Shoot...I need help structuring this deal - Posted by Constance (TX)

Posted by Sean on December 23, 2000 at 09:11:23:

I’m not forgetting that lenders buy on appraised value. I also don’t think the property is worth only $62,500 like a simple square footage calculation indicates. If the property truly is one of the smallest in the area then the other properties around it will bring its value up (the poster indicated that the other homes sell for $65,000 - $80,000). This is the “principle of progression.”

Second of all, even if the house does only appraise for $65,000 the purchase price proposed for the note ($51,500) represents 79.2% ITV.

Third, while $7,000+interest isn’t a killing and wouldn’t tempt me to do the deal (I require at least $10,000 profit), you seem to think this deal will be an incredible amount of work. Why? The hardest part will be convincing the seller to take 80% or less of her asking price as fair value. Once that’s done and a contract is signed it’s not hard to find a buyer for a house with owner financing.

If I were to do the deal I’d see if the Seller would take a $60,000 sale price with $4,500 down and use one of the many techniques to beat the due-on-sale clause and I’d sell on a wrap for $70,000 with $7,000 down.

The nice thing is if you choose your buyer carefully (600-639 FICO) and his credit issues are due to things bad things that happened several years ago, then in a year or two your buyer will have a FICO high enough to refinance. Considering that the Federal Reserve is expected to lower interest rates in the upcoming year, your buyer may quickly find a way to do so.

Plus you’ll be making a spread on the interest rates and you still preserve the option down the road of cashing the original seller out at a discount.

Shoot…I need help structuring this deal - Posted by Constance (TX)

Posted by Constance (TX) on December 19, 2000 at 19:36:53:

It is kinda’ hard for me to estimate the price value on this home 'cause the houses around it “really” vary in size and age. Nevertheless, I used the comps of homes recently sold and averaged the price/sq.ft. which comes up to $62,563. The other homes sell for $65-$80K.

Anyhow…the home itself is a 3-1.5-2, 1284 sq.ft., 10440 lot size, built in 1954, ch/a, roof is 5 years old, had some plumbing work done (that will be completed in January), $36,000 mortgage balance. Owner is recently divorced and will be moving home to take care of her parents…she’s already packing. She is very motivated and is willing to work with me. Her asking price is $69,000, she said she will accept an all cash offer for $65,000. She is willing to do a lease purchase type deal.

Now, she understands that I will be offering on a discount. Since I “plan” to owner finance and sell the note at the table, I want to make sure I do this right. I’m trying to use a system here…$62,500 (purchase price) minus 65% discount (I think that’s the way notebuyers figure it…right?) for an all cash purchase price offer to seller of $40,625. — Or a lease-purchase price offer of $44,688, with $500/mo, and $500 down.

I will structure the following terms with my buyer - Purchase price $55,000 for bank qualified buyers or $62,500 to owner finance ($6250-10% down, 13% interest, 30yrs, 7 yr balloon, $691.37/mo) or ($3125-5% down, 13% interest, 15yrs, 7 yr ballon, $790.78/mo). If the lease-purchase offer is accepted I will offer a minimum of 3% down with $690/mo. I’m assuming the worst…551 FICO score.

Am I on the right track here?..or am I headed in the wrong direction?

Re: Shoot…I need help structuring this deal - Posted by Sean

Posted by Sean on December 20, 2000 at 19:30:44:

It sounds to me like you’re on the right track in that you’ve located a motivated seller and you’ve determined the value of the house using recent sales.

We are assuming a sale price of $70,000? For owner financing a person should be willing to pay a premium. Assuming 10% down ($7,000) and you carry back a 10% second ($7,000) you’ll have a first for 80% LTV in the amount of $56,000.

Now in order to get a Fannie Mae conforming mortgage a buyer needs to have a FICO score of at least 620 (and 640+ makes it much easier). So your target FICO scores are from 600-639 because these people either can’t get a FNMA loan or will find it difficult and paper-intensive.

Now I’ve been told that you can many times sell these notes for 92% of the face value if they have a good coupon amount. That means you might be able to get $51,500 for the note and $7,000 as the down payment. So if you can get the seller to agree to a sale price of $60,000 or less then I think the deal is doable. Your profit would be in the form of a high LTV second, which would be unsalable.

Of course, you should check and see if the note is salable and how much you can get for it. I think there’s some sort of link that someone around here posts that’ll let you go to their website and get an estimate of the value of the note.

Also you may need to put some money of your own into the deal to cover closing costs.

Re: Shoot…I need help structuring this deal - Posted by Ron Ohara

Posted by Ron Ohara on December 20, 2000 at 04:09:31:


I have several questions here. The Seller is willing to sell at $69,000.00 and will accept an all cash offer of $65,000.00. And you are willing to buy it from the Seller between the price range of $40,000.00 to $44,500.00. I really do not understand what you and the seller are trying to accomplish here.

What I am reading here, the seller is not selling the property to you for $69,000.00. The seller is willing to take between $40,000.00 to $44,500.00 for the property. After you take title to the property, you will be selling the property at a higher price.

What Michael Morrongiello has stated regarding the simultaneous closing between you and your prospective buyer is correct and to the point. If you are looking at selling the property to a buyer with a 551 FICO score, most likely, you may have trouble in selling the note. Michael’s comments on having your buyer with a much higher FICO and/or Beacon score would be very beneficial to you.

Seperate … - Posted by David Alexander

Posted by David Alexander on December 19, 2000 at 21:58:05:

Her needs from her wants. You say she’s motivated but then say she’s asking 69k, will take 65k all cash for a house you just comped out at 62,500?

Where’s the deal?

Part of this business is knowing when to deal and when to walk away… or rather never even getting off the couch, until you know someone is truly is motivated to sell.

For Instance maybe only needing a grand or so to move and let you take over payments.

David Alexander

To flip or not ? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on December 19, 2000 at 21:46:31:

First off, you’d better get a “good” accurate handle on the “retail” fair market value for this home if you were to put it in pristine condition.

This should be the target sales price you should shoot for when you market the home to your ultimate end user who will be an owner occupied “retail” sales price buyer.

If you are trying to use the cash that will be generated from the sale of the seller finance note to complete YOUR purchase of the home from the buyer (otherwise known as a flip), then you’d better pre-qualify the “retail” buyer to have good employment, stability on their jobs, an overall reasonable credit profile, and credit scores in the 600 plus FICO & BEACON range.

Note funders in general do not like to purchase newly created paper where there has been a quick run in the sales price or “value” of a home over a short period of time unless there is some justification to the increased value. The fact that you may be getting a “good deal” does not placate many note funders who are being asked to put thier funds at risk on a new sale to an UNPROVEN buyer.

This is not to say that all note funders look at these deals the same way as they don’t. Some note funders will allow for a deal like this to happen providing it is equitable for all parties.

The interest rate of 13% you are intending to finance the sale with is probably a bit high. Depending on the credit of the prospective buyers a note interest rate in the 11.5% -12.25% range should work.

You very well may have to take back some your “profit” in the form of a 2nd lien mortgage when you sell to the “retail” buyer. If the home is capable of supporting a $65K sales price to the owner occupied “retail” buyer where they are putting down anywhere from 5% to 10% of that sale price in cash, then it would appear very feasible to generate enough cash from the sale of the note to be able to satisfy your property sellers providing they substantially come off their $69K asking price for cash.

Hope this helps…If you need more assistance feel free to contact me as we will purchase paper created under these circumstances.

To your success,

Michael Morrongiello

Re: Shoot…I need help structuring this deal - Posted by David Alexander

Posted by David Alexander on December 20, 2000 at 19:57:17:

That’s a whole lot of work for way too little and your forgeting that the Notebuyers buy notes based on appraisal value not just face value or sales price.
So if that property only appraises for 65k, then the 80% is 52k.

Again she needs to find out the needs and solve that problem or there is no deal.

David Alexander