Buying our first home - Posted by Tina

Posted by GL(ON) on July 01, 2002 at 15:46:31:

By the way Ron this might be an idea for an area with high house prices, where rentals are always negative cash flow, and rapid appreciation.

Suppose you have a deal on a house where you stand to make $20,000 profit in the form of a second mortgage.

Instead of taking back a mortgage, you call it a down payment and retain half ownership in the property.

In the end you get your $20,000 back but with half the appreciation of the property instead of interest. This would make a capital gain instead of income, and might well be a lot more money.

Something to think about, even to do a few that way as a hedge against inflation.

Buying our first home - Posted by Tina

Posted by Tina on June 30, 2002 at 10:10:58:

Hi Everyone,

We just got approved for a $45k loan to buy our first home. Unfortunately, the house that we want is asking for $67k. The house, itself sits on about a half acre, but we also want the 8 1/2 acres that comes with it. I know that there is a creative way to go about purchasing this property. Say for instance, we use the $45k that we’re approved for and buy the house along with a couple of acres. And then working out a deal with the seller to lease option the rest of the land to us for a year, then we can refinance in a year and use the money to exercise our option. I’m not sure how that will work though. Your input will be greatly appreciated as well as any suggestions that you have to “creatively” get over this hurdle.

The property is being sold by an agent and he seems like he wants to help us get into this home and is open for suggestions from us too.

Thanks in advance,

go easy here - Posted by Donald

Posted by Donald on June 30, 2002 at 17:45:06:


You could----

1…Take it one step at a time.
2…Buy the house with the 1/2 acre.(get in it first)
3…Offer the seller a two year ‘option to buy’ the other 8 acres (at an agreed price) for, let us say, 100 bucks cash.
4…Have the attorney, who does the escrow close on the house, help you write up the option paperwork. (he will have the blank forms)
5…If seller won’t go for a two year option then ask for 18 months. If all else fails shoot for a 1 year option to buy.
6…If he won’t agree, up the option to $200 or $300 cash. (well, you get the idea)

my 2 cents


Re: Buying our first home - Posted by GL(ON)

Posted by GL(ON) on June 30, 2002 at 12:28:54:

This is only a suggestion. But it would be a way to buy the property you want, and still have the smaller $45000 mortgage and smaller payment. Without having to pay any down payment out of your own pocket.

What if you got an investor to put up the down payment? Say you can get the property for $65000 with $20000 down and a $45000 mortgage. Then you take care of the place, live there of course, pay all bills such as taxes insurance repairs etc. The advantage to you is obviouse - you get the home you want and someone else puts up the $20000 down payment.

So what is in it for the investor? They get a half interest in a valuable real estate investment by putting up less than 1/3 the cost. In other words they get half of a $65000 investment for only $20000 so right off the bat they are making money. Eventually you will sell the place and they will get their investment back plus half of the increase in value.

In the meantime they will have no tanant hassles, no vacancies, no bills to pay, no work and no worry.

If you know anyone who has some money invested ask what they think of this as an investment. You don’t even have to tell them you want money, just ask what they think of it as an idea. I bet if you ask 5 people at least one will want to get in on it.

That was the plan… - Posted by Tina

Posted by Tina on July 01, 2002 at 10:45:43:

Hi Donald,
That’s what I was thinking. But my question is if we refinance at the end of 1 or 2 years, will we be able to exercise our option or will we have to go out and get an entirely new loan? I’m trying to figure out how refinancing works. Any remarks?

Thanks in advance,

Re: Buying our first home - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 01, 2002 at 14:21:40:


I thought, ok this may be a good thing for these potential home owners. Then I though, what is going on here?

I think you make some sort of miscalculation. Sure, the investor owns half the house–but only once the loan is paid off. At first the investor owns 1/2 of the “equity” of the house. Which, given the figures, would be $10K. I, as an investor, would not be getting excited about having $10K in equity for my $20K investment.

Oh, maybe you meant that the investor would be entitled to $20K plus 1/2 of any increase in equity for the property? That might make sense. Especially if the agreement were for only a few years, say five maximum. Otherwise the decreasing value of the dollar would make the $20K investment become worth less over time.

Good Investing*********Ron Starr***************

Re: Buying our first home - Posted by GL(ON)

Posted by GL(ON) on July 01, 2002 at 15:12:02:

I was over simplifying for the sake of someone who was not experienced in the details of real estate transactions.

In this case the problem if I read it correctly is that the buyer wishes to buy a property for which the asking price is $67,000. They already know they qualify for a $45000 mortgage. That means they need a $20000 down payment which they don’t have.I am assuming they can get the place for $65000 cash, in fact they should be able to do better than that, but let’s be consevative.

Now suppose an investor put down $20,000 in return for half ownership in the house.

The buyer agrees to make all payments, pay taxes insurance repairs and any other expenses of the property.

The investor does not get monthly cash flow, on the other hand he has no expenses no hassles and no risk.

I say no risk because this is all spelled out in the contract. If the buyer does not live up to his agreement, the investor can take over, evict the buyer or whatever is necessary. Remember the investor is already on the deed as half owner.

So for $20,000 the investor is half owner of a $65000 property with no further liability, unless the buyer defaults, in which case he becomes full owner.

Now when they come to sell, the investor gets back his $20,000 off the top plus half of the appreciation or equity buildup.

If you chose, you could put a time limit on this. For example, you could agree that in 10 years time, if you have not sold the house yet, you would either sell it and divide the proceeds or have the property appraised and the buyer pay out the investor’s $20,000 plus his half of the equity, which the buyer could raise by getting a larger mortgage.

Now if you were a senior real estate investor with plenty of cash on hand, would you be interested in an investment like that?

The only question remains, how good do you want it? In other words how much of a down payment would you make in return for half interest in the property?

Remember that you would be getting a half interest in the property for cash while the buyer would be responsible for ALL the mortgage payments.

Now suppose the investor wanted a half interest in return for 1/4 payment.That would be $16,250 and the buyer would have to come up with the other $3750, still a far cry from the $20,000 they don’t have.

I leave it to you whether a half interest in a house for 1/4 of the price would be of interest to you, under the circumstances.

Re: Buying our first home - Posted by GL(ON)

Posted by GL(ON) on July 01, 2002 at 15:27:58:

Let me put this another way:

Take the example of a senior real estate investor with plenty of properties and plenty of money. Or perhaps a doctor, or other person who is interested in real estate investing.

With a 25% down payment you can take your pick of houses to buy, get a mortgage for the other 75% and there you are. That’s standard, houses are bought that way every day.

Now you have the chance to make some cashflow, maybe, if you are in the type of area where prices are low. In places where prices are rising rapidly, this is impossible.

But in order to get that cash flow you have to rent the place out and deal with all the hassles of tenants, repairs, bills, unpaid rent, vacancies etc.

On the other hand you could put a nice young family into their first home, have no more worries or hassles, but you would miss out on the monthly cash flow (if any) and only get half the appreciation.

The next question is, would it be worth it? Probably not over a year or 2, but if you left it there for 10, 15 or 20 years… how much does real estate go up? How long would it take for the value of the house to double? Who knows?

I can easily see some well off person doing this with part of their money, as a safe easy way to diversify their investments, and to get some of the tax advantages etc. How many people have seen their mutual funds go down by half over the last 2 or 3 years, not to mention certain stocks? Owning a house in partnership with a nice young family might well look good in comparison.