Help with motivated seller - Posted by Jeff

Real Estate Investing Real Estate Gurus
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Posted by Jeff on March 07, 2001 at 15:31:23:

Yes, you have some good points. My yield will go down if the first purchaser on a L/O agreement falls through. But, I will keep their 5% deposit, which will help the yield.

If I didn’t prequality people for a living, I would be more concerned.

And yes, I think your numbers are correct, that 65% of L/O’s don’t close. I think that is a positive. If I have to L/O it twice, each time with 5% deposit, I’m happy.

The lease I will use, requires the occupants to pay for any repairs not covered by the home owners systems warranty.

The occupants have a built in incentive to keep the place in good shape, and I can further motivate them to do so, if they decide not to excersize their option to purchase by offering a small amount of their deposit back to them if they leave the house in perfect shape.

Your ideas about a L/O from the current buyer are good ones. In this case, she is moving out of state and wants the cash in her account for peace of mind as she does not work.

The property is in an excellent location and will sell quickly under a L/O scenario, and will have some appreciation, which, if the first L/O falls through, will also help the yield.

It’s a judgement call on my part not to press her on the terms of the deal. But, I will re think it tonight. It’s not in writing yet, so nothing is binding, and no $ has changed hands.

Like I said, it’s not perfect, but the yield is excellent.

Thanks for the input
Jeff

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Help with motivated seller - Posted by Jeff

Posted by Jeff on March 07, 2001 at 08:41:24:

Would appreciate an opinion on how to structure this deal.

Conservative value of house $177,000 No repairs needed.

Seller will sell for $160,000.

Seller wants to continue to live in the house for 6 months, but wants to pay $300 less than fair market rent.

I have access to financing and don’t mind putting 10% down.

Anyone’s thoughts greatly appreciated.

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Re: Help with motivated seller - Posted by Stu Silver

Posted by Stu Silver on March 07, 2001 at 12:04:09:

Hey Jeff !

First, let’s look at risk and reward. Cost is $160,000 and value is $177,000. Gross profit is $17,000.

But how much is the net profit after closing costs? If you need a broker (7%), figure a total of 10% of the gross price spent getting to closing, or $17,700. With only $17,000 in gross profit, YOU WILL LOSE MONEY. (And you can’t make it up in volume)

With so tight a profit margin, I do not like to own. I would rather do a sandwich lease/option, i.e. get the owner to lease/option the house to me at 160M, and then sell the house myself on a lease/option for 177M(saving the brokerage commission).

Therefore, get a lease/option from the owner at $160M, but don’t start the lease/option until 6 months.

I would put a 2 -3 week inspection contingency on the lease option, and advertise it for sale or lease/option during that 2 -3 weeks.

If you get 20 or more calls from excited buyers, you are onto something good. If you get 2 calls, from people with no money, move on - find another house.

Hope that helps.

Stu Silver, CCIM
Lead Instructor, Russ Whitney’s Millionaire U Boot Camp
Licensed Real Estate Broker
Licensed Auctioneer
Registered Real Estate Appraiser
Certified Exchange Consultant
Licensed Mortgage Broker

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Re: Help with motivated seller - Posted by JohnBoy

Posted by JohnBoy on March 07, 2001 at 11:13:43:

Jeff,

Based on what you’ve told us so far this is not a deal. If I was going to buy a property using 10% of MY money and willing to put a new loan on it in MY name, I wouldn’t pay more than $140k and would probably be closer to $130k, assuming your estimate FMV of $177k is correct.

You don’t tell us what your plan is to do with this property if you were to get it. If you were planning to resell it for a profit, you would be lucky to break even on this by the time you cover your loan costs, holding costs, selling costs, etc. More than likely you would risk losing money by paying $160k on a $177k property.

Now I would do a deal like this if it were on MY terms! I would consider doing this on a “subject to” or a L/O arrangement where I would turn around and resell it to my buyer on a L/O or a contract for deed, depending on which way I ended up doing the deal.

You don’t tell us why the seller is motivated or how motivated the seller is. Why is he selling? What makes him motivated? How motivted is he? How much does he owe on the property? What does he NEED, not want, but really NEED? If he says he needs some cash out of this, what does he need it for? How much of his equity does he really NEED, if any at all? What do you plan to do with the property if you got it?

Remember, the first 10% of value on any property is air. In this case you’re only looking at 9% below FMV if your numbers are right. To justify using your money and/or putting new financing on a property in your name, I wouldn’t go over 80% FMV as my purchase price and that’s assuming the property needs no work and is in top condition, and I would be shooting closer to 70% of FMV. The only way I would go above 80% of FMV is if I can buy on my terms, using none of my money and not having to get new financing in my name. I’m in business to make a profit, not to just buy property at cost on a break even deal. You ALWAYS make your profit when you buy, not later by holding it and waiting for equity build up. Any future equity build up is gravy, but my profit must be made when I buy. The more risk that I have to take like investing any of MY money or using MY credit and putting new loans in MY name, the less I’m going to pay for the property because I’m going to need to make more profit to offset the risk I’m taking by buying the property.

The last thing I want to happen is end up becoming the motivated seller down the road after any of my profit or equity is all used up from costs involved trying to make my profit out of the deal. I need enough cushion in the deal to absorb my costs involved and still allow myself to make a sizable profit, otherwise it will be me that ends up being a motivted seller trying to unload a property because I’m losing money from not allowing enough cushion in the deal to justify the risks involved.

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Re: Help with motivated seller - Posted by Kevin W - Whitney Trainer

Posted by Kevin W - Whitney Trainer on March 07, 2001 at 10:57:45:

Dear Jeff,

I’m Kevin Wessell, I teach 3-day training camps for the Russ Whitney group.

Yes, you can purchase the house with 10% down. However, my thoughts are that it is best to preserve your cash. I know you don’t mind putting up the 10% but keep this in mind: You are getting a $17,700 “bargain” on a house. However, you are having to part with $20,000 to get it. ($16,000 down payment plus about $4000 in closing costs.) So, you’re trading $20,000 in cash for a $17,700 bargain.

In my mind, equivalent cash is more valuable. So I would do this:

  1. Get an 80% loan from a private note buyer (not a bank). (If you can’t find any, reply to this and I will send you the names of some. whitneymortgage.com might be able to help.)
  2. Have the seller carry back 20% as a second mortgage.
  3. Make payments to the note buyer on the 1st mortgages and to the seller on the 2nd mortgage.

This way, all you pay up front are the closing costs. Supposedly you are getting the same bargain, but with less cash out of pocket.

Now, you need two things:

  1. The existing mortgage balance must be less than $128,000.
  2. The seller must be willing to accept your offer.

If the seller wants to live in the property for 6 months, I would insist that they pay fair market rent…or at least enought to cover your mortgage payments.

Next, when the owner moves out, I would lease the property to a tenant and give them an option to buy. This way you you can charge higher than market rent, a tenant that (usually) takes better care of the property, and a chunk of option money up front.

Hope you find some or all of these ideas useful.

Kevin Wessell
Russ Whitney Trainer

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Re: Help with motivated seller - Posted by rw

Posted by rw on March 07, 2001 at 08:51:40:

Jeff,

I am going to pass this one to one of the Russ Whitney Trainers.

I am forwarding it to my good friend and real estate expert, Stu S in florida. I am also forwarding it to Kevin W in Calif, and to Todd D in Dallas.

Look for your response within the day and no later than tomorrow.
Hope this helps you.

Russ Whitney
Whitney Education Group Inc.

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Re: Help with motivated seller - Posted by JohnBoy

Posted by JohnBoy on March 07, 2001 at 15:40:51:

Why would you choose to use a note buyer on the first vs. using a lender? You would have to discount the note and lose more of your profit in the deal. What is your reasoning behind this vs. just getting a new 80% first through a lender where you wouldn’t have to take a hit on discounting a note?

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Re: Help with motivated seller - Posted by Jeff

Posted by Jeff on March 07, 2001 at 11:39:03:

to all who replied.

Thank you for your ideas. There is no mortgage on the house and her bottom line is 160,000. No ifs ands or buts.

I will proceed as follows:

Seller to provide a systems warranty for a 1 yr period at closing.

I will put 10% down and build the closing costs into the interest rate, thus no cash for closing costs. This is also refered to as lender paid closing costs. This only raises my rate to approx 7.75% for a 30 yr fixed mortgage. No prepayment penalties, no balloon payments.

I will give the seller 3 months of reduced rent, then she goes to fair market rent and must let me show the house for resale after those first 3 months. I will give the her 30 days notice when I re sell the house. She must give me 30 days notice of intent to vacate.

The rent she pays initially will come within $150 of covering the payment. Not perfect, but not bad, and it’s only for 3 months. Her credit is perfect and she has money, so I’m not worried about her leaving in the middle of the night. She just doesn’t want the hassle of listing the house, showing the house, etc etc etc.

I will re sell the house (for $185,000) (and it will appraise for this, which is very important because a new buyer won’t be able to get a loan unless it appraises for the sales price)

Re sale will be a lease with option to buy, with non refundable 5% deposit up front. Credit report will be pulled on the buyer and they will be prequalified up front for an FHA mortgage to close within 1 year. I will personally handle the mortgage. (I’m a mortgage broker) If the buyer wants to use another mortage person, I will not pay closing costs. If they use me, I will pay closing costs up to $1000, and add the remainder of the closing costs into the price.

Yes, I’d like to get the house for cheaper, but my return on investment is still extraordinary.

my out of pocket will be 10% plus approx 1,200 for tax escrow and insurance.

My profit will easily be double what I put down on the house. Where else can I double an investment within 18 months?

Are there drawbacks? Of course there are. Is the perfect deal? Nope. But it’s there and it’s staring me in the face, and with careful planning, I’ll douple my investment.

Anyone done that in the stock market lately?

Further opinions encouraged.

Jeff

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Re: Help with motivated seller - Posted by JohnBoy

Posted by JohnBoy on March 08, 2001 at 08:54:17:

One comment on something you stated in your post pertaining to the property having to appraise for the sales price in order for the buyer to get a new loan. You stated:

“”“I will re sell the house (for $185,000) (and it will appraise for this, which is very important because a new buyer won’t be able to get a loan unless it appraises for the sales price)”“”

This is not true. The house does not have to appraise for the sales price. Lenders will loan based on the purchase price OR the appraised value, which ever is LOWER. This does not mean the property has to appraise at or even above the purchase price.

Example:

In your case lets say you wrote the contract up for $195k. Your buyer decides to exercise their option in a year. The house only appraises at $185k. In this case the lender would loan based on the $185k and allow what ever LTV they will loan on $185k. The difference can be held back as second mortgage by the seller. The only requirement to get this by the lender is that the borrower qualifies with the debt ratio to afford the payments. Their are a lot of lenders out their that allow seller carry backs and the second mortgage can exceed the actual appraised value. The first could care less about the second’s position and how much risk they elect to put themselves at. They only care that the total payments on both the first and second, along with all the other debts, fall within the lenders debt ratio to qualify in order to afford the payments.

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Re: Help with motivated seller - Posted by JohnBoy

Posted by JohnBoy on March 07, 2001 at 12:25:05:

If her bottom line is $160k, no ifs, ands and buts, then where is the motivation on her part???

Based on your plan and assuming everything works out with no hang ups and you’re happy with the deal, then go for it. One thing to consider. You can screen your buyers until you’re blue in the face, but that doesn’t guarantee they will ever buy the property. 65% of all buyers that enter into a L/O agreement end up NOT buying the property and moving out. Not that this is a bad thing, it’s actually a good thing because it generates more profits on the deal in the long run. The only problem in your case if this happens is that your 10% is tied up until someone eventually exercises the option and buys the property. That would diminish the amount of your return if the first tenant doesn’t buy the property and you have to carry it another year.

You still don’t tell us what she NEEDS the cash for or much of the cash she NEEDS now?

Why not just get her a new loan in her name against this property for the amount she NEEDS to get out of it. Then you L/O the property from her for the $160k for 3 years! Then you L/O it to your buyer for one year at the $185k getting your 5% down. What’s your return on this deal then??? No matter what you make off the deal your return is infinite!

If you NEEDED to sweaten the deal for her, tell her not only will you L/O the house from her for her new mortgage payment, but you’ll even throw in the 6 months she wants to rent for FREE!!! 6 months of mortgage payments is a whole lot less than putting $16k down out of your pocket and getting a negative cash flow of $150 for 3 months!

Just another opinion.