Posted by fan man on November 09, 1998 at 23:36:56:
Gang,
there are a variety of strategies to avoid the disclosure of the full scope of your personal assets and any potential personal liability arising from that ownership…
But that’s not what Im here to talk about. Find a nice, small bank in your area (make sure they have no plans to be purchased by a GREAT BIG BANK) and explain the full scope of what you want to do to a loan officer who understands real estate. I am a loan officer at a bank and currently I am doing about a dozen revolving lines of credit for small borrowers. The lines of credit are secured by real estate already owned by the borrower, and the available equity is leveraged as purchase money for more real estate (which is then added to the collateral pool). There are thoughtful bankers out there that can help you, the problem is there are also alot of a-holes.
I’m having trouble coming up with a positive cash flow on over 30 properties I have called and done a "cash flow analysis on:
It’s easy to find seller’s willing and able to finance the 10, 20 or 30% the bank won’t, but the banks won’t allow it! At the very least, I have to put in $10%, $8000 off the top on a $80,000 property, plus closing costs! If I go for 80-90% from the bank, I also have to pay mortgage insurance, another $60 a month, and still the $8000 out of pocket. IF I were able to borrow the broker’s commission, it’s only a few thousand out of pocket, plus closing, but then it’s another monthly debt.
How do you guys do it? Even if the banks WOULD allow the seller to put up the 30%, I find the second mortgage debt puts it in the red, or darn close. The only way I find monthly income is if I DO pay 30% cash!
What is it you guys are doing that’s so different?
Get their price down. Don’t forget, if they are seller financing, they are saving capital gains on their taxes too ! Start low-balling the offers. Someone will bite !
Posted by Rob FL on November 05, 1998 at 21:55:55:
Here are some stats on I deal I plan on closing next week. Seller owns free and clear and selling at 67K. House is in great shape in great neighborhood and worth about 75K. I put down 10% (6700). However I am buying this with a partner, so I only have to come up with 1/2 of that (3350). Seller to pay all closing costs except that related to the seller’s 90% mtg.
Seller’s mtg is at 7.5% amortized over 30 yrs. ($421 PI) for the first 5 yrs. and then 8% (442 PI) for the next 10 yrs. with a balloon over 45K at the end of 15 yrs (mtg is amortized over 30 yrs.) Taxes and insurance will raise the inital payment to about $540. Mtg is assume no qualify. With no payments due on the loan until 1/15/1999.
The plan is to lease option the house to a new tenant/buyer get about 2K-3K down in non-refundable option consideration. And rent at $700-750/month with 50-100$ going towards the down payment.
Hopefully before the first mtg payment is due, about 1/2 the down payment will be recouped by virtue of option consideration and a month’s rent. Then after that I will get $100 a month positive cash flow for my 1/2 of the partnership. And tenant/buyer does all the repairs (it will eventually be their house). If they buy at 75K at the end of 1 year, we make 7K or so in profit. If they decide not to buy (which is what I prefer), we lease/option it again and make even more money.
Let me elaborate: Asking $79,900 (Owner/broker) for side x side duplex. Rents $1080/mo. Insurance and taxes 311.66/mo. This leaves 768/mo. Owner has assumable mortgage in "the $50’s @8.0%, about 24-25 years left. That leaves $20 something that seller would have to finance. The first mortgage and expenses already ate up the rent profits, not to mention vacancy and maintenance projections. Nothing left over to PAY a second mortgage. The current leases are good thru 8/99 and tenants pay all utilities (I like that–the majority are owner paid utilities). For sure I have yet to get exact figures, but this, like all I have contemplated, look like a no-go as far as generating a cash flow!
Posted by Joe Kaiser on November 06, 1998 at 12:22:21:
Kathy, there’s a only a couple things you really need to know when it comes to being a real estate investor, and the very first thing is knowing what’s a “good deal.” Under nearly any terms imaginable, this isn’t a good deal and I wouldn’t spend 5 seconds wondering about it.
The other thing you need to know is how to go about finding the good deals, and simply stated, you just look for people motivated to sell.
Put those two together, get your proposal into their hands and good things will happen.
You can forget about 99% of the rest of this stuff and just focus on those two things and you’d be miles ahead of the game.
Posted by Kev_NC on November 06, 1998 at 11:03:12:
If the deal is to skinny, don’t do it. If the numbers do work, I would avoid using a bank for this. What if you assumed the first and the seller carried a 2nd? Or could you borrow against one of your other properties for the other 20K? Or better yet, Lease option the property (my favorite).
I already am in the process of getting a 2nd mortgage on my own home for financing WHATEVER…but don’t really want to “put all my eggs in one basket”…ya know? Either way, it’s another debt; paying back my 2nd or paying the seller. You’d think it would be apparent to the sellers that there’s no income being generated at a given asking price. When I found out the (general) amount of their payment, $700 something, I said, oh, that doesn’t leave much left of the rent payments. They’ll disagree every time!
Thanks for sticking by me with your suggestions. Please stay with me. It really helps to have someone take a walk through this with me. I really have been thinking hard about this and here is one better plan of action.
I can get a loan for 90%. (30 yrs, 8.5%) Asking 79,900 meaning 7990 out of my pocket (10%) plus closing = $9,400. Instead of offering 75,000, I will offer to pay the full price for duplex, pay 10% down (7,990) cash, and ask the seller to gift the $5,000 at closing. My total out-of-pocket would be 2,990 plus closing; maybe $4,000 total. My payments including taxes and insurance and mtg. ins. would be roughly $760/mo. (NO 2nd mtg required) Income of $1080/mo. leaves $320 cash flow. Not sure what to project for maintenance and vacancy, but say $120/mo. would still leave $200 for me.
What do you think of these figures? Do you think I could offer less than the selling price and still get $5,000 rebate? They could probably get a discount on paying off their mortgage, they’ll pocket about 20,000, and the seller is a real estate agent, so will get 1/2 of the commission from the sale.
This plan might be better than paying off their “50 something” mortgage (about the same monthly payment) and finance with seller. Or, at least I’d think they’d be more willing to accept such an offer and be done with the property. Is there some reason I should prefer to pay off existing mtg and use seller financing for the $20 something balance?
Posted by Joe Kaiser on November 07, 1998 at 01:07:12:
Kathy, you’re missing the big picture. The point is to make a profit, not just going through the motions. Seeing through the game isn’t the same as winning the game.
I suggested you forget about bank loans and you start off by saying the first thing you will do is go get one.
Forget about rebates, discounts, full price offers and all that other seminar crappola. It’s all nonsense. I’m not saying it won’t ever happen, it’s just that it won’t happen often enough to make things worth pursing.
You make money by buying cheap.
My father in law is a multimillionaire. He has a keen business mind because it is completely uncluttered with jazzy seminar techniques. His business is much more straightforward and he’s an amazing success because he does one thing: HE BUYS FOR A BUCK AND SELLS FOR TWO. That’s all he ever learned and all he knows about business.
Turns out, that’s all you need to know.
When it comes right down to it, it ain’t the full price, rebate, fancy schmancy stuff that will get you where you want to do. Instead, you buy cheap and figure out a way to make something happen.
Your deal isn’t a deal at all. Full price will buy you just about everything on the market. Forget about full price offers and forget about bank loans. Instead, figure out a way to get your proposal into the hands of the motivated sellers in your town. They will sell to you at rock bottom prices and won’t require a whole lot of hoops to jump through.
Your main point is to not to buy at retail price–I get that. What I can’t understand is, what’s the difference whether it’s seller financing or bank financing (except for the closing costs involved with the bank?) and I’m sure the banks would eventually say “that’s enough”. Other than that, the interest rates are comparable with seller financing.
Also, on another track…If you have 10 Contracts with seller financing and then do apply for a loan, whether personal or for investment, you have to disclose the private (seller’s financing) debts you owe…right? So either way your income/debt ratio could be high and not so appealing to banks.
Kathy - Joe is right on target. You’re headed for a loss. If you want to be a real estate investor for long, always remember that you are not a retail buyer. Go to a few auctions in your area, call a few FISBO’s. Look hard for a discounted property. Make your money going in. I’m a part timer and I regularly find properties at good discounts. Some I rent, some I resell. The mistakes I’ve made have cost me some money but they’ve never hurt to bad - because I always bought the property at a discount. You are not a retail buyer. Follow the advice of Joe, he’s right on target.
Re: I understand what your saying… - Posted by Rob FL
Posted by Rob FL on November 07, 1998 at 20:14:12:
One big difference between bank financing and seller financing is that you can negotiate some terms with the seller that you can’t with a bank. Try getting a bank to give you a ANQ loan. Or try to get a bank to not have you sign personally on the note. It might be possible but it is extremely difficult.
I make sure that on my seller financing deals that the loans do not contain personal libability. All they are is a house with a lien on the title, not some debt that I owe that will ever show up on a credit report. Even if they foreclosed and got a judgement, there is still no personal libality. In fact the seller’s don’t even have my social security number or my home address just some dumb PO Box. Oh wait the person who signed the mortgage and note was the trustee of a trust (which owns nothing except that particular property) and a corporation is the beneficiary. Have the bank try to trace that debt to me. Ain’t America great.
You’re right about seller financed properties not showing up on credit checks. We had a credit report done in April for our first mortgate and now again for our 2nd. Just thought you should disclose the debt/income information when applying for a loan, although the mtg broker handling ours didn’t even alude to the rental income we have (even though free and clear of all debt) because we didn’t need it. Just used our employment info. So I guess you can leave that out of the picture, even though you are attesting (signing) to the fact that “all information is complete…”
Posted by Rob FL on November 07, 1998 at 21:45:22:
ANQ = Assumable with No Qualifying
Yes you are supposed to show it all. However if the property is not in your name and the loan is not in your name then all you really own is a beneficial interest in the trust or stock in a corporation and that is personal property. I try to keep the property out of my name whenever possible for various reasons. Do you list all the personal property that you own on the application? (my wife has 50 pairs of shoes and 30 dresses in the closet that she doesn’t wear, they are personal property but I don’t list them on my bank application) And if the trustee signs the note with no personal liability what debt is it of yours. Use your best judgement. I have read some of JOHN DOE’s articles on this site and he recommends not disclosing everything you own to the bank.
A funny story, I bought a duplex several years ago and assumed the mortgage. About 2 years later Nationsbank gobbled up that little bank and so I started paying Nationsbank. Last year I helped my mother-in-law buy a condo and got another loan from Nationsbank. My credit report showed that the original loan on the duplex was paid in full (an error because of the bank merger). The loan officer couldn’t even tell from the credit report that I had another loan with THEIR bank already. I did end up disclosing that to them because it was in my name. But otherwise they wouldn’t even have known about it.
Posted by Matthew Chan on November 08, 1998 at 14:06:28:
Rob,
Let me see if I understand you correctly. You buy properties under a corporation that you own. This limits liability and doesn’t register on your credit report. Is that right?
I want confirmation mainly because I am going through this very issue right now. Who will own the properties I negotiate, my corporation or me personally? I would like to have the corporation (under a holding company or something) do it from the liability standpoint.
When would it be appropriate to put title of property in your name and when would it be appropriate to put under a corporation? Thanks!