Re: Can I get around a prepayment penalty? - Posted by JohnBoy
Posted by JohnBoy on December 20, 1999 at 12:55:21:
Even if you could avoid the pre-pay penalty there isn’t enough room to flip to a rehabber. ARV is $150k. The amount owed is $117k plus $10k in repairs. $150k - $127k = $23,000 to work with.
Back out the realtors commission the rehabber would pay to resell at retail and that knocks another $9k off. Then figure another 3 - 6 months holding costs for the rehabber to fix and market to sell. Back out your cut on the deal. By the time you back out all of the expenses the rehabber is lucky to break even. A rehabber would probably expect to NET $20k minimum after all expenses on a property like this.
The way to do this deal is on a Lease Option or a Land Contract with the right to assign. Tie up the deal, then assign your contract to a retail buyer that will live in the house and take care of all the repairs. You could assign your contract for a quick $5k - $10k and walk away.
Or if you want to stay in the deal for awhile lease option it or sell on contract to someone else.
Another way to do it is just assume the sellers loan “subject to”. You take over the payments leaving the current loan in place while the seller deeds the property over to you. You become the legal owner without liability on the loan. Next you l/o to your tenant/buyer or sell to them on a land contract for $150k “as is” making them responsible for all the repairs. Get $5k - $10k down as “non-refundable option consideration” if you l/o it or $5k - $10k down as a down payment if you sell on contract.
Before approving your tenant/buyer, take their credit app. to a good mortgage broker to see about getting them financed in 18 months to 2 years from now.
After making payments for 18 - 24 months getting past the pre-payment penalty you get them refinanced for 80% - 90% LTV (loan to value)and you carry back a second.
Lets say you found a buyer that had $10k to put down. Since your willing to carry for 2 years on terms, you sell for the $150k ARV “as is” on contract or a l/o. (Lots of people out there would gladly pay market value if they can get in with good terms) At the end of 2 years your buyer has done most of the repairs if not all of them and the property would appraise for more providing the market holds up over the next 2 years.
Your buyer needs to come up with $140k to refinance in order to pay you off. Lets say the property only appraises for the $150k in 2 years from now. Your buyer is able qualify for a mortgage at 90% LTV. 90% of $150k is $135k. You get $135k at closing. $117k goes to pay off the underlying loan you assumed “subject to” leaving $18k in your pocket. Your buyer still needs to come up with $5k that you agree to carry back as second mortgage. You made $10k up front, $18k at closing, a second mortgage of $5k, plus any positive cash flow you got over 2 years from your buyers monthly payments that exceeded your payment on the current loan you took over.
You didn’t say what the current payments are on the existing loan. Simply adjust the interest rate to your buyer based on $140k amortized over 30 years to reflect the amount of positive cash flow you get each month. Of course the payment has to be affordable and inline with what you can reasonably expect to collect based on the market in your area.
Lets assume for an example that the current loan is at a 9% interest rate on $117k. The principle and interest payment would be $941.41 per month plus taxes and insurance. At the end of 2 years the balance owed on this loan would be $115,326.28 (Read the mortgage agreement the seller has to determine the accurate interest and payments on the loan)
You sell for $150k with $10k down leaving a balance of $140k. You sell on contract and amortize the $140k over 30 years at 10.5% interest (10.5% interest on a land contract is pretty standard, at least in my area it is) with a 2 year balloon plus taxes and insurance. Your buyers principle and interest payment to you would be $1280.64 plus taxes and insurance. You collect a positive cash flow of $339.23 for 24 months.
At the end of 24 months when the balloon comes due and your buyer needs to refinance to pay you off the principle balance owed would be $138,521.33
They get a loan for 90% LTV based on $150k appraisal = $135k. (If the property appraises higher then you may get completely cashed out at closing. If not, then carry a second for the difference. Its all extra free money to you!)
$135k - your pay off of $115,326.28 = $19,673.72 cash in your pocket at closing!
You make $10k up front, $8,141.52 cash flow over 24 months, $19,673.72 at closing when your buyer refinances, and a second mortgage amortized over 5 years at 14% for $3,521.33. That’s $81.94 for 60 months = $4,916.40
$10,000.00 up front
$ 8,141.52 monthly cash flow over 2 years
$19,673.72 cash at closing
$ 4,916.40 in payments on a five year second mortgage
$42,731.64 total profit!
Tie up the deal and try to get 60 days before you start making payments. This gives you 2 months to market the property and lock up a buyer.
Go for it!