CFD or wrap mortgage.. - Posted by Robert (NC)

Real Estate Investing Real Estate Financing
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Posted by Marcos on February 19, 2002 at 09:44:42:

Nothing you have said do I disagree with. My point is, I can almost guarantee you that Robert is closing on this house using an investor loan and putting down 10%+. He said as much in his posts. He was excited about the idea of his buyer giving him his cash back. Most buy and hold investors don’t realize that you don’t have to sink your own cash into a deal to make it work. My contention was that Robert was coming from that buy and hold mentality and he was most likely sinking his own money into the deal. Hell it wasn’t that long ago that I was in the same mentality.

But, that’s not to say that it can’t work. If you can buy properties at 80-85% of FMV and do CFD’s on them. And you have the cash and the credit to do them. You can build quite a big cash cow. The point is that you get it right back as that’s part of your exit plan.

My point was Robert was putting 10% down or so. Robert now has cash tied up in the property. Robert might be better served selling the house on CFD, and getting his cash back so he’s able to do other deals. I wasn’t talking about how he should go about doing other deals, I was just talking about this one deal. Nor was I talking about how one in general should go about acquiring real estate.

Marcos

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CFD or wrap mortgage… - Posted by Robert (NC)

Posted by Robert (NC) on February 17, 2002 at 09:25:56:

I need some information and HELP.

I’m closing on a house that I had intended to use as a rental, getting about 850 a month. I’ getting the house for 15k below FMV, and only putting in 500 in cosmetic repairs.

Last night at the furniture store, Me and my wife got to talking to the Sales manager and I jokingly mentioned ‘yeah, now if you could help find us a tenant’

To which the Sales manager said 'Really… I’m looking for a 3 bed 2 bath house with a fenced in back yard, that allows pets… I’d really like to buy with owner financing, becuase I’ve been repairing my credit for the last 3 years after my divorce… ’ So I said… I’d be interested…

So now she is coming out to look at the place Tuesday.
IF, and BIG IF, she likes it… I was thinking , as long as her credit score was around 630, and it appeard that her credit was getting cleaned up that I could maybe sale to her on Contract for Deed or some other wrap mortgage…
I have a great 7.25 % interest rate on the current mortgage, so if sale with 10% down 11%, I get most of my equaity out of the house, PLUS 3.75% spread on the interest rate… then in 1 or 2 years, she could do a tradition mortgage…

How can I do that without triggering the due on sale clause ? I’m working with a small town bank, that gave me an in house investor mortgage with low rates, 15 years. I’m building a relationship with this bank for future deals and don’t want to mess it up (larger banks just don’t seem to want to work with small real estate investors)…

Any advice on how I could handle this ? I bought it to use as a rental, but if I could sell with owner financing, that would be even better (no landlord hassles…)

thanks.

Robert

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Re: CFD or wrap mortgage… - Posted by JohnBoy

Posted by JohnBoy on February 17, 2002 at 10:17:52:

Don’t record the contract! Then your bank would never know unless you told them about it.

You should also feel your banker out about selling your properties on contract vs. just renting them. You may find your banker won’t care one way or the other as long as the payments to them are being made on time. Many local banks in my area cater to investors doing this and don’t care. But if your contract between you and your buyer is never recorded then the only way your bank could find out about it is if you told them about it.

Why do you need at least a 630 FICO score in order to sell to them? If they had that they could get financing through a bank and buy any property they wanted up to the dollar amount they qualified for according to income and debt ratios.

I have one lender that will give a 100% first mortgage with FICO scores starting as low as 580. There are a number of lenders that would give 100% financing with a 630 FICO. With 10% down they could get financed with almost any bank with a 630 FICO!

Since they already said they were working on rebuilding their credit than that tells you right there they have had credit problems and expecting a 630 FICO is a bit much!

I don’t worry about the FICO score. That can change a lot within a year or two. What I look at is what their current history is. Have they been paying on time recently? How much do they owe in outstanding charge offs and/or judgements? If any, is the amount to get those paid off in the next year or two reasonable amounts that they could afford to clear up within that time or not? If so, then once they clear that up their FICO score would shoot up. You need to look at the whole picture as to why their score is what it is today vs. what they would have to do to get up enough to qualify for financing later.

Also, since this is a deal that you own with your own financing in place, then unless you NEED to get it sold and cashed out in a year or two, then what’s the big deal what their FICO score is? As long as you get enough down and they make their payments on time every month, I would just renew with them by writing up a new contract every two years and continue to carry them while they pay me until I die!!! There is no time limits to get them to cash you out like there would be when you have a seller involved where you where buying on a L/O or subject to from them where you need to get their underlying financing paid off in the near future.

You purchased this as a rental which is usually a long term investment. So what difference does it make if you ended up carrying this over the next 30 years by selling on one or two year contracts??? You have the best of both worlds! You get TOP dollar should they get financing to cash you out. Meanwhile you get a big chunk of cash up front to cover any risks involved should they ever default within a year or two, you get top dollar in monthly payments vs. rent payments, you get no landlord/tenant headsches since they are buying vs. renting. You get to rewrite a new contract or sell to someone else when the contract comes due every year or two and adjust the price each time, making more money off the property until someone eventually cashes you out!

So who cares what their FICO score is right now? They are coming in with a sizable down payment. That buys a lot of risk to offset their credit score with! If you were just renting by only being able to get first months rent with a month’s rent for a security deposit that that would be another story. But coming in with 10% down buys a lot of credit forgiveness with me! That’s why people buy from us in the first place, because most of them can’t get financing through a bank today. If I had buyers walking in with 630 FICO Scores I could be cashing out on my deals now instead of waiting to get that money in a year or two from now!

If they have been working on repairing their credit for 3 years then they should be showing a decent payment history since they had their problems. That’s all I would care about. The scoring system is already flawed enough. If you’re going to be strict like a bank when it comes to going by credit scores only then your buyers aren’t really going to need you to sell to them. They could walk into just about any bank and get a loan based on those standards! A 630 FICO is a slam dunk for getting a loan through a bank!

Other than that it looks like you have the right idea on structuring this to make maximum returns on your investment!

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meant get my cash out , not equity. - Posted by Robert (NC)

Posted by Robert (NC) on February 17, 2002 at 09:46:05:

I meant that if the person puts 10% down, that I can get all my cash back out of the house. So that I would have a house, sold CFD or other wrap mortgage. so that I have ZERO of my money on the deal.
I had to put cash in this deal and do a quick closing to get it… this property was never on the market… Amazing how much better a deal you get when you have a little $$$ to get things quickly…

anywway… thanks on advice on CFD and wrap mortgages.

Robert

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Re: CFD or wrap mortgage… - Posted by Robert (NC)

Posted by Robert (NC) on February 17, 2002 at 15:33:03:

Johnboy,
I did expect to keep this as a long term rental, because at 850 a month rent, I would be getting 250 a month cash flow after tax, insurance, mortgage and that is on a 15 year mortgage…

I"ll be talking more with the potential buyer this week. Since I hadnt considered owner financing, I wasn’t too sure on some of the items, and wanted to be able to sell the owner financed note in case I needed too.

Anyway… After she takes a look at the place, I’ll see if she is intersted. If so, I can do a Lease/Option if she dosn’t have much down, or can’t find regular mortgage, if she has ore to put down, but still bad credit, then I can do the CFD and not record it (is that right ??).
I like having several possible OUTS…

thanks

Robert

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John boy - Posted by diana

Posted by diana on February 17, 2002 at 10:40:44:

Do I understand you right. You can sell on a land contract without jeopardising the financing you have in place as long as you don’t record it? Doesn’t the buyer want it recorded for their protection though.
Diana

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Re: CFD or wrap mortgage… - Posted by JohnBoy

Posted by JohnBoy on February 17, 2002 at 15:44:01:

If the market will bare a good rent amount doing a L/O then I would only sell on a L/O and forget the contract for deed.

The only time I go with contract for deed is when financing the balance at 10% - 11% will bring in a higher payment than what the market would bare for rents on a L/O.

You say it will rent for $850 and that you got for $15k under market, but you don’t say what it’s worth as far as what you could sell it for.

But if rents are going for $850 then you should get $950 - $1050 on a L/O.

What would the princple & interest payment be on the amount you financed at 10%?

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Re: John boy - Posted by JohnBoy

Posted by JohnBoy on February 17, 2002 at 11:13:36:

You can drastically limit your risk with the lender finding out about it by not having anything recorded.

As far as buyers wanting to record their contract, most don’t even question it because most don’t even know how the process works for the most part. If they have an attorney look over their contract then the attorney may inform them of this, but most don’t even do that! These are MOTIVATED Buyers just happy to find a house that someone will finance them so they can own something.

You also need to check your state laws pertaining to contract sales. Some states may require the contract to be recorded.

But even if the lender found out it would be highly unlikely they would do anything about it as long as the payments are being made on time and kept current.

Look for some local Banks in your area that are also portfolio lenders. These are Banks that hold a lot of their own paper vs. selling it off. Go in and talk to the banker in the commercial loan department. Tell them about your plans of getting loans through them for your investment properties and ask if they would have a problem if you were to sell some of these on contract vs. just renting them to tenants. You may be surprised to hear what they say!

This is common practice in my area. Investors buy property putting loans on the property and selling them on contract. The Bankers don’t care and make these loans being fully aware of it!

Many of these Banks will even refinance the property for the investor while they have it sold on contract. The contract allows the investor to do this where the Buyer agrees to subordinate their contract behind any new loans the seller takes out against the property up to the principal amount the Buyer owes on the contract. So if Banks will do this then why would they care about it after the fact?

Don’t take my word for it. Just go in and talk to some bankers in the commercial loan departments at some local Banks that are portfolio lenders see what they say.

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Re: CFD or wrap mortgage… - Posted by Robert (NC)

Posted by Robert (NC) on February 17, 2002 at 19:17:43:

Johnboy,
House appraises at 85k… I think if I owner finance I can sell it at full amount. Needs some minor cosmetic repair, which I’m doing before renting, selling… about 400 to 500 bucks. (replace some closet doors, paint, haul off trash, replace cracked electrical plates, etc… )

My payment is 520 a month (15 year mortgage). Local rents are hard to determine becuase there are only 2 houses renting in the area and they are smaller… the 2 bedroom house is renting for 500 a month, a 1100 sqr ft 3 bed 1 bath house is renting for 700. I’ve already talked to section 8, and they told me they will pay 850 in a heart beat if I’ll accept a section 8 tenant… Local small college, dean of student housing told me that he has a list of students that are looking for 3 bedroom houses and said I could get about 300 to 350 per student and asked if I would accept college students come by and pick up list of folks to contact…
So I feel good that I can get 800 to 850 a month rent.

I would, if possible, like to sell with owner financing, since I could not be a landlord, and make more money overall. Heck with my mortgage being 7.25% for 15 years or only 520 a month, if I sell the house for 85k on CFD owner financing, with 5% down their monthly would be 769.00, at 10% down theirs is 728.53… financed 30 years. 20 year it would be 834 and 790 respectivly.

I’ve never considered selling CFD before, but if I have a motivated buyer (been paying 800 a month for a small townhouse for the last 5 years. SAME address and landlord) this might be a win/win.

Write up the contract for Deed agreement get her to agree NOT to record it (I’ll find out if we have to record it on Monday or Tuesday). She would prefer not to do a lease option becuase she is tired of rent and is willing to pay higher interest just to own a home again. She makes enough to easily cover the mortgage/taxes/ insurence since those items wouldn’t be to much more than what she is paying in rent now.

lets see… about 200 a month spread, so 2400 a year for not doing much (assuming she pays her mortgage and tax’s , insurance) I’d make 15K on sale, plus 2400 a year until she refinanced (am I looking at this right ?)…

Johnboy, thanks for your advice and help… I should know by the end of this week if she will buy it or not. I’m not waiting, my ads start running on Wednesday of this week…

Your thoughts ?

Robert

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Re: CFD or wrap mortgage… - Posted by JohnBoy

Posted by JohnBoy on February 17, 2002 at 20:06:36:

You need to check on what the laws are pertaining to Contract for Deeds in your state. If the buyer defaults will you have to foreclose or could you evict without having to foreclose? If you had to foreclose what is the average time involved to get the property back through foreclosure and what would it cost?

These are things you would want to find out to determine if selling on contract in your state would even be worth messing with or not.

For example, in my state we can evict a buyer on contract for deed as long as the contract is for less than 5 years AND the buyer has less than 20% equity in the property. If the contract was for 5 years or longer and the buyer had 20% or more in equity then we would have to foreclose which can take 9 - 12 months before getting the property back. Meanwhile the buyer could be living in the property for free until the foreclosure is done.

As far as wanting to buy on contract vs doing a L/O, in both cases the buyer would only have an equitable interest in the property. They would not have legal title until they paid the contract off or exercised the option and paid you off. In both cases the buyer would be responsible for all repairs and maintenance.

The only difference is the buyer would get to deduct the interest buying on contract vs. leasing with an option. But with the amount financed in this deal getting the interest deduction wouldn’t be much benefit since they could take the standard deduction of $7600 if married filing a joint return. The difference between their tax deduction on the interest vs. the standard deduction would be less than only a $1k. So no great loss there!

So depending on the laws in your state a L/O may be much more beneficial to you over selling on contract. You would just need to explain that having the option provides about the same benefit as a contract. Only that a contract obligates them to buy the property where the option allows them the right to walk away in the end if they decided they didn’t want to buy after trying the house out. Explain that your risks are much higher selling on contract should they default because of having to foreclose vs. just evicting if under a L/O. To offset and justify your risk you would have to have MUCH more down vs. what you would need for a L/O.

If you told them they would need at least 20% down to buy on contract vs. only $5k for a L/O…which would they most likely agree to excepting??? Of course this all depends on the laws in your state pertaining to contract for deeds as to how you would play this one out with the buyer.

Also, if you went with the contract for deed, don’t even mention anything about recording the contract unless they bring it up! If the contract isn’t notarized then they wouldn’t be able to record it anyway.

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One potential problem I see… - Posted by Marcos

Posted by Marcos on February 19, 2002 at 08:30:39:

One potential problem I see with your recommendation. I don’t know how much cash he put into the property, but doubtful that he will be able to pull the cash out with a traditional L/O. The CFD would be better to pull cash out right now, and then he could go on to do another deal. If he L/O’s it then how long before he can do another one? And if he keeps buying them and L/O them then eventually he’s going to run out of cash. Hence the benefit of selling on CFD.

Just another thing to think about.

Marcos

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Re: CFD or wrap mortgage… - Posted by Robert (NC)

Posted by Robert (NC) on February 17, 2002 at 21:52:12:

Johnboy.

Thanks for your advice…

Robert

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Re: One potential problem I see… - Posted by JohnBoy

Posted by JohnBoy on February 19, 2002 at 08:48:23:

How is the benefit of selling on a L/O vs Contract for Deed any different as far as being able to pull your cash back out???

By pulling your cash back out I assume you mean he refinances after getting someone in the property to pull his cash back out?

The only difference is that you can usually get a higher down payment on a Contract for Deed vs. a L/O from the buyer.

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Sorry I wasn’t clear… - Posted by Marcos

Posted by Marcos on February 19, 2002 at 09:06:33:

That’s exactly what I meant. The higher down payment. If he does a L/O he’ll probably get 3-5% down. With a CFD he could get 10-20% down. Hence pull all his cash out almost instantly. Then move on to do another deal. I’m assuming since he’s just getting started Cash isn’t abundant. Hence the instant lump of cash to go and do another deal is probably better than a little higher cash flow on the L/O. I think more than anything else it’s really up to him to try to work the deal in his favor rather than worrying about what his “perfect candidate” wants. If you offer terms, obviously your pool of potential candidates grows exponentially.

Marcos

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Re: Sorry I wasn’t clear… - Posted by JohnBoy

Posted by JohnBoy on February 19, 2002 at 09:21:08:

That would all just depend on how your buying.

If you are buying on terms from the seller than there isn’t a problem.

If you have a line of credit to work with where you pay cash and then refinance to pull your cash out to replenish your credit line, no problem.

If you are running around getting new loans having to put 5% - 10% down on each deal and pay closing costs on top of that, then you will eventually run out of money!

This is also another reason why you should learn how to buy without using your own money! If you are starting out with little money then focus on building your cash first. Then only use it if and when you come across the great deals that have a lot of equity to be had where cash is needed to get the deal! Otherwise stick to buying on terms from motivated sellers where cash isn’t needed and your down payment money from your buyers is profit that you can use to build your cash reserves with!