs to get in conventionally. What they are suggesting is to credit you back 15k in repair costs for the needed roof repair 
That would leave you needing 30k to come up with for a mortgage at 80% of which the sellers would take back a note (2nd mortgage) and all you would be left with is closing costs. In my opinion if the cashflow works is to have them refi for 15-20k over what they owe to get them their cash and do give you a wraparound mortgage. This would protect them in several ways. 1. You would pay them so they would know the payments are being made 2. They don’t pay taxes on the gain because they are selling in installments 3. They keep the steady income 4. They get a good interest rate (better than on a CD not as good if they do a 1031) 5. They have a stronger first position on the wraparound if you default. 6.They sell the property fast.
By the way, are they kicking the daughter out? You stated that it apparently has good occupancy? Where’s the proof? I would expect to see the last 3 years books. 1 year at the bare minimum (last year).
Good Luck,
Shawn(OH)
Just one question… - Posted by Andrew
Posted by Andrew on December 04, 2002 at 11:42:51:
Royland,
So, if it’s such a great property and they’ve got a nice positive cashflow… WHY are they motivated?
-Andrew
I agree with you on the equity part… - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on December 04, 2002 at 14:52:09:
I was not clear. read my explanation further in the thread. Buying to flip is a lot different than buying to hold.
Good Luck,
Shawn(OH)
FLIP - rule - must be 85% of value of property - Posted by royland
Posted by royland on December 04, 2002 at 14:11:06:
Thanks James - suggestion noted - I really do need to study more. The only thing is I have recently come to realize something which first became apparent after studying stocks for a while:
IF YOU DO NOT HAVE MONEY IN PLAY YOU ARE LOSING MONEY
…as suggested by the fact that stocks - on average - give higher returns than savings accounts etc.
I almost feel the same way about property - I need to get my minute amounts of cash into play.
And, this is not just a money thing. I need to learn the rules of the game as quickly and cleanly as possible and I almost feel compelled to go ahead with a deal even if it is bad one just so I can get my hair wet and learn something. But, this is a probably really naive and asking for a world of debt!
I did like your general rule about 85% pay out for the value of a property. That makes sense.
How many successful no money down deals have you achieved thus far?
Cheers
Royland
R U buying >> hold? A flip would be preferable,but - Posted by royland
Posted by royland on December 04, 2002 at 12:39:24:
Hi Shawn - many thanks for the quick, focused, specific advice which seems to be advocating:
Have them refinance for 15-20k over what they owe (on their existing mortage? )to get them their cash and do give me a wraparound mortgage which will offer them greater protection.
Can I answer each of your points in turn before querying some of your points which I don’t really understand:
Can I afford highly leverage pyaments if property is vacant for +1 month?
A = Probably Not. I have about $1500 in my current bank account and no nothing about property management.
…will they kick daughter out?
A = They bluntly said yes, although I was thinking it may be better to keep her there as she is an established tenant and may provide more leverage when I negotiate with them. I could also perhaps count on her input from time to time…???
Good occupancy? I am taking their word at face value. I need to check this out. But, they have existing tenants and South Florida seems reasonably popular. Also, interest rates may go up which could help?
Am I buying to hold to hold?
A = I would actually prefer a FLIP in my first deal. Frankly, I am bit afraid of being a landlord although a + monthly cash flow is very enticing.
Shawn, I am still confused by some of your points and was hoping you could clarify.
Why do you say they will not give my enough equity to flip?
Being a slow learner I do not fully understand what you mean by “taking a 2nd mortage”…
…Or by I will only be left with the closing costs?
…How do I establish if the cashflow works?
When you say RE-FINANCE - what exactly do you mean…do you mean they should find another mortage at another bank which charges less interest???
I really do not understand the concept of WRAPAROUND mortage - could this be explained?
I seem to be struggling with the concepts you are presenting and would appreciate further guidance
Why motivated? Absentee landlord; Vero Beach! - Posted by royland
Posted by royland on December 04, 2002 at 11:47:54:
Good question: They claim they have got value out of the property already and are now in the process of concentrating their efforts in developing a complex of housing rentals in Vero Beach. They are selling their house on the AIA in South Florida and moving up there.
An obvious reason is becuase they do not want to be absentee landlords. Another reason is because they are versed in creative financing techniques and also wish to deal with someone they trust quickly.
I am hoping everyone in the discussion group will not question WHETHER the seller is motivated but rather help me understand the dynamics of the deal and how I should proceed with points (1) and (2).
Many thanks
This is probably too much prop to start with - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on December 04, 2002 at 14:47:01:
You need to study the archives here, and get a basic feel of the terminology and the ideas of what we try to accomplish when we invest. A mortgage is what we call a house or property loan. If you have a mortgage (loan on prop) that you owe 50,000.00 on and it is worth 100k then the difference between the amount you owe and the value is called equity. To refinance means to go to the bank and ask for a mortgage for 75k on that property. The bank would have you sign a new loan for 75k, payoff the existing 50k and give you the 25k difference in cash or equivalent. You can have several different loans on the same property each in a different pecking order. The most important and safest one for the lender is a first mortgage. If anything ever goes wrong they get paid first. A second mortgage is a loan second to the first and as such if anything goes wrong the second lender only gets whats left over after the first lender is paid.
As to not having enough equity to flip I mean that there is not enough profit for you to buy for 235k and sell to make a profit. Point #1 Is that particular property worth 250k? Always figure the top 10% as air Actually it is probably worth about 225-235k which is what they are asking. Lightbulb! If they list it they will likely add on the negotiation amount 5-10k and the Real Estate commission 6% or so. Lightbulb! Ok 235k + 5k negotiable + 15k Realtors commission= $255k List price. See how it works?
A wraparound mortgage is when they have a loan for 50k at 7% they can sell it to you and lend you the money so to speak. They can give you a mortgage for the 235k at 7.5% or whatever. The amount you pay them on the wrap is used to pay their own loan and they pocket the difference.
I am a cashflow buyer. I am different. I don’t care as much about appraisal (I do care) as I do cash flow. I like the idea of renters buying and paying for my property. So, if the property has enough income to pay for the loan, taxes, insurance, vacancy allowance, advertising, double maintenance, and pay me a little something, I’ll buy it.
I think if you don’t have the reserves to keep you out of financial ruin should something go wrong… and it most assuredly will, you need to stick with cheaper properties like 30-50k. Or check out the mobile home forum. You can do well there with much smaller risk… In other words walk before you run… actually you need to learn to crawl. Read all the information on this and any other real estate site you can. Learn before you jump.
Good Luck,
Shawn(OH)
Vero Beach! - Posted by Jonathan Rexford
Posted by Jonathan Rexford on December 04, 2002 at 14:24:50:
Hey thats where I live…lol.
JR
Re: Why motivated? Absentee landlord; Vero Beach! - Posted by Andrew
Posted by Andrew on December 04, 2002 at 13:51:11:
Royland,
Okay, now I can see WHY they are motivated. This wasn’t clear to me in your first post. I wasn’t questioning WHETHER or not the seller was motivated. It was clear that they are motivated, but it’s always good to know why (e.g. relocating, tax liens, foreclosure, divorce, bad tenants) before you buy.
It sounded like you are fairly new to this and I didn’t want to see you getting stuck with their problem.
-Andrew
Proposal! - Posted by royland
Posted by royland on December 04, 2002 at 15:25:17:
Shawn! Thanks - that was a brilliant explanationa and I have a much clearer understanding of the price structuring and the mortage implications. Really helps!
The only thing which I did not click was the WRAPAROUND MORTAGE.
Is the value of this mortage always equal to the value of an EXISTING mortage + EQUITY currently inherent in the property?
I agree that maybe I am taking on too much risk.
I have a proposal: Why do I not give you the deal - subordinate on you reducing the asking price - in exchange for myself putting in a small % of the equity ddown payment and learning the procedure from you in the meantime? 
Vero Beach :: What is really like? - Posted by royland
Posted by royland on December 04, 2002 at 14:33:15:
Hey Jonathan - I would be interested in your views on Vero considering the motivated sellers I am touch with are very experienced and successful investors who are estatic about the prospects up there!
Cheers
Royland
Re: Why motivated? Could a 2br duplex be a problem - Posted by royland
Posted by royland on December 04, 2002 at 14:00:14:
Hi Andrew,
Actually, you have a point which chrystallized a short while ago:
I once heard from a Carlton Sheets Seminar that one should NEVER,EVER buy a 2 bedroom property as these are the hardest to fill with renters. He suggests tackling the path of least resistance: 3 bedroom family homes - which he refers to as Bread and Butter properties.
I am actually now a bit more skeptical about their potential offer. Could it be they are extremely nervous about having a 2 bedroom property in a declining market…
I don’t know, I am very experienced. What do you think?
Where in Florida? - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on December 04, 2002 at 16:23:06:
As I said there is probably not enough equity to mess with… I’d like to see the cashflow figures though… But There’d have to be someone to help manage the property. Is it anywhere near Tampa? My parents spend the winter down there in God’s waiting room.
Email me privately @ loanwizard@hotmail.com
Re: Vero Beach :: What is really like? - Posted by Jonathan Rexford
Posted by Jonathan Rexford on December 04, 2002 at 16:05:50:
Its a quiet community. Indian River COunty has about 120K in population. Some retired. From my contacts down in South Florida is that people want to get away from traffic and crime. We are in a different world here…as far as deals go. Deals are everywhere. Because People will always have problems.
2 Br’s have less risk of lot’s of kids. - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on December 04, 2002 at 16:31:08:
I love kid’s but they’re not as careful as adults in the care of your property. Ever notice that some of the folks on careltons show talking about a no money down purchase that results in a positive cash flow? That’s what a multi family property will due for you. It is also safer in that if 1 unit is empty, you still have income coming in.
Good Luck,
Shawn(OH)
Re: Why motivated? Could a 2br duplex be a problem - Posted by Nate(DC)
Posted by Nate(DC) on December 04, 2002 at 14:16:35:
I disagree with that advice. For a rental, a 2BR can be fine. It can hold a wide variety of family sizes and configurations - single parent or couple with or without kids, single person who wants extra space, even two roommates. I think a 2BR can sometimes be harder to SELL, but I wouldn’t think they would be more difficult to RENT.
NT