Success with a couple creative techniques - Posted by Neil (MS)

Real Estate Investing Hotel/Motel
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Posted by Ray S on November 25, 2004 at 24:53:32:

Hi Neil, although I have little experience with Mobile Homes, I do have a lot of experience with House rentals. Some things I would do:
1 Go for the money
2 Make sure I see his Driver License
3 Consider restructuring the numbers to make it easier to stay out of default (in my greed I have gone along with buyers unworkable plans only to have the buyer go in default). An example would be to minimize payment ie $600 p/month. I would sell it like this. I am concerned with the high payments and it’s important we don’t haven a default. We can structure this to amortize 22.5k at 12.9 percent for x amount of months, but have an option to purchase to buy at any time within the first year for 17.5k, with all monthly payments being credited to principal.

This should be an easy sale. Your saying if you do as you say then you get your terms, but if you have setbacks you at least won’t lose your property.

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Success with a couple creative techniques - Posted by Neil (MS)

Posted by Neil (MS) on November 22, 2004 at 16:05:29:

I posted a couple weeks ago about my blind luck in getting cashed out with a $10k profit on my first deal that I made a whole list of mistakes on. I also mentioned my desire to use a technique I read somewhere I call the Down Payment Bonus. The concept is to set a minimally acceptable down payment amount, then offer to “match” any amount over that the buyer puts down, as well as drop the interest rate and required payment. In this particular case, I had bought a nearly new condition mobile home that could stay in place for $8k, which isn’t exactly cheap, but the best I could find. I advertised the down payment bonus and set the price at $22.5k (NADA retail minus about 5%). I got several interested, but the one that’s probably going to close is even more interesting.

This guy calls me and tells me (in shortened form) that he was in prison for felony DUI(!) and got out and cleaned up his act, started a very successful vinyl siding contracting business, and has 2 or 3 trucks, a few employees, etc. He can’t get any financing for a used mobile home, and doesn’t want to buy a new one. He said he could probably go a bit more than the minimum down ($2500) if I could work with him on the interest rate. I explained the program, and a few days later he says he can put down $7k and wants to pay a higher monthly note because that’s what he’s used to at the extended stay motel he’s been in for the past six months. What we finally agreed on was $7k down, $917/mo for 12 months at 0% interest. Any late payment incurs a rate of 12.9%. Amazingly, this was his request because he wants to pay it off in a year. In the end, he’s really buying for $17,500 with 365 days same as cash. He was very sensitive to interest, not so much to price, so I was happy to “give up” the interest and part of the profit to cash out so quick. I plan to close this on Saturday. This home was so clean that I only had to sweep a bit and spend about 15 minutes dusting and polishing the furniture the previous owner left. In January, I’ll be cashed out and collecting 11 more payments of $917. There may be a lot things wrong with that structure, but it sounds good to me.

The other one I’m working on is another immaculate (“puff”, to quote Greg) 16x80 that’s located about an hour from me. The owner is stuck with it after her son decided he’d rather do something else and left her to sell it. She owes $13.5k on it. I told her I could only give her $8k (I just like that number I guess…seriously, the model I built in Excel that has been very good to me tells me to give no more than $8300).

She said $10k was all she could take because she only had enough savings to eat $3500 of the remaining amount owed. I told her my investors wouldn’t allow me to give more than the offered amount for a singlewide, but that I could work with her to get it off her hands. I’ve offered to pay her $8k for the trailer and loan her the other $2k at 9.9% for 12 months or 16.9% for 24 months to enable the payoff. She is going to talk it over with her husband, etc. and get back to me, but I don’t see where she really has any other options since it has to be moved and nobody has offered her anything on it otherwise.

Again, this isn’t by the book, but it makes sense to me: I really wouldn’t be in too bad a shape if she defaults on the $2k, I just don’t want to pay $10k for it if I can help it. She’s just happy to have an option that will take the payments, lot rent, and insurance off her hands soon.

Anybody see any big problems with either of these two deals?

Neil

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Re: Success with a couple creative techniques - Posted by Anne_ND

Posted by Anne_ND on November 23, 2004 at 07:43:43:

Nice job Neil, I’m impressed with your thinking.

I agree with what the others said about buyers with big cash down payments, they rarely perform in my experience.

My only other thought is that you should charge the first guy interest on his note. He couldn’t get any kind of a bank loan, because of his payment history he doesn’t deserve one (hasn’t earned one)- so if you gave him 8% he should be tickled. Also- the IRS will impute an interest rate (of about 6% I believe is what John Hyre says) even if you say the note is 0% interest, so you’ll be paying taxes as if you received interest. I used to do this, but now I always charge a minumum rate of 6%.

Good luck, sounds like you are really rockin’ and rollin’!

Anne

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these are both nice pops… - Posted by Greg Meade

Posted by Greg Meade on November 23, 2004 at 05:55:10:

i like the first one the best. with this kind of down and monthly stroke, you would not mind it coming back to Daddy in 8 months or so LOL. One way to guard your interest is get the name of the parole officer and discuss this with him. the felon, seeing this contact is MUCH less likely to damage your unit.

I don’t much care for the idea of you coming out of pocket on a loan basis on the second one. With her not missing any payments yet,if they won’t short sale(and most won’t here in FL), she will prolly find a way to come up with remainder owed. One option is for you to buy her late model car with a 12 month note for your 2k.If she plans to pay this should be ok. You need some collateral for this dough.

Great job on all three Neil!
Greg

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Re: Success with a couple creative techniques - Posted by Tony Colella

Posted by Tony Colella on November 23, 2004 at 03:25:24:

Hey Neil,

A couple of cautions about the buyer in your first deal. So long as you get the $7k from him, you should be in a good spot but if he tries to drop it back down, I would suggest you reconsider him.

Yes, it sounds promising but here is how this type of buyer has proven time and time again to work out for me (hopefully your experience will vary).

First if he served time for felony DWI, chances are he is an habitual offender which means his license to drive is revoked for up to 10 years. If he claims to have 2 trucks working for his new company, they are not in his name and likely uninsured. Eventually he will get caught and his income will be interupted, leaving you with a ear full of his excuses instead of his payments.

Second, every time I have tried to help someone buy a home who is currently living in a motel, they have gone bad. I have spoken to other investors and time and time again they have had these folks go bad, almost right from the start.

It seems logical that they should be able to afford the house payments after paying such high motel bills but for whatever reason, they are not well suited for homeownership just yet.

It comes down to screening. If this buyer were to apply to rent this place, they would not likely pass the application process. He cannot legally drive. He has a criminal background that you are aware of and may well be more extensive than you currently know of. His income is what I call weather based. No matter what, I get the excuse, “well the weather wasn’t right so we didn’t get to work all week so I can’t pay all the rent” etc. His current housing situation is not a reliable predictor of future stability. Across the board this buyer would fail the application.

The lure of cash is what may be enticing but if he decides to whittle that down, which I expect he will at the last minute, then you are left with taking a gamble that no longer provides you with a strong expectation of receiving payments.

Look at it this way. You will be creating a monthly relationship with this buyer that will extend for years to come. You want to place yourself in a position that provides the greatest expectation of payment and people facing this buyer’s circumstances have proven time and time again to me that they are not able to meet that expectation yet.

Let them establish a rental history somewhere else first and then graduate to buying. The motel is a transient rental history. He needs to make the rental step first, then perhaps he may qualify to buy on payments.

If he were to pay all cash, perhaps you put him in a more traditional Lonnie deal that he can pay all cash for now, rent the lot from the park for a year or more to prove himself and then upgrade him later once he has done so.

Tony

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Try a short sale to make up the difference - Posted by Karl (Oh)

Posted by Karl (Oh) on November 23, 2004 at 24:17:46:

Neil,

Regarding the second deal. Call the lender’s loss mitigation department and see if they would knock a couple grand (or more) off the balance if you bought the home and paid off the loan. Explain to the lender exactly what’s going on. You’re interested in buying the home, but the seller owes more than you’re willing to pay, and the seller can’t make up the difference.

Karl Kleiner

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Re: Success with a couple creative techniques - Posted by Neil (MS)

Posted by Neil (MS) on November 23, 2004 at 09:19:51:

Tony:
Excellent points (especially from a former officer!). The reason I’m not AS concerned about this guy is that he will pay the whole note within a year. I would be much more concerned about starting a long-term landlord relationship with him.

I see your point about motel dwellers not working out: it’s risky to be the first non-weekly landlord they’ve had. Let them prove themselves with somebody else first.

You’re right about the cash being a lure: I’m in a position right now where cash is my focus for this business. I’m working on developing some land-home setups near my home and need to raise some funds to keep it going.

I’m going to go ahead with this one if his trade and modtel credit references check out. I won’t accept less for a down payment, but I will be on the lookout for him trying to whittle it down.

Thanks again to all for the input. It can be scary trying to make these deals when you don’t really know what you’re doing, and it helps to have a whole panel of experts available on here.

Neil

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Re: Try a short sale to make up the difference - Posted by Neil (MS)

Posted by Neil (MS) on November 23, 2004 at 24:27:56:

Excellent idea. I know she hasn’t been late with the payments yet, but it’s certainly worth a shot. I’ll mention the possibility to the seller and see if I can make it work. Thanks!

Neil

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Decisions Decisions. Some aren’t so easy. - Posted by Dr. Craig Whisler CA

Posted by Dr. Craig Whisler CA on November 23, 2004 at 12:01:58:

Neil, you didn’t say if this mobile is in a park. If so, do you suppose your buyer will be acceptable to the park manager who will base his decision on things other than a large downpayment as you have?

Are his trucks paid for? It might not hurt to ask for a lein on them as ADDITIONAL security, if they are of any value.

DUI? I feel like Tony does on this one. This guy doesn’t pass the ‘sniff test’ in more ways than one. Let me count the reliable drunks I have known over the years. The number zero is the first one that comes to mind.

With only $7k down you need to do the math. How much to repo it (assuming it doesn’t disappear in the dead of night). How much for lost payments? How much back space rent? How much to rehab it? How much for atty. fees? How much time and effort might be involved for legal hassle, rehab, and resale effort? How much is your time worth?

If you proceed, and I still might do so if this were my deal, be sure to put something in your contract that prevents the mobile from being moved before it is paid in full. It might not be a bad cash price (for him) if he moves it to parts unknown and you can’t even repo it. Without a contract provision prevental its removal it probably wouldn’t do much good to call the police if a move is attempted. Also I would ask the park manager to notify me if it looks like moving preperation is taking place.

Consider also your (not lost) opportunity costs for the $7k. If you can do another quick flip and make another quick $10 grand with his downstroke, it might favorably affect your risks and decision making process.

I wouldn’t be too quick to shine this one on but you should weigh your risks carefully. There is one remaining factor to consider. You have the ability to talk to this guy face to face and look him in the eye. Nothing beets a first hand, up close and personal, evaluation. Thats an advantage you have over us in making this decision.

Regards, doc

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Re: Decisions Decisions. Some aren’t so easy. - Posted by Neil (MS)

Posted by Neil (MS) on November 23, 2004 at 12:22:07:

Cool…now I’ve got Doc weighing in, too. Again, valid points from folks more experienced than I am. I’ve not met the guy in person, but my wife has twice, and she’s less trusting than I am. She thinks he’s OK. The park has approved him (it’s the best park in town, by far) even with his history. I might have mistyped before: he’s been out of jail for nearly 3 years and has excellent references from suppliers and larger customers. I’m working through calling some of them now, but they back up what he claimed: that he’s financially stable since he got out of jail.

I’m going to go against popular sentiment and with my gut (and no, the cash isn’t the only thing I’m considering here) and proceed with the deal if nothing else surprising comes up. I’ll be sure to keep y’all posted on the results.

Thanks again to all of you for taking the time to write.

Neil