Posted by Tom on November 26, 2000 at 11:21:12:
Your lucky if the lenders will do the deal if they know your carrying a third on the house. The only thing you have is their word that they will apply for the loan, the only thing you can enforce is what is in writing. The 20% second may even have some perpayment penalties if they refinance, better make sure.
Broke Rule #1… - Posted by Marty_CA
Posted by Marty_CA on November 26, 2000 at 11:01:33:
Or maybe rule #2…I am just finishing up my first rehab. I found a buyer about a month ago and we are scheduled for closing on 12/15. My problem, I fixed up a house to “nicest on the block” but have no comps to support sales price. Buyers agreed to my asking price of $122k. I am in central California and getting spill over from the super-heated Bay area market. That’s good. They are qualified for 100% financing, a loan that provides an 80% first and 20% second. My house appraised for $105K. They are agreeing to have me carry a 3rd for $17k. Their loan broker says I should make it a 5 yr, interest only note. After, closing, he will help them get an equity loan up to 125% LTV and pay me off. My question, is this the best way to go and if it is, how do I guarantee that they do in fact turn right around after closing and get that loan. In other words, if my note indicates 5yr interest only, what will legally compel them to refi and pay me off?
Happy Holidays to all and thanks for your help.
Re: Broke Rule #1… - Posted by Jim IL
Posted by Jim IL on November 26, 2000 at 20:02:49:
Marty,
I’d want to take a long hard look at the appraisal that gave you $105k.
Look at the comps, and then decide if this was an accurate appraisal.
You may even fork over the extra $300 or so and get another appraisal.
I know that on one of my deals, my T/B’er went to a lender, got approved, and the appraisal came up short.
I looked at the appraisal and it was done by someone from out of the area.
There comps were from homes that were NOT like mine, and I pointed that out to the lender.
I then put the lender in touch with a local appraisal company who appraised the home at $10k higher than the first guy.
We obviously used the higher appraisal, and the lender was fine with it as well, since they were state licensed.
I also helped the appraiser by giving him the addresses of some comps. (Carefully selected of course.)
Sort of “Stearing the appraisal” if you will.
But, it worked for me, so you may try it.
Sure never hurts.
And, if that will not fly, as someone else suggested, try to get your buyers to a different broker who can get them 95% with you carrying a second, rather than a third.
Trust me, they are out there.
Good luck to you,
Jim IL
P.S. Getting all this done MAY make you close a little later, but the increased CASH now will be worth the wait. IMHO.
Re: Broke Rule #1… - Posted by dewCO
Posted by dewCO on November 26, 2000 at 19:19:35:
Geez, how do you set the price with no sold comps. Are you sure the appraiser just didn’t do a bad job? Where did you get the price from, a hat?
Re: Broke Rule #1… - Posted by JohnBoy
Posted by JohnBoy on November 26, 2000 at 16:03:55:
Rather than have them go for the 80/20 and you carrying a 3rd, what about having them get a new 95% first with a seller carry back second for the difference? You’re in a better position with a second vs. a 3rd. Amortized the second out for the shortest term with the highest rate that the buyer can qualify to make payments on income wise. Put a one year balloon on the second in case the broker can’t get them the 125% equity loan. This way you at least get paid off in a year and after 12 months seasoning the buyer should be able to refi with no problem assuming they make the payments on time the first 12 months.
The problem here seems to be getting the buyer 100% financing. Getting 100% from a lender is requiring an 80/20 with a 1st and 2nd. They have a lot of programs available they should be able to get a 95% first with a seller carry back instead of using the 80/20 leaving you stuck with a 3rd. Even if your second exceeds appraised value it shouldn’t be a problem.
Carry back a second with a 1 year balloon at the shortest term with the highest rate the buyer can qualify for. At best they get a new equity loan after closing and pay you off. At worst you collect a nice cash flow for 12 months and then get paid off. Assuming you didn’t end up having to foreclose during the first 12 months, which if you did, being in second postion puts you in a better spot than being 3rd.
Re: Broke Rule #1… - Posted by Dave T
Posted by Dave T on November 26, 2000 at 13:12:52:
Nothing will legally compel them to immediately refinance. Instead, you give your buyers a financial incentive to refinance. If the interest rate on your note is high enough, the monthly payment itself should give the buyer an incentive to refinance.
What is high enough? Don’t know your market, and don’t know your buyer. You don’t mention what interest rate will be attached to the first and second mortgage loans. Since the property would be overleveraged, and there is apparently no equity to “secure” your third position loan, is an 18% rate enough return to offset this risk?
You ask if this is the best way to go? Again, can’t answer that without knowing more about your financial position, current cash position, and future investment plan. And I also don’t know if you wanted a comment on the structure of the deal, or, if you just wanted an opinion on an interest-only note.
That said, I do have an observation on the structure of the deal for you to consider. You said that this property is a “rehab”. I assume that your total investment in this property is well below the $105K appraisal. If this is true, then you have three income centers working for you in this deal.
For the sake of this discussion, let’s assume that your total investment (purchase and rehab cost) in this property is $75. Here’s your first income center: at settlement, you receive $30K in profit, in cash (difference between your $75K and the new $105K mortgages). Your second income center is the monthly payment you receive on your note. At 18% interest, this is $255 every month, or, $3060 each year. If your buyers take the full five years to refinance, you will have received $15300 in interest payments alone. Your third income center is the payoff on the note. When the note is satisfied, you get a $17000 payday. The numbers here illustrate a potential $62300 “profit” in five years.
Now let’s assume that the buyers run into financial difficulty and default on your note. Foreclose! If it sells at auction, you get cashed out. If you get the property back, sell it again!
Is this the best way to go? Can’t tell you. If you do this deal, will your temperment, financial position, and tolerance for risk let you sleep at night? If not, then you may want to find a buyer that will bring $17K cash to the table and avoid the third mortgage loan entirely.
One final thought for your consideration. Since this is a buy-fix-sell transaction, the entire profit on the sale of this property is fully taxable as ordinary income in the year of sale. This may put you in a position where you are paying taxes on profit you won’t actually receive until your note is cashed out. Capital gains tax rates do not apply, and, you can not use an installment sale tax treatment to defer realizing some of your profit.
Perhaps a visit with your CPA will tell you whether you can afford this deal.
Re: Broke Rule #1… - Posted by Hugh James
Posted by Hugh James on November 26, 2000 at 12:25:30:
Tom is right on the money. I suspect that the loan broker (among others) is motivated to do the deal he has in house now and get paid. Then if he can refi the second in a 125 program, well, it’s gravy.