Help with Business Plan - Posted by breeves

Posted by JHyre in Ohio on March 31, 1999 at 05:50:33:


Thanks, you satiated my curiosity. Bully for your accountant, 30y Term will do it, especially if buyout price was below FMV.

John Hyre

Help with Business Plan - Posted by breeves

Posted by breeves on March 30, 1999 at 07:25:55:

I could use some input on formulating a workable business plan. I have access to private investor money. I don’t want to do flips or rehab. I’m trying to put together a plan to buy SFH’s in need of no more than cosmetics and sell on L/P to tenant/buyer. I will buy at approx. 88%FMV and sell at 102%FMV. This is close to what Merle Wooley does with his investor program. The problem I’m going to have in presenting to investors is how liquid is their money. Merle puts them on a 5 yr note and since he has an established business his current investor escrow account has enough to offer any investor his cash back upon request. Question - how do I structure the deal to the investor and address the liquidity issue? We can’t cash out until tenant buys. I’m thinking of giving the investor a return of 9% until I sell and a part of the profit (88% vs 102%). I am actively looking for lease options where I don’t take ownership, the way most of us do them. But I feel I can significantly increase my volume if I can offer cash to the seller at a reasonable price(88%FMV). I will be looking for a buyer with a very good chance of qualifying within a year. My concern is tying up the investors money longer than they would be comfortable. Any suggestions would be appreciated.

Re: Help with Business Plan - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on March 31, 1999 at 09:20:09:

Assuming you raised pockets full of cash with private money what’s the point of paying 88% LTV ? Even unsophisticated homebuyers-occupants sometimes snatch deals like that. As a professional investor you should target and be able to do much better than that. The fact that you are using other people’s money should make you become more conservative in your approach and pricing, not more careless.

Cash is power. Why not look for bargains and offer even less. In your very marketplace there are homes that are already underpriced, as compared to the rest of the houses in a subdivision. Of those find vacant homes, with 4-6 months or longer on the market and you’ll have a good chance of acceptance. Just formulate the criteria of what you are looking for and have an agent doing searches for your routinely. You are bound to come up with good buys.

I’m with Jim Piper on not signing short term balloons. I did this and it caused me grief. It’s unbelivable how time flies. Possible exception - low LTV loans which could be refinanced with conventional or other investors’ money. With economy changing the easy money may and will dry up, and you’ll be stuck with high LTV loans that can’t be refinanced.

help w/??? - Posted by karp

Posted by karp on March 30, 1999 at 19:19:36:

Your plan is a guarenteed recipe for destruction. I see overpaid houses being given back to you. I see payments not being made to lenders. I see a mess is what I see.

Now I know why Merle pays 85%. I also know why he can get away with it.

Ah nevermind, I can’t verbalize very well right now. The plan has too many flaws… Here is my suggestion.
Call Merle or email him and let somebody who likes this approach give you guidance.

As you have it right now, you will go boom.



Re: Help with Business Plan - Posted by JPiper

Posted by JPiper on March 30, 1999 at 15:51:37:

Just a couple of comments regarding this program?..understanding that the details you provide are sketchy.

  1. I would not personally offer a private investor liquidity. My attitude would be that if he doesn’t want to lock his money up for the specified time period (5 years if that’s what it is), then your program is not for him. You may be able to help an investor resell his note, but chances are, given the terms, that the investor will not be particularly happy with the price in this event. I think you would be better served to understand that you can’t be all things to all people. While instant liquidity may be a disadvantage to your program, the advantage is that interest rate is higher than they could earn from other competing instruments, and it is secured by a property (albeit at a high LTV). Learn how to answer this objection to your program if it comes up. Obviously you might be able to pay off the loan sooner if your tenant/buyer exercises sooner?.just don’t guarantee it.

  2. Since you’re getting started you might find it necessary to pay higher than 9% interest. Something to think about anyway. Make certain you work through an amortization table to see what the balance of the loan is in let’s say 5 years?..and contemplate how you will refinance this if you have to. Understand that if your amortization is too long, you will have little equity build-up. Therefore refinancing through a conventional source may not be possible?..putting you at a higher level of risk than normal if your private investor program has any problems with it.

  3. I would question the wisdom of buying properties at 88% of market value on a regular basis. There are risks in this business?.and you have precious little equity at 88% with which to cover these risks. In most areas real estate commissions alone are 6%-7%. If for some reason you had to take a property back, it had been damaged by the prior buyer, and you had to sell quickly through an agent.?this equity position is not going to cover you or your investor. Even Wooley bought at 85% of market?.a number I thought was too high as well.

  4. As the other responses have mentioned, depending on exactly how you are seeking out these private investors, and exactly what type of investment you are involving them in?.review your state laws carefully in reference to securities laws. Seek out legal advice concerning this subject?it’s a complicated one.

  5. These days the lenders have come up with attractive loan programs. I would carefully check some of these out as alternatives to what you propose, depending on you and your credit.


Re: Help with Business Plan - Posted by JohnK(CA)

Posted by JohnK(CA) on March 30, 1999 at 10:46:33:

I’m sure no expert but it sounds to me like you may need to do a securities filing with the state for these type of transactions. Aren’t you proposing to sort of operate as a bank? I’m sure you will find more answers as others read your post.
Good luck

My take - Posted by Bud Branstetter

Posted by Bud Branstetter on March 30, 1999 at 10:44:00:

I want to first comment that I think this approach is a waste of money. By this I mean the cash could be put to more profitable use. Yes, this means rehabs, hard money loans, multifamily, and commercial. Leverage is great when you know how to use it.

I have , I believe, carefully read Merle’s Private Banker and Lease Option courses. He says in the prologue that you should investigate with your attorneys the securities issues. He does multiple mortgagees on a single property. If you are comfortable with this, proceed. On his lease option approach it was attacked as not being able to withstand a sale versus lease audit. I felt he believed his advisors that he was within the guidelines. Rather than continue to be on the defensive all the time, he chose not to offer his courses but to continue what he was doing himself.

Having said all the above This is what I would do. Properly structured notes can be very liquid. But by doing this you lose the depreciation aspect as it becomes a sale. Since I would be in at least as high a tax bracket at the future point only the present value of future tax liability becomes an issue. The benefits or liabilities of this seem small in comparison to the potential of actual cash flow profits. If I can attract infinite amounts of capital then I would run into a dealer problem. With the right mix of rent to own and owner financed sales the cash flow problem on this could be solved. There are also other approaches to eliminate the immediate tax due problem of a dealer corporation. With those notes I would then do a personal loan secured with a deed of trust against the deed of trust taken back on the property.

Anytime my investors wanted to become liquid I would be forced to either sell the underlying note or hustle to find some more investors. I would not be adverse to directly selling the buyers mortgage directly to an investor that wants long term cash flow. I would give recourse if I serviced the note or if it was not in a prolonged default.

You also comment that you can’t cash out until the tenant buyer exercises his option and buys. Obviously with owner financing this does not become a problem unless it has a short term call. On a more common L/O the buyer should be encouraged to exercise the option. You can prescreen prospective tenant buyers and sell to ones that have a good chance of exercising in a year or two. You can also select buyers that are unlikely to ever exercise the option. It may somewhat depend on your philosophy of the business. I could have an escalating interest rate on a note or I could make it clear that the payment would increase if the tenant buyer does not exercise the option at the end of the year.

I don’t know if this fits with want you wanted. If you want to brainstorm more on it do not hesitate to contact me directly to discuss.

Reclass - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 30, 1999 at 13:06:46:


How does Merle structure his L/O’s? It strikes me as VERY unlikely that IRS reclass would occur under most circumstances, so I am curious.


John Hyre

No,no,no! Don’t go there! - Posted by karp

Posted by karp on March 30, 1999 at 19:12:17:


Dude, I can tell you with utmost conviction that a lease option for 30 years ain’t gonna cut it.

This is not one of my favorite memories but my accountant made me change something in order to avoid an audit. My lease option went Boom! and I paid taxes that year.