Posted by mike on February 28, 2001 at 16:02:46:
I am going to look for other banks or a broker. I will look into my father financing it. I just have to look into wraps and see how this all works. I know it would work for me. I just have to see what would still be worth it for my dad.
Thanks for all your help. I appreciate it.
Mike
Buying @ 50% of Value. - Posted by Mike
Posted by Mike on February 27, 2001 at 09:51:39:
Hi,
I have been managing 2 properties for my father for a couple years. I am now trying to buy one of them from him. He will sell it to me for around $110,000-$120,000. It is worth around $200,000. It is zoned commercial and rented now to a business. They are leaving at the end of March and I will be re-renting it for about $1,900/mo.
Taxes are $4300 and Ins. is $500. No other expenses and no repairs necessary. I have good credit but low income. I was wondering if anyone Knew how I could buy this with 0 downd and 100% financing since I am getting it for almost 1/2 the value. The rent covers the mortgage and expenses by way more than the ratio the bank looks for. Total expenses would be between $1400/mo. and $1450/mo. depending on the interest rate on the mortgage. My bank told me they loan on commercial based on the purchase price not the market value. I want this loan to be based on the rental income not my personal inc. because I am trying to start doing this full-time and I have very low income from a landscaping bus. that I did on the side thru college. I am just holding onto that to get me by while I get my REI business going. I would also like to know if I could pull some of that equity out at closing or whenever possible. I am also now concerned because my accountant said that my father may have to pay cap gains on difference between my purchase price and the actual value cause it looks like he is gifting me all that equity(she has to look into that that)but he only paid $120,000 for it in 1994 but the values on main st. in my town have been going up fast. Is she right? sounds rediculous to me, he’s selling for the price he paid for it.
Sorry for this rediculously long post, but thats the whole story and thanks very much to anyone who takes the time to respond to it,
Mike in CT.
Re: Buying @ 50% of Value. - Posted by Nate
Posted by Nate on February 27, 2001 at 11:18:06:
Mike,
Since the seller is your father, why not see if he would be open to a creative financing option such as a lease/option, land contract, or owner-financed deal for the properties. It would allow him to defer some of his profits and allow you to get control of the property for little or no money.
Is the property owned by him personally or in an LLC? If the latter, you could always have him assign ownership of the LLC to you and get the same result.
Also, does he have an existing mortgage on the property? If so, it may be assumable for a low (usually 1%) assumption fee. Check into it.
Hope this works out for you.
NT
Re: Buying @ 50% of Value. - Posted by mike
Posted by mike on February 27, 2001 at 18:18:09:
Nate,
My father owns the property free and clear. No mortgage. It is owned by him personally, no LLC. He would finance some, but the idea is to get him as much cash as possible since he is giving me the property so cheap. If he finances 25% does that count as the 25% the bank wants down? cause it’s really not any down its just another loan. Also I wanted to pull some of that equity out do you know how I would do that?
Thanks,
Mike
Re: Buying @ 50% of Value. - Posted by Nate
Posted by Nate on February 27, 2001 at 21:21:53:
I’m confused about your father’s intention in entering into this transaction. Is he trying to get as much cash as possible, or is he trying to give you a gift? Those goals are to some extent mutually exclusive. If he is trying to get the most cash possible, he should sell it to a “normal” buyer who will pay full retail price for it. If he is trying to give you a gift, then why is he so worried about getting a lot of cash up front?
Better idea: Why not have him refinance the property to get his cash up front, THEN sell you to on a land contract or such. He gets his cash, you get into the property, everyone’s happy.
NT
Re: Buying @ 50% of Value. - Posted by mike
Posted by mike on February 28, 2001 at 09:02:50:
Nate,
My father really has no intentions. I talked him into selling me the property sinse I take care of it and he hates to deal w/ it anyway. He only owns it cause he bought it in an estate as a package deal cause he wanted the garage(bldng.& business)where he worked. The plus to him though is the $$ cause he is worth money on paper but not too much actual cash. He only paid $120,000 for the property 6 yrs. ago however now its worth much more. Neither of us want it to be sold to someone else. I am the one who wants to get him the most cash as possible since hes giving it to me for such a good price, plus the cash is the only real benefit to him.
Can you refinance a commercial property that you dont live or have your business in?? Also if he could do that how would that work when he sells it to me? Do you mean he gets a mortgage then I just pay him???
Mike
Re: Buying @ 50% of Value. - Posted by Nate
Posted by Nate on February 28, 2001 at 11:42:23:
If the property is generating income, you can definitely get a loan on it. I see you said the current tenant is leaving next month. I assume you intend to replace them.
Once they are replaced with a new tenant, go to the bank and get a loan - I don’t know exactly what LTV and debt coverage ratio your bank will require, but he should be able to borrow 150-160K most likely based on the #s you presented.
Then, once he has the mortgage, like you said, you would pay him. You could do a wrap or contract for deed, so he would give up the title to the property, but continue paying on the loan with the money you give him to do so.
The other thing is, if he gets a new loan, he may want to find out of the new loan is assumable. You might be able to assume it for a 1% assumption fee. However, in most cases the loan will have to be “seasoned” first, so he wouldn’t be able to let you assume it for at least a year. You should ask the local banks in town and find out which one will give him the best terms.
Good luck!
NT
Re: Buying @ 50% of Value. - Posted by mike
Posted by mike on February 28, 2001 at 14:46:49:
This bank only lends 75% of sale price. They don’t care what the value is. Also my father is not going to want to be stuck w/ a mortgage on this place even if I pay him. What I am wondering is if anyone knows if and where I can get the money based on this rental income alone of about $1900/ mo. expenses $400/ month not including whatever mortgage i get on it obviously. I am paying about $120k its worth over $200k
Re: Buying @ 50% of Value. - Posted by Nate
Posted by Nate on February 28, 2001 at 15:43:16:
If your dad refinances the property before selling it to you, there is no “sale”, so the bank can’t lend based on “sale price”. Besides, if that really were your bank’s policy I would suggest you find another bank or ask a mortgage broker.
How do you know your father won’t refi the property first? Functionally, for him, a refi and then sale with a wrap or CFD is no different than him selling it and you getting new financing. And it will be a heck of a lot easier for him to get financing than it would for you because he already owns the building free and clear and (I’m guessing here) has a higher income since he is older.
If you could get someone to finance you with no down payment yourself to buy the building outright, this would be a hard money loan. It would be very expensive. You would eat up a lot of cash flow paying the debt service. I really think you would be much better off considering one of the other options I have presented.
Nate
One other thing… - Posted by Nate
Posted by Nate on February 28, 2001 at 15:52:55:
One other thing: I didn’t answer your question earlier about how to get equity out of the property in cash. The short answer is that, for you, it would be extremely difficult. If you need cash the best option is for your dad to refi the property and then give or lend the cash to you. As long as he gives you less than $10,000 per year it would not even be subject to gift tax - that might be a way to get you some of the equity in the property, get it to you quickly in cash, and not have him have to pay gift taxes on it (as you suggested might be the case in your first post).
Anyway, good luck.
NT