how do I create? - Posted by Oj

Posted by John Behle on May 17, 2000 at 12:58:52:

Most buyers shun “nothing down” type deals. Or “McDonald’s” transactions (you get cash back) on the purchase of a property.

Your LTV is fairly high too. If you are looking at 240 price on a 260 value, that note would be at 92%. I doubt you could find anyone who would touch it under those terms.

Now, it may be possible to create a first and a second, sell the first and have the seller of the property keep the second. The key will be finding someone who would consider that scenario and structuring the right LTV’s.

Getting your seller 240k cash and some for you also is not likely. But, for example, if they were willing to take 200k cash and hold back a note for 40k, then you could do this with the right note buyer and/or lender.

Then a scenario where you create a 220k note, broker it for 205k, give your seller 200 and you keep 5k might be possible. But again, you would need a lender or note buyer willing to go a little over 85% LTV with no qualms about “secondary” financing like the seller carry back, the fact that it is nothing down, and that they are loaning on appraisal not price.

HIGHLY unlikely, but may be possible with a local note buyer or lender. I’ve done deals like that, but they are a challenge to structure and disclosure is important. As long as everyone understands the details and structure and agrees, it is fine.

When you start to play any games with a lender or note buyer as far as hiding the real price or not telling them about the secondary financing, you can enter into the realm of loan fraud.

It can be easier sometimes on a refinance. Some lenders have been open to refinances with no or little seasoning of title. I.E. you buy the property under seller financing and refinance 3-6 months later. Many go higher LTV’s and terms on a refinance. At lower loan to value ratios, they are less concerned about secondary financing - or some will even do a combo loan of a 1st and second themselves.

In a refinance situation, you could get the seller to “Subordinate” a portion of what is due to them, because again 240k cash out of the deal would be un-likely.

The key is knowing lenders, note buyers and what they will do. It’s possible to do deals like that, but can be done improperly resulting in problems (someone claiming fraud, etc.) Fraud is not a problem if there is no form of deception.

But, there are two other issues.

PROFIT? I would vote the deal is too skinny. One, there are better deals - in any market. Two, the risks are too high. There has to be enough profit in a deal to easily re-sell a property or have the cash flow needed to keep it.

ETHICS? First, it’s not easy to get a seller to agree to one of the described scenarios - especially if they see you are walking away with cash. It’s not impossible, but more often than not their question comes down to “then why do we need you?” and they refinance themselves, discount the price for cash or find a better buyer. Only when the deal is too skinny, do they readily accept it.

And then, you have to look at both your and the seller’s position after the sale. If they are in a high LTV junior lien position, that is a risk. If you have a property that is financed to the hilt, that is a risk too - for you and them. Again, there needs to be more of a profit margin.

Sometimes getting into deals can be too easy.

It reminds me of the little dog I had as a kid. I followed him one day all down the fence barking fiercely at the huge dog on the other side. When he got down near the gate and saw it open - with a look of panic in his eyes he looked up at me like - “HURRY - CLOSE THE GATE!”.

The point? Over 20+ years I’ve seen dozens, maybe hundreds of people use creative financing to get into deals and not be able to deal with it once they have it. They crash or bail out and either they or the previous seller get hurt.

If an investor doesn’t have a very sure plan and procedure for the disposition or profitable ownership of the property, then it is called “The greater fool theory”. They just expect someone to come along and bail them out of their marginal or un-profitable deal.

When it doesn’t happen, and they can’t afford to keep the property - pain follows.

So, is the deal profitable enough? Probably not. One sure way to tell if a deal is profitable enough is how easy it is to structure. If the profit is there, there is money available and techniques that will make it fly. That doesn’t mean it may not be an advanced or complicated deal.

If we are struggling to find a way to put a deal together, the first pause and question ought to be “is it profitable enough?” And, if it is, then money or financing usually isn’t a problem.

how do I create? - Posted by Oj

Posted by Oj on May 17, 2000 at 11:33:57:

Hello everyone!

I have a seller who wants to cash out at closing…(want to pay off mortgage & get their equity).

House is worth 260K Their willing to accept 235K-245K. How would I create a note

  • to pay them off
  • plus make a profit as well

I have been a investor for a year, I WOULD GREATLY APPRECIATE all responses!!

Thank you,

Re: how do I create? - Posted by Jim

Posted by Jim on May 23, 2000 at 17:55:13:

Equity Buyouts? The only concerns I have is the balance on the note(s). If the total balance is 60% or more of the sales price, I have investors looking to create income streams and you should, too.
Next, I would find out, what is the sellers biggest concerns are. Getting his/her cash or debt releif or just getting the note out of there name(s).
If getting the note out of their name is the biggest concern then my offer would be MUCH lower.
BUT if getting their cash and the payments off their backs is it,… (and the numbers are in line) EQUITY BUYOUT!!! I’ll pay them ALL their Equity IN CASH, releave them from the payments (note taken ‘SUBJECT TO’) and close in two to three days!
I do these all the time. And if a seller has concerns about me NOT making the payments, I let them understand I’m NOT going to loose my $Equity$ (or cash I give them) for any reason. I wouldn’t be in business very long, would I?
SELL with owner financing @ 105% - 110% of retail ($270k-$280k-ish).

My thought was - Posted by Sean

Posted by Sean on May 18, 2000 at 08:46:08:

that you could offer to buy the house from them all cash for a reasonable price and then resell the house yourself using owner financing and selling the note.

Let’s say that you managed to sell the house to someone else for $260k, $26k down, 208k first and 26k second and you sold the first for 92% you would net $217,360 cash and a second for $26k. This would, unfortunately, require you to come up with $17,000+ out of pocket to make the deal happen and your profit would be a $26k note of dubious value.

Are you certain that $235k is their best figure and that they can offer no form of seller financing? I’m all for people getting cash but not everyone packs $235k cash in their pocket.