Getting that purchase price Down - Posted by Paul from OZ

Posted by Paul from OZ on March 29, 1999 at 18:15:19:

Hello everyone,

I am from Australia and have been reading your site for about 9 months. I am very interested in owning property and using lease options to generate cashflow. This site has inspired me to put together a plan that will enable me to enter the world of lease options. We have very restrictive laws over here regarding any type of lease option. But as with anything - there are ways of doing it legally!

I have set up a private company and have two lenders (so far) who are willing to lend my new company “as much as it needs” to acquire property on the following terms:

first mortgage security over each property;
6.8-7.5% interest (fixed for the term of the loan - the rate varies depending upon how long I want to fix the interest rate for);
fixed term;

Here in Australia, if you go above a loan to value ratio of 80% you need mortgage insurance (which costs $1,500), thus I want to keep my acquisitions below this threshold (including closing expenses - which on an average home of $200,000 are around $5,000 because of government taxes). I also want to keep acquisitions below this threshold so that I have a decent profit spread in the deal.

I want to target homes where I can acquire them with the Loan to value ratio down to around 70-75%, but which are properties that can be lease optioned quickly (i.e in saleable condition).

The market here is reasonably hot for sellers at the moment. We have had price increases of around 35% in some areas over the last year, but there are signs that the market is cooling down.

I want to negotiate purchases where I pay the owners 75% (or less) of the value of the home at closing. With the owners taking a second mortgage for the balance of the purchase price (maybe another 10% of the value of the property), which will preferably not accrue interest, and will be paid to them as a balloon in, say, 3 years time. I read about this technique on this board. Effectively, this will be a “no money down” deal.

Do you think that this is a good idea? Does your experience indicate that these are acceptable terms?

Any other ideas about how to get initial purchase prices down so that the lender only has to lend 70-75% FMV would be greatly appreciated.


Paul in OZ