Where do I start ... - Posted by Willy

Posted by Willy on February 14, 2000 at 14:58:00:

Thanks for your responses Brian. Your numbers are very helpful… they’re pretty close to what I had envisioned. I am leaning towards the sandwich lease option as an exit strategy however I think I’ll live in it for awhile so I may go for a longer lease term. The cash flow should be good in the end.
Youl’ve been a great help and I’ll let you know how it works out. Making money in Canada is always a little more difficult, left wing ideals and limited banking competition. By the way spitting at Ontario may be seen as an illegal fresh water export by our government :slight_smile:

Where do I start … - Posted by Willy

Posted by Willy on February 13, 2000 at 18:59:24:

Owner interested in making some kind of deal… tired of the place. Listing at 95000 until May(listed for over a year). 40 acres, well & septic. Comps with any kind of livable house selling for 120 - 130k. Previous renter paid 450/mo and was supposed to fix it up, trashed it instead. House currently uninhabitable. Current rents around 900 for similar property with good house. Owner has ton of equity(says he has a small mortgage)… originally paid 120k as an investment… wants to cut his losses and sell but said to me he’d be interested in making a deal. All info from him verified by mutual friend.
I currently rent apt for 600 + H&H. I am a skilled tradesman and could fix/live in house however it needs work to even make it livable. I couldn’t afford to pay him and for apt so am trying to figure out a deal. I have been trying to figure out L/O without much success - understand the principal however am having a hard time with details. Found this site 1 week ago and have been reading everything but feel I can’t learn enough in time - don’t want to lose this house.
I know I should and will purchase a course but would like to get a rolling start.
Any and all suggestions appreciated

Re: Where do I start … - Posted by B.L.Renfrow

Posted by B.L.Renfrow on February 13, 2000 at 20:59:58:

How much will it require for repairs? The fact that the owner paid $120K is irrelevant in determining a fair purchase price for you. Likewise, realize that the listing price may well represent a figment of the owner’s/agent’s imagination rather than a realistic price.

If the seller is not interested in a lease/option, how about owner financing? You could offer his asking price less repairs, in exchange for favorable terms, i.e. interest only (or no payments) for 6 months, or however long it will take you to make the place livable. If need be, you could include a balloon payment in, say, 5 years, at which time you would refinance and pay off the seller.

Actually, there are all kinds of options. Land trust, L/O, note sale, etc. Which is best depends upon many factors, such as the seller’s needs and motivation, your available cash/credit, amount of the existing mortgage, and so on.

If you have a significantly motivated seller and the ability to think creatively, there are any number of ways to put together a deal!

Brian (NY)

Re: Where do I start … - Posted by Willy

Posted by Willy on February 13, 2000 at 22:08:47:

Thanks for the reply! I included his original purchase price just fyi. I think it may play a part in his willingness to deal. I know you guy’s must get exasperated with ‘newbies’ asking questions before having the basic knowledge nescessary to even discuss CREI but I’m working on it. I know I’ve got the cart before the horse but…
Cost of repairs depend on the extent of the rehab. 3500-5000 to make it liveable(rentable). 5000 to 10000 to extensively rehabilitate(foundation work & addition). I think his asking price is probably 7-10000 dollars too high based on my knowledge of the market. I do service work on bank owned properties here in Canada so I see all foreclosure properties in my area and have a good grasp of the market. My credit is average however I subcontract the bank work so traditional mortgage is out.

  1. Would you suggest I start with a private appraisal?
  2. Since it is listed would you wait for the listing to expire (May)?
  3. If it is not too much trouble could you outline how the numbers might look on a lease option?

Re: Where do I start … - Posted by The Donald

Posted by The Donald on June 21, 2000 at 23:01:14:

Whereabouts are you in Canada? You have a head start on many Canadian investor - access to bank owned properties. Since most Canadian RE is disposed of via the power of sale (they only have to wait 35 days in default to take action), I’d love to know which type of properties that the bank has taken back?

Re: Where do I start … - Posted by B.L.Renfrow

Posted by B.L.Renfrow on February 14, 2000 at 12:02:57:

Sure, always happy to give an opinion! However, I should point out that I am by no means an expert; I have been doing this only little more than a year, so read with that in mind. Also, I see you are in Canada. I don’t know beans about CRE in Canada (although I spend two days a week within spitting distance of the Ontario border)! I believe there are, however, several Canadians on the board here, so maybe they will be able to better advise regarding specific techniques, but keep in mind I am answering from the perspective of a US investor.

As to your specific questions:

No need for an appraisal at this point. Appraisals are like blood pressure: up one minute, down the next. They are hardly scientific, and (at least in the US) typically reflect the agenda of whomever orders it. Appraisals have their purpose (which generally is when a commercial lender requires them), as do comps, but in the end, the best determination of a property’s value is whatever the buyer agrees to pay and the seller agrees to take!

Regarding whether to wait for the listing to expire, remember that the broker commission is paid by the seller, so unless the deal is so thin for him that it would break the deal, I wouldn’t worry about it. Keep in mind also that most listing agreements require the seller to pay a commission for a certain period of time after expiration, if the seller sells to a buyer who became aware of the property through efforts of the broker. So, even if you wait until June to make an offer, the seller may well be responsible for a commission anyway.

In terms of how it could work with a L/O, let’s say, just for sake of discussion, that the present as-is value is $85k and it requires $5k in repairs. What you could do is offer a one year renewable lease option with an option price of $80k. Then, because you need to make repairs to make the place livable, offer no rent for, say, 4 months, while you complete the repairs, or alternatively, a token amount if the seller insists on something. Then you could pay him $500 per month, which is $50 more than he was getting from the previous tenant, plus you have fixed the place up significantly. The other thing I would try to negotiate is that whatever you put into the place in terms of materials and labor costs becomes option consideration applied to the purchase price when you exercise. Then, when repairs are completed you’ve got a property with an ARV of around $125k with $40k equity. Not bad! (You must realize there will be other expenses involved as well, so keep that in mind.)

Of course, if you can’t exercise down the road for any reason, you’re screwed. That’s why if you can get the seller to finance and get the deed, you’d be better off. It wasn’t clear whether you plan to live in the house or rent it or sell it when repairs are completed. Naturally, your exit strategy, if there is one, has a bearing on how much you want to put into the thing. If you sell to a T/Ber on a sandwich L/O, you should have a decent cash flow, plus profit from option consideration, plus a great back end profit. If you’re sure about your numbers, I’d do that deal in a heartbeat.

It sounds as if you’ve got the right ideas. As you know, however, before you actually make the offer you should get input from someone knowledgeable about Canadian transactions, and do plenty of reading to further educate yourself.

Brian (NY)