Thank you, Tyler I was beginning to think no one was ever going to answer Nancy’s question! Did anyone else read Cash Cow? Just a 2% spread in interest rate makes for a nice cash flow. Or, doing the LeGrand thing where you lease option it to them and let them pay in additional downpayment in installments, can make for a healthy cash flow. You get the money up front, and the monthly money, you probably won’t get much on the back end, when it finally sells. But thats ok, there are literally hundreds of these houses waiting for you, so only go get the ones that are in good condition in areas that are popular. Offer it up on LO or CD and it should sell like hotcakes.
how are you making money when taking deed to full price homes? - Posted by Nancy Cason
Posted by Nancy Cason on April 20, 1999 at 13:15:45:
When finding pretty homes with recent mortgages how are you making money? Are you holding the home for a permanent rental because it has a low interest rate loan on it? Are you marking the price up and selling on a lease option? I haven’t been able to figure out what folks are doing with this type deal.
I would not hold a loan like this as a permanent rental unless I had Brad put it in a Pactrust for me and I could afford to pay him his 3 sheckles.
Since there was likely some down payment and some appreciation has taken place there is likely to be a small amount of equity in the property. In turn there is likely to be some appreciation in value, some value for a buyer to get into a nice home, and some discretionary hedge in a future appraisal. These factors say to me that I can sell the house for more than I bought it for.
Since there is greater demand for this product than there is supply people are doing it and making money at it.
Re: how are you making money when taking deed to full price homes? - Posted by Brad Crouch
Posted by Brad Crouch on April 20, 1999 at 14:13:05:
Nancy,
This senario sounds perfect for a PACTrust. They are good for “no equity”, “low equity” or “overencumbered” properties (not to exceed 10% overencumbered).
The seller gets out of the property without further maintenance or repair obligation but needs to stay on the loan for a few years. The monthly payments are accepted and disbursed by a “distribution” company and the payments are never late because of a “contingency fund” which holds a few months of monthly payments (at least one). So the sellers loan is never jeopardized, and it is the first thing paid when the property is eventually refinanced or sold (at the current FMV - a few years down the road).
You find a buyer who comes in with “closing costs” (which goes in your pocket, similar to initial option consideration on a L/O) and a few months worth of monthly payments (depending on credit worthiness, maybe several months of monthly payments in advance would be required).
The buyer gets all the tax benefits of a homeowner and gets his “closing costs” back, too . . . at the end of the term (a few years). Any “improvements” the buyer wants to make, require YOUR approval (must be something that adds value to the property or you will not approve).
During the time the trust agreement is in force, the loan balance gets paid down, resulting in “principal reduction”, which you split with the buyer at termination of the trust. Also you get to split any appreciation that may occurr in that time, with the buyer.
That’s a pretty fair amount of money to split at the end of the deal, and there is monthly cash flow and initial cash coming in, too.
The PACTrust method looks good to me for any kind of situation where “seller financing” is involved.
Re: how are you making money when taking deed to full price homes? - Posted by Tim (Atlanta)
Posted by Tim (Atlanta) on April 20, 1999 at 13:26:20:
The methodology (according to Ron LeGrand) works something like this :
Your seller is really ready to move (motivation). They have a home that is let’s say only 2 years old. They put the minimum amount down they could (3%). Let’s say that the FMV on the home is $105,000. The balance on the loan is around $102,000. There is no real equity here, right? Loan payment is say $800.
You buy the home using a lease-option agreement. You put NO money in the deal as option consideration. There is no equity, so you put no money in. You agree to make the mortgage payments of $800 per month under this agreement. Minimum term for the deal is 2 years.
You advertise the house for sale owner-financing under a lease purchase for $110,000. For owner financing, buyers will pay more than market. Take $5,000 in upfront option consideration with payments at $900 per month.
So you make $5,000 option consideration.
plus $100 per month for two years, $2400
plus ~$8,000 at the end of the lease option(110,000 - 102,000 mortgage balance).
For a total profit of $15,400 with NONE of your money in the deal.
Re: how are you making money when taking deed to full price homes? - Posted by Bill Gatten
Posted by Bill Gatten on April 20, 1999 at 16:39:32:
Tim,
That’s good, but why would a buyer pay that much per-month when they have no tax write-off (and would they pay more if they could get the tax write-off)? And during the time the buyer is striving to accumulate its purchase money, who is responsible for the roof if it leaks or blows off (the water heater, the exploded water pipes, etc.). Who pays the property tax and insurance, and who pays the Home Owner’s Association Dues and Mello Roos Imposition (it’s a Calif. thang)? Is the property and its title subject to liens, suits, creditor judgements, BKs and legal actions in marital disputes, etc., by you Lessor, your Lessee and you? Is there a Due-on-Sale Clause violation here? Do you, personally, get any tax write-off here? Do you have to pay full bore taxes on your $900 (and does that detract from your pofit margin)?
Hey Tim. What part of Atlanta are you in. I am on the West Side (Cobb, Douglas, Paulding,etc). I have read your post for the last several weeks and would like to know how long you have been investing in Atlanta, and in what are of real estate have you found to be more sucessful over other areas(Lease Options, wholesaling, flips, retail, rehab, etc…). I am just getting started (been studying for while; but traveling with my job a lot). What aspect do you reccomend for a beginner in the Atlanta area?
Oh, one thing… What do you know about John Adams and his seminars. He is scheduled to have a seminar on investing in foreclosures in Georgia at the Galleria in May. Just wondering if you have ever heard/followed him.
Re: how are you making money when taking deed to full price homes? - Posted by SteveM(MA)
Posted by SteveM(MA) on April 20, 1999 at 13:57:29:
Couple of nits…
Shouldn’t the option consideration be credited towards the final price?
$5,000 - Option money
2,400 - lease ($100 x 24 months)
3,000 - profit on back end ($110,000 - $5,000 - $102,000)
$10,400 profit
also, if you can write up the deal so that your buy price is equal to “the mortgage balance at the time of purchase”, then you profit from the declining balance as the mortgage is paid off.
Re: how are you making money when taking deed to full price homes? - Posted by Brad Crouch
Posted by Brad Crouch on April 21, 1999 at 11:05:51:
Hi Marvin,
It depends on what the seller wants/needs. If he needs cash now, he could refinance first and pull out as much as he needs or as much as he can.
If he could not re-finance or didn’t want to, that’s O.K., he could get a monthly cash flow during the time the trust was in force, and/or get all his equity out when the trust terminates. The sellers’ “contributions” are the third thing paid off at the end of the trust when the property is sold for FMV.
The first thing to be paid off are all loans (mortgages) against the property. The second thing to be paid is the costs of selling the property. The fourth thing paid from the proceeds of the sale is the “resident beneficiarys” (buyer) non-recurring costs (closing costs initially paid) and any “mutually agreed upon” costs of repairs and capital improvements that have occurred during the duration of the trust.
Fifth thing: All remaining net proceeds are divided between the PACTrust beneficiaries with respect to each of their percentages of beneficial interest owned (held) in the trust.
Hope this clears it up a bit. It’s pretty flexible and can be structured to make life easier for the seller. Although there is cash coming in at the inception and cash coming in on a monthly basis, there is good potiential for very large paydays at the end. And if only half of that ever came to pass . . . still not a bad deal for a few hours mental work. I wonder how many of these deals could be done in a year? I’ll let you know.
Hi all, I have alot of the same questions that I notice Bill has and am hoping some of you will give it your best shot to reply to these questions that Bill and I have. I also was wondering about the Option consideration money…doesn’t that have to be used towards the tenant/buyers purchase for prepaids, cc’s or downpayment if they eventually use their option to purchase??? I can’t see counting this money as cash flow or income if I really need to put it in escrow for the possible sale down the road. Obviously that would be a disaster if I didn’t have the money when needed. I would really appreciate it if someone could clear these questions up for me. Thanks alot! Carolyn
After a number of “trying” to get deals done with the Kevtrust- similar to Pactrust*- I am finally going to get one done on these no equity properties. Once again, these were numerous properties that I passed up before or set up as equity share deals for the sellers. Since I read your early posts on the “No Equity” deals, it struck me as to why don’t I do the deals with the seller myself. Finally, I did get one wrapped up and now in the process of two more.
Thanks, Bill, for turning the light bulb on with the trust program that we use.
It is EXACTLY what this message poster should do.
Not affiliated with Bill or any of his programs. Although, I’m sure it’s a great program.
Kev.
Re: Question concerning GA Real Estate - Posted by Tim (Atlanta)
Posted by Tim (Atlanta) on April 20, 1999 at 15:04:11:
I too live and operate in the western Cobb county area. I have been actively investing in real estate in the Austell area for about 2 years now. I have mainly been purchasing townhomes as rentals for cash flow. Since very few investors will bother with townhomes, I find I can get a good deal on one. Recently I have been branching out into sandwich lease/options like I wrote about above. The only real problem with this is finding the deals before 5 other investors have been there. There are a lot of real estate investors in the Atlanta market. Just go to one of the GAREIA (real estate investors association) meetings. There are usually 500 people there, with a membership of over 1300.
I have heard that John Adams is a good speaker. He writes a weekly column in the AJC and is very highly regarded in the GAREIA. I have personally had no dealings with him. Foreclosures may be a good way to go, but there is a lot of competition in Cobb county. At the last auction I went to there were over 100 people at the auction, with about half of those bidding.
If you would like to talk or meet, reply via private e-mail. I am more than happy to help.
Re: how are you making money when taking deed to full price homes? - Posted by Brad Crouch
Posted by Brad Crouch on April 20, 1999 at 14:31:01:
Steve,
The INITIAL option consideration is normally credited to the downpayment, IF the buyer exercises his/her option to purchase the property. This has the effect of being reducing the balance of the money owed, should the option be exercised.
> if you can write up the deal so that your buy price
> is equal to “the mortgage balance at the time of
> purchase”, then you profit from the declining balance
> as the mortgage is paid off.
That’s great for you. What makes you so sure the seller will go for it? Assuming he has any equity, he might not be willing to just give it to you.
You can write up anything you want, but getting an agreement on what you write up is a different story. Without an agreement, you have no deal.
Posted by Nancy Cason on April 21, 1999 at 20:05:48:
Carolyn,
The option fee is financial consideration for the right to buy the property on specific terms in the future. It does not have to apply to the purchase price. It is the fee they pay up front to take the property off the market for a period of time.
The option consideration say $1,000 is not income until the date they exercise the option. So on your income tax return you declare it as income in the year the buyer exercises the option or fails to exercise the option and you sell to someone else. It is not rent. It is important to keep the data on the fee so that you don’t forget and declare it as income twice. People who apply the fee to the purchase price sometimes forget and pay tax on the money twice, by posting the fee as income in the year they receive it and again at the time of sale.
Option money is negotiable on whether it applies to down or not. Most do apply it to downpayment. Irrespective, it is still your money and does not need to be escrowed. My contract says they pay the cost of closing or getting a new loan. I have a separate accounting catagory set up in Quickbooks for option considerations. That way I know what amounts there are that do not have to be reported until I want to.
Gosh…You are investing in my backyard (as it is now). I have lived in the Mableton area all my life. Have just closed on a house and will be moving to Paulding County this week. After the dust settles, I would very much like to meet, if you would still like to.
Re: how are you making money when taking deed to full price homes? - Posted by SteveM(MA)
Posted by SteveM(MA) on April 20, 1999 at 17:32:26:
Sorry, I should have been clearer. One of the speakers at the convention (I think it was Ron LeGrand) suggested the mortgage balance wording in the contract when you have a seller who just wants to get out from under. It puts a few dollars more in your pocket and the seller has presumably already given up any hope of getting any money out of the deal - they just want out.