Posted by Rick Wheat on January 30, 2001 at 03:54:19:
You have at least two things that could cause this deal to blow up in your face.
There appears to be NO EQUITY. Notice I said APPEARS. Most investors would be (and should be) concerned about paying “Full Market Value” for a property - Where’s your PROFIT???
The adjustable rate mortgage. It will alomst assuredly go UP at the end of the first period. Usually as much as the mortgage terms will allow. And with a base rate of 10.33, making a cash flow will be a problem.
HOWEVER - don’t be discouraged. There are several things you can do with a deal like this:
A. Rent it out. Carleton Sheets grads will tell you that this is the typical “Nothing Down” deal he tells you about. The only thing to keep in mind is that the rents may or may not cover all the debt service BEFORE TAXES. You need to consider this to be a long-term keeper property, and probably the property will appreciate, the mortgage balance will decrease, and the depreciation might give you a positive AFTER-TAX cash flow.
B. Lease/Option to a Tenant/Buyer. This would allow you to get some cash up front, possibly some cash each month, and some more cash when your Tenant/Buyer gets approved for their financing. Better yet, you get the good chance to do this four or five times before one of the Buyers gets financed.
C. Sell it with Owner Financing. This would allow you to get the most cash up front, and a larger monthly payment. You could put a few things into the mortgage note to give it some “Teeth”, and make it easier to recover possession or to collect late fees.
D. Take it “Subject To”, then turn around and mark it up a few thousand, then sell it to a fully qualified buyer. I did this several times in the recent months, and made anywhere from $6,500 - $21,000 within an average of 45 - 60 days from the time I got the property under contract. I call these my “Retail Flips”. It takes knowing a lot about the market, about getting your buyer financed quickly, about making the property the “brightest penny” in the neighborhood, and about creating a strong demand for the house.
So, although it takes some education to learn all the things you need to know to create chicken salad from this chicken poo-poo, it certainly can be turned into a money-maker.