HELP! PLEASE READ, 1st possible purchase! - Posted by Steve

Posted by Craig on June 16, 2006 at 19:13:23:

Sounds like an interesting scenerio. I don’t have enough experience to give you any advise, but I would love to hear how this all pans out. BTW Where do you live that a 2/1 brings that large of a price. In my area 45k would be tops.

HELP! PLEASE READ, 1st possible purchase! - Posted by Steve

Posted by Steve on June 16, 2006 at 16:58:47:

HERE’S THE SCENARIO: Empty 2/1 home with a backhouse/bathroom in good condition (comps $410k) free and clear, owner passed away about 5 months ago. His 2 sons inherited the house by means of a Revocable Living Trust, the title still remains in the Trust. They have maintained the property since then and have paid the taxes. My friend, who lives across the street from the vacant house, told them I might be interested in buying. So they called me to gauge my interest. They told me that they were looking for an owner-occupant, who was going to take good care of the house. Their dad built it 50 years ago & they want it to go to a good family that will keep the house & neighborhood up. We had a very good conversation as we “connected” for about 30 minutes. It went VERY WELL.

HERE’S THE PROBLEM: I can’t afford a payment for a $410k mortgage. I informed him of this during our conversation. I wanted to be up front with him and not waste his time before he showed me the house. He said they are willing to be flexible & sell for $20k-$30k below market value, he also said they would entertain a creative offer if I had one. (I almost passed out at this point) I told him I was thinking along the lines of a “legal” seller carried 2nd, contingent upon the banks acceptance. I didn’t get into specifics, I just wanted to throw it out there to see if he would consider such a transaction. He seemed to be open to this, however he wanted to talk it over with his brother.

HERE’S MY PLAN: Because I can only afford a payment of $1500 per month (PITI), I’m thinking about offering to buy for $380k.

—Get a loan for $200k (52.6 % LTV), pay the 20% down payment to the bank out of my 401k. Finance $180k for 30 years @ a decent interest rate (I have good credit)
—Give the sellers a good faith deposit, have them carry a 2nd for 3 years for the remaining balance, NO payments due, NO Interest accrued, total amount due in 3 years.
—I would then apply for a HELOC for investments.
—Use a portion of the profits from the investments to add another bedroom & bath. (The comps show $475k for a 3/2 in the area)

I would now have the option of paying off the 2nd when it’s due and keep the house IF I can afford the payment by then, OR sell the house after 2 years, so I can get the 250/500k tax exemption, pay off both the 1st & the 2nd. Keep the profits (potentially $50k-95k) and invest away!

HERE’S MY PERSONAL SITUATION: I’m not looking to make a killing on this house. I just think that it would allow me to accomplish a few personal goals:

  1. move my daughter & pregnant wife out of our small apartment & into a home without killing us financially while allowing my wife to stay at home for a year with our new baby.

  2. Use the $20k-30k equity in this house to get a HELOC for investment purposes and get my RE investing business going.

  3. Move my parents into the nice little backhouse(rent-free), so they can move out of their rental and have more $$$ for retirement.

I thought if I can buy this house this way, it gives me 3 years to afford to buy it outright or use it to leverage other investments and help me attain my goal of investing full time. What do you guys/gals think? Is this even possible? Do you have any other suggestions? Please feel free to chime in. Thanks in advance!

Steve

Re: HELP! PLEASE READ, 1st possible purchase! - Posted by Brian Profits

Posted by Brian Profits on June 17, 2006 at 23:29:45:

Hi Steve,

If you buy for $380K with 20% Down $76,000 the loan amount is $304,000 and the PITI payment will be over $1500.

Why not structure the offer as follows:
Price $380,000 with principle only payments to seller of $1,055 over 30 years. ($380,000/360 = $1,055) You can pay up to $5,333 in property taxes and insurance per year. You can offer a five year balloon. I wouldn’t go less the 3 years without the right to extend.

Re: HELP! PLEASE READ, 1st possible purchase! - Posted by Berno

Posted by Berno on June 17, 2006 at 14:12:30:

It seems like you would be buying a bit more thatn you can afford. If a 2/1 is actually worth 410k in your area, I don’t think that a 30k HELOC would do much for you. I would also think that the bank would give you a thumbs-down when you asked for one. Also, adding a bedroom and bathroom would probably cost as much as you would gain in value it seems like. In 3 years the market may sour and leave you with a bad situation. It just doesn’t sound like a good deal and probably not for you.

Just my views, but my market is MUCH different from yours. Just be sure that you know what you are getting into. Good luck!

-Berno

Re: HELP! PLEASE READ, 1st possible purchase! - Posted by BTI

Posted by BTI on June 17, 2006 at 11:56:01:

Steve

All I see is a old high priced 2/1, a tough sale in the areas I do business. Secondly I see them asking top market value less the commission and at this point if you were my brother I would paint sucker on your forehead. Third, your wife is pregnant and this will likely be your home for a very long time and unless you add on your not going to be satified. Finally, I see a sellers dream, a highly motivated buyer, the last thing you want to be.

My suggestion at this point tell them you reviewed the whole thing and their asking way to much for you and what your going to do, that you wouldn’t pay more then $280k seeing as your going need to add on to the house and update it.

I hate it when you say comps at $410k, are you sure these are real comps, if they are you are really paying for the land the home is incidental, are they basically identical to what your looking at, plus what has the market done since those comps (when you look a comp you need to figure out when the deal was put together, not when it closed for a more accurate time factor).

Not to be negative here but only once have I regretted not buying something I passed on and this home sounds like a no deal at this point, but the good thing is it’s not my choice, you have to live with the results and maybe it’s an area where appreciation will bail you out if you make a mistake.

BTI