Are Options a waste of time? - Posted by LeonNC

Re: Here’s an example. (Long) - Posted by Scotty

Posted by Scotty on May 21, 2000 at 10:09:16:

Maybe you need to rethink who you are using to broker your notes through? The company I’m using has no problems with a 580 FICO and does 90-5-5 deals with them consistently. The deal would shake out something more like this on 100,000 FMV and Purchase Price…

$5,000 down from buyer
$5,000 seller carried second mortgage
$84,000 realized from sale of $90,000 first mortgage at discount
$94,000 total proceeds
$89,000 cash in deal…plus the proceeds from the second if you choose to sell it.

This is all on a thirty year straight amortization. Probably could do even better if you started playing with balloons. I certainly don’t know if they are the best source, but it does appear to be a better deal than what you’ve been seeing.

Admittedly you need to allow for closing costs since the buyer probably has had to struggle to come up with that 5% anyway. As was alluded to, the down payment doesn’t have to be seasoned. Source is not important like it is under a standard mortgage and can be gifted. In any event, it seems to me even if you were buying at 85% of FMV you’d be doing better than getting up and going to work in the morning. If you find a seller with some sort of motivation you probably have a shot structuring an open option with them at that pricing level. Wave “all cash offer, 30 day escrow” in their face and see what happens, and then execute an option so you can complete your ‘due diligence’. If they find a buyer before you at a better price your only out your marketing expense.

I don’t know that I’d try to build my investing solely around this technique, but beating people up on price and getting them to focus on the dollars can be a nice way to manuever them into concessions using another technique where you may be able to give them their full asking price.

Re: Here’s an example. (Long) - Posted by Monique

Posted by Monique on May 23, 2000 at 07:57:52:

Ditto on wanting to know the note buyer you work with. Please email me. Thanks!

Monique

Re: Here’s an example. (Long) - Posted by dew

Posted by dew on May 22, 2000 at 20:11:28:

I’d like to know the lender on the 90-5-5 too. Thanks.

Re: Here’s an example. (Long) - Posted by Kayla

Posted by Kayla on May 22, 2000 at 06:06:19:

Would love to know the company that has programs like the one you described, please e-mail me.

Thanks

Re: Here’s an example. (Long) - Posted by Craig

Posted by Craig on May 21, 2000 at 14:52:14:

Is your buyer also paying all of the closing costs, or any of them? If not, you are netting alot less cash here. If they’re paying none, you are probably walking away with $2500 cash in your pocket plus your 2nd, which really isn’t salable. How much of that up front profit goes to the IRS, and are you having to pay taxes on the full profit this year with the amount of the 2nd included? If so now you have to take what’s left of that up front profit and set aside to pay taxes on that portion of paper profit. If so, how much do you actually make on such a deal when it’s really all said and done?

Re: Here’s an example. (Long) - Posted by Scotty

Posted by Scotty on May 21, 2000 at 16:41:00:

Here’s a novel idea. Don’t do the deal. Leave this one for somebody else since this fish isn’t big enough to nourish you.

You know, I wasn’t going to respond to your post and then I got to thinking. What you had to say was just poison and could well discourage some people, and by stating I wouldn’t build an investment strategy around this I may have done some folks a disservice as well.

The biggest problem with the ‘real estate investor’ is not that he has too many deals on his plate, but rather he doesn’t have enough deals or never even does a deal in the first place. I’d like to illustrate why 99% of the people that read this forum should never walk away from this deal. I’ll call it the reality check.

Let’s have a little fun with Leon from North Carolina since he started this thread. I don’t know what Leon does for a living, but let’s pretend he works at a plant there in Carolina making a pretty good wage as compared to the general populace since he is a member of a union and pulls down $20 bucks an hour before taxes and union dues. Assuming he doesn’t work any overtime his gross pay for the week is $800. If he worked 10 hours of overtime he’d make say another $300 gross. So far is this a pretty good analysis of Joe Sixpack across America that works for a living?

Since this is my story I’m going to continue to make stuff up as I go along. I’ll play your game and take it a step further. Let’s say that after taxes and closing costs there is NO money left in the deal for Leon to walk with at closing. All he was walking with was a $5000 note at 12% over say 10 years. If you calculate that payment it comes out to $71.73 per month. I am also going to make some other assumptions. I am going to estimate that when push comes to shove Leon is going to have about 10 hours into this deal. Double it if you want to, but it doesn’t materially affect the numbers.

Tell me how you think this coversation would go. Leon goes to Mrs. Leon and says, "Honey, I need to work some overtime this month. I can do it pretty much to my schedule. It will be about 10 hours worth. Instead of time and a half at $30/hour and having it show up on my paycheck they are going to pay me $500/hour and spread it out over time. They are going to pay a pretty good interest rate until they just pay me the balance in a lump sum in about 3 years when they rework their finances. Now this overtime isn’t regular, but I could probably get it every couple of months. What do you think Mrs. Leon is going to say? How do you think this would effect the lives of most Americans if over a year’s time you increased their monthly disposable income by $500-600 per month?

Remember, Leon has no hard dollars in the deal save a newspaper ad or whatever other marketing he might do. He has no risk, other than the guy doesn’t pay the second mortgage and he forecloses and does this all over again. When he sits down with the homeowner to talk turkey his search time and even his visit to the house to look at it are sunk costs. At that point you simply have to decide…do I want $5000 maybe as this stands or do I walk with a for sure nothing?

Now as I indicated you might use this to roll someone into a strategy that was more favorable, or then again maybe not.

Your point about taxes is valid, but you can’t really factor that in since your tax bill is a function of both income and expenses. This may actually improve their tax situation since now they can start writing off some of their everyday expenses that they wouldn’t have been able to otherwise. They now operate a business out of their own home and drive a company car at least part of the time.

The fact of the matter is you may be able to still make this deal better for Leon and have him walk with some cash in his pocket. I think it was Chester Karras that said 'You don’t get what you deserve, you get what you negotiate". Do you think if you went back to the seller now that you had a buyer in hand and told him flat out I have a buyer in place ready to go, but in order to make this deal fly I need a little better price from you he might move a little bit? Who has never when dealing over an inexpensive used car fanned the $100 bills across the hood to entice someone? If he wouldn’t move on price do you think you might get him to assist in the most nebulous term in real estate, closing costs? It isn’t all that uncommon to specify seller to pay all closing costs or at least to have them split evenly between the parties. How did you structure the deal with them in the first place? You might even be able to lower the closing costs if you knew what you were doing. We also originally said that this was being sold right at fair market or appraised value? What is keeping you from selling above FMV since you are offering owner financing? So you carry it back in a larger note. It is still more dollars in your pocket. You also start building a buyers base of the people that for whatever reason you didn’t get into this property that may have you find something else that works for them.

I think the bottom line here is why are you walking away from money unless you are simply so busy you can’t devote any time to it? For most people opportunity cost simply does not come into play. If you’ve already made it or just have to have a bunch of cash on the front end of a deal then keep looking for glass slippers that fit Cinderella. I guess I don’t have a problem making a little pumpkin pie if the coach doesn’t turn out to be what I thought.

Thank-you! - Posted by LeonNC

Posted by LeonNC on May 21, 2000 at 20:48:17:

Thanks guys! All great answers. Just what I was looking for.

LeonNC

Re: Here’s an example. (Long) - Posted by JohnBoy

Posted by JohnBoy on May 21, 2000 at 20:33:50:

You stated in your example that Leon would have no risk other than the buyer didn’t pay on the second where Leon could foreclose.

When Leon creates the new first mortgage note, is he allowed to make that note a “Non-recourse” note? My understanding of creating a note as the seller is that if the note is not a non-recourse note and the new buyer defaults in the future, the buyer of that note can come back to the seller to collect on it? If that is the case then there would be a lot of risk involved with creating notes to sell at closing. Do the deals you handle allow those notes created to have non-recourse clauses in them?

Re: Here’s an example. (Long) - Posted by Craig

Posted by Craig on May 21, 2000 at 19:07:57:

Another note and again I’m hoping you won’t take it personal. I asked a question about that 2nd mortgage because I just don’t know, truthfully. Yes taxes are a cost to earning money. The potential problem I see is that, let’s say all that is left over in the deal is that 2nd mortgage for $5,000 that pays whatever per month. Am I or anyone doing this deal going to have to pay taxes on the full $5,000 profit this year? If so, and if I make no up front cash, then how do I come up with the $550 to $1500 to pay taxes on that money. So I would at the very least want to make sure that I make enough up front to cover the taxes on that 2nd if that were the case. Plus you’re right it’s not that uncommon for a seller to pay closing costs when you’re paying full price for their home. However when your offering 80% to 90% of the appraised value it becomes very unlikely that the seller will pay for anything except maybe the homeowners title policy. Plus in a deal like this, since you are asking the title company to simultaneous close plus close on the note sale, your closing costs go up about 50%. Plus most buyers out there that fit into programs like this have enough trouble putting up the 5% down, that getting them to cover any closing costs is highly unlikely. Please don’t take my questions or observations so personal. I just think it would really suck for someone to jump into a deal like this without factoring all of the costs in, only to wind up at the closing table with nothing, or at the end of the year owing more taxes than he can afford to pay.

Re: Here’s an example. (Long) - Posted by Craig

Posted by Craig on May 21, 2000 at 18:54:24:

My intention wasn’t to offend you. Sure the profit on a deal like that may be enough for some people, but then again I could be a real estate agent and sit and list properties all day long and make the same amount on a deal. The way I figure it a seller pays 6% on average to sell the traditional way and a buyer pays about 4% on average to get financing, so if I can’t do a deal and gross 10% up front cash on a deal which nets 6-7% then I’m not going to go through all of the trouble it takes to make a deal like this happen. I’d rather earn 1.5 to 2 points as a loan officer or real estate agent with less hassle.

Re: Here’s an example. (Long) - Posted by Scotty

Posted by Scotty on May 21, 2000 at 21:10:33:

I personally wouldn’t do it any other way than non-recourse. That highlights one of the challenges in dealing with notes and investors you run into from time to time. Sometimes they forget their reward of high interest rates is some risk. They can be a little unreasonable and want the whole enchilada meaning high written interest rate, solid gold buyer, large down, healthy discount and low LTV’s. Nice business if you can get it, I guess.

Re: Here’s an example. (Long) - Posted by SScotty

Posted by SScotty on May 21, 2000 at 22:19:22:

Part of doing deals is being able to pencil them before hand. As I said, I don’t like to feed deals to make them happen as a general rule and that would include paying taxes on projected return on a second out of pocket. I wouldn’t recommend a novice do this either. Most rookies are doing this as a source of income and not as an investment, and there is a distinction between the two. My point in the scenario was assuming the entire sum of the cash in the deal all went to closing costs AND to satisfy the tax man with the flipper getting nothing at the closing table it would still be a good deal for Joe Lunchbucket to walk away with just the second. Certainly better than putting in overtime at the factory and immensely better than a poke in the eye with a sharp stick.

I encourage you not to project what a seller will and will not pay for, because unless you are the seller you don’t know until you ask. I would tell you no seller would ever be crazy enough to sell their house at 40-60% of FMV, but I know people that buy that way. The moment you make projections or assumptions about what a seller or buyer will or won’t do you’ve limited your possibilities. Why would you do that to yourself? I think it was Joe Kaiser that so poignantly reminded us we all should be looking for motivated sellers, not properties.

Ask your title company about a binder on the property to mitigate the second fee. You may be able to get by much cheaper than you thought.

I couldn’t agree with you more that I’d hate to see a newbie end up with a big surprise once the ink is on the contracts. I’d also hate for them to walk away and leave money on the table they didn’t have to. It is hard enough for most of them to get started that they shouldn’t be forced to find the perfect deal to get the off the snide.