Yes, the finance company would hold the title, but the agreement would protect the investor from the finance company selling the property without the investors consent. The lease agreement would be very favorable to the investor.
The chance the finance company becomes the landlord is the risk the finance company takes for earning the 2%. Just a business risk in doing a deal like this. Remember, most finance companies are loaning a third party’s money and the finance company is getting paid to handle situations such as default.
I am looking to get some feedback from Investors. Please let me know if you would be interested in real estate financing structured as described below. If you would not be interested, please let me know what the problem with the structure is.
The structure is very similar to ?sale / lease back? agreements that banks and finance companies have been using to finance equipment purchases with corporations for a long time.
The finance company would offer 100% financing on investment property (preferably multi-family units). Investors would locate property that would be cash flow positive after the MONTHLY PAYMENT to the finance company. The MONTHLY PAYMENT would consist of the following parts: Principal payment, Interest payment, Real Estate Taxes, Hazard Insurance and Repair Escrow (the Repair Escrow portion would end once a certain level was reached, say $3,000). The Principal and Interest payment would be based on a 30-year amortization schedule with interest in the 10%-12% range.
The Investor would obtain a sales contract with the seller. Prior to closing, the Investor would be required to pay for an appraisal ($800 estimated cost), a physical inspection ($300 estimated cost) and a termite inspection ($200 estimated cost). The finance company would arrange to have all three completed. At closing the fees would be 2% of the sales price paid to the Finance Company (origination fee) plus title company fees. All fees (including the appraisal, physical inspection, termite inspection, 2% origination fee and title company fees) could be included in the financing, as long as the deal was still cash flow positive. Approval of deals would mainly based on the property and cash flow with less emphasis placed on the credit history of the Investor.
At closing the Investor would assign the sales contract to the finance company. Also at closing the finance company and Investor would sign a Lease Agreement leasing the property to the Investor. Obviously the Lease Agreement would allow the Investor to sub-let the units to tenants. The Lease Agreement would outline the MONTHLY PAYMENT as described above. In essence, 100% of the lease payment would go towards principal, interest and operating expenses. The Lease Agreement would require that the tenants send there monthly rent checks directly to the finance company. The finance company would they send the difference between the total rent received and the Monthly Payment to the Investor. The Lease Agreement would also allow the Investor to sell the property at any time, so long as the sales price was greater than the amount owned based on the 30 year amortization schedule. When the property is sold, the finance company would only receive the amount owned per the 30 year amortization schedule. The Investor would receive the benefit of principle pay down and increase in market value.
Any and all input (positive or negative) would be greatly appreciated!!!
This sounds like a sandwich lease. Some tired landlords out there will lease you their multi-unit buildings for one check a month so they don’t have to deal with vacancies and chasing down tenants for rent checks. You take that on as you sublease the units to tenants, keeping the difference between your payment to owner and the rents you collect. In your scenario, why would a finance company want to do this, possibly becoming the landlord if you default on your lease agreement? Doesn’t the finance company hold title to the property? Why can’t finance company sell the property in a rising market, cutting you out of any potential profit?
This sounds like an interesting deal. I am looking to start investing in properties with no money down, this sounds like the perfect opportunity to start up. Tell me more, I am very interested sounds like it wouldn’t hurt either of us. Do you have the means to put this in motion?
Looking forward to your response.
Fiona