Posted by Glen SoCal on February 11, 2002 at 20:41:07:
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Give Me Some Creative Ideas for this deal!!! - Posted by JohnP SFL
Posted by JohnP SFL on February 10, 2002 at 08:12:12:
I have a person who needs to sell their house. They need 30K upfront for a new business they have started due to losing their job. The house is worth 270K they owe 151K it needs 20K in repairs. Great area of Boca Raton FL, the houses have really appreciated in the past couple of years. What I am thinking is giving the person the 30K after I check title. Put the property in a trust (taking the deed). The only problem is the person will take the 30K ( he wants 50K in total) but wants to share in the profits on the backend. I initially offered that we would share the back end 50/50 no money upfront. If you run the numbers I will be paying 12K more for the house then my all cash numbers say I should. The only good thing is that he will keep paying the mortgage. The Bad thing is that if he gets into a cash crunch again I will picking up the Mtg payments of $1650. per month. I don’t like risk especially 30K worth. somebody give me some twist on this one. I am racking my brains. (What little I have left).
Thanks
JohnP SFL
This is pretty straight forward. - Posted by Glen SoCal
Posted by Glen SoCal on February 10, 2002 at 21:58:31:
First of all, I’m sure you’ll be checking the title on this property and loan payment arrears.
Questions: If the seller lost his job and can still make the payments, why is he selling at a discount? If he needs the cash to start a new business, where would he come up with the money to make the payments anyway, out of the money you gave him? Why not just give him less and you make the payments? And as he wants $30k up front, do you think he’s due $20k on the back end?
In looking at this deal, is there any need to be that creative? Maybe I’m jaded by all the creative deals I read here, but this seems to qualify for a fairly simple approach.
Wouldn’t the standard rehab purchase price be applicable?
The standard: 70% of sale price minus repairs. That would be $270,000 x 70% = $189,000. $189,000 minus 20k repairs = $169,000 purchase price. Some investors add holding costs and other costs as well.
Some investors start at 65% and start subtracting from there. But lets look at a straight 70% of purchase price minus repairs.
169,000 Purchase price
20,000 repair
9,000 holding costs
27,000 selling costs
5,500 contingency
$231,500 Total costs
$270,000 (sale price) - $231,500 (total costs) = 14% profit or $38,500.
If you give him $20k on the BACK END, your profit (7%) is near that of BROKERING the sale front and back…with all the RISK of being an INVESTOR.
There would be no back end on this unless there was less front end. It seems pretty straightforward.
I’m probably not telling you anything you don’t already know. And I don’t have any experience. It’s what I’ve read and heard. So really, my 1 cent.
If I’m way off on my estimates of the profit potential, I would appreciate a good smacking from the board.
Also, the sellers would have to vacate immediately.
Personally, I’d have their check ($30k only) waiting out front when they had left the place and it was swept clean. After a brief inspection of the property, I’d trade their house keys for the check and have the waiting locksmith go to work.
Also, this would be a good subject-to, payments made to a third party etc. I’d decrease the sticky, tenants-stay, back-end-profit factor on this one as much as possible. Adios the sellers, contractors go to work, sell it.
Re: Give Me Some Creative Ideas for this deal!!! - Posted by Brent_IL
Posted by Brent_IL on February 10, 2002 at 13:30:20:
If he’s living in it now, and will continue to live in the house, only make repairs to the physical structure that is essential. Not the $20K to bring it to FMV.
Make the 50/50 split on everything over $270K. In return for his equity, the difference of $119K, the seller gets $30,000 for a new business, new job at the new business, and gets to live in a $270K house for $1,650 a month.
Use a good attorney to do the trust right. If he gets kicked out for not paying, it’s by the trustee and outside of your control.
Check all the numbers. Why is he talking to you instead of getting a no doc/no income HELOC? A majority of new businesses fail within the first year, and most within five. Without income, how will he pay the bank?
Re: Give Me Some Creative Ideas for this deal!!! - Posted by JT-IN
Posted by JT-IN on February 10, 2002 at 13:13:10:
John:
Everything was looking pretty enticing, until we get to the part of them staying in the house. It is not clear where your exit strategy is; when and how will you sell the house? The other concern is, where is your return on your 30K? And if it is when you well, then we are back to # 1 concern; When? I do not see either of these answers in your post.
I would tell them that you will do the deal, but only if they vacate, and allow you a clear-cut way to your profit. Sharing the back-end is not particularly attractive either, and can raise some legal concerns, unless you use something like a PacTrust.
It looks like muddy water to me…
Just the way that I view things…
JT-IN
cherry picked your way out of a deal - Posted by rr smith
Posted by rr smith on February 10, 2002 at 12:51:55:
Let’s see, the owner gets all their cash up front,
a share of the back end profits (if any?!)
you pay their mortgage, and take all the risk of carrying their property while the contractors take their time fixing up the place. Wow! this sounds like a good deal for me (for any owner/seller), are you up for a few more “deals” like this? I need to do the same thing and finance a beauty salon, please write to my e mail soonest!
wow glen has the best advice - Posted by rr smith
Posted by rr smith on February 11, 2002 at 18:50:58:
maybe you should listen to him and give him a consultants fee …hint hint
Re: This is pretty straight forward. - Posted by JohnP SFL
Posted by JohnP SFL on February 11, 2002 at 06:19:59:
Glen,
Your estimates are exactly right. I have come to the conclusion to give the seller 50% profit above the 270K selling price. The only thing is the I never give the seller a 30K check at the door. I give them $100 dollars to bind the deal and check title. He pick’s up his money at the title co. once he has left the premises. I thank you for replying. I just needed to bounce some Ideas around and I appreciate everyone’s input.
JohnP SFL
Re: Give Me Some Creative Ideas for this deal!!! - Posted by JohnP SFL
Posted by JohnP SFL on February 10, 2002 at 21:15:14:
Brent, thanks for replying. He can’t get any type of loan his credit is gone.He ahs been talking to hard money guys, but he dosen’t like the rates. I said to him who does. Brent I am spliting everything after the 270K. I figured the deal like this
owes 151K
30K from me
20K fix up equals =201K.
20% profit from sale price (we will use 270K)= 54K.
profit.
201K + 54K equals 255K
OK now we know that we must minus 10% from the sales price for closing cost realtor fee’s etc… this equals 27K. Minus this from the 270K and we get a total of 243K. You see where my concern is? If I am not careful I will only return 43K and will lay-out 50K. Not great return on money. The only plus side is that one of the properties I am using as a comp sold for 270K and needed work (about 20K). But this is pre 9-11 so I don’t know how much higher I can go with the property fixed up and I want this sucker gone quickly. As far as his business he is slowing gaining momentum. There is no guarantee he can pay the mtg for 3-6 months or so.
Thanks for your help.
JohnP SFL
Re: Give Me Some Creative Ideas for this deal!!! - Posted by JohnP SFL
Posted by JohnP SFL on February 10, 2002 at 21:17:37:
JT,
Thanks for replying. He will vacate the property. Take a look at the answer I gave to Brent’s post. You can see how I am breaking this down and where my concerns are. Thanks so much for replying.
JohnP SFL
Re: cherry picked your way out of a deal - Posted by JohnP SFl
Posted by JohnP SFl on February 10, 2002 at 20:54:40:
rr Smith,
The situation is the owner pays the mortgage. I take the property into trust, meaning I am the new owner. We are looking at about a 12k difference in numbers. Another words an all cash deal I would pay $169K he is looking for 30K for his new business so I would pay $181K for the property. The difference is I would not incur the cost of a new loan and payments. The seller is looking for 50K in total. What I am doing is having him go down the road with me to see how much back end money is left. I will get my 20% profit off the top plus the 30K back. Yes, I will have a little more risk. But I will also own a house with about 60K in profit when all is said and done. I am looking for some other suggestions not criticism. Thanks for replying
JohnP SFL