Posted by Gino on February 28, 1999 at 22:58:23:
Thats why this type of transaction might not be right for you. You really should know the note business pretty well before you do this type of deal.
Learning how to structure a note properly so all persons involved have their butt covered is very important. People that look at this type of deal and are scared of it for an unjust reason are robbing themselves. This is CREI. Do what feels right for you.
Gino
How i paid 125% of FMV and made $17,000 - Posted by GINO
Posted by GINO on February 28, 1999 at 18:00:36:
I told quite a few of you about this technique before in chat so i figured i’d give you the breakdown of how i used it this month.
my seller wanted 165k
house is worth 165k
i offer 136,900 cash
he: laughs
i: offer 206,250 and he pays title and Appraisal NOW!
he says: sweet
heres how i did it…
the guy has equity and is heavily into investing (stocks bonds etc)d open to understanding the time value of money. i sense this and play on it.
i sign a 90 day option on the house…found my buyer with 10% down and decent credit, sold him the house for 165k with 16,500 for his down.
i write the note for 30 years (148,500) with a 5 year prepay penalty…@11%
i sell the first 5 years of payments with a face value of $85k to my investor for $62,000
now my seller does’nt want to deal with collecting payments or anything and all he needs right now is 70k.
so at closing he gets 62k and 8k of the down payment ( i get the other 8.5k)
the investor collects payments for the next 60 months and then it turns back over to my seller…the buyer still owes 145,000
i then sell the well seasoned balance immmediately back to the investor for 143,00(actually he pays 145k) and sweep myself another 2k.
so i got my seller:
the 62k
the 143k
the 8k
=$213,000
then i deduct my FEE for structuring the transaction of 7k
he gets his 206k for his 165k home…and the satisfaction of knowing he mad out like a bandit on this creampuff of a home he would’nt part with for a penny less than its worth.
i made $17,000 structuring the deal and had the seller run the ads to find the buyer. im into this deal for $0. my Yield and return on my money in incalculable. i get $8,500 up front and $9,000 in 5 years.
this deal was sweet so i wanted to share it with you. the key think here was educationg the seller as to how he could let his money that he did’nt need right away sit in the home. by sitting down with a pad and pen and explaining this to sellers it works quite well as long as they have eq and a head on their shoulders. its not a ton of money for me but if consider the fact that its really simple and takes only about 10 hrs of your time maybe more but i have my seller show the property, its not a bad little payday. its also nice to cathc the tail end of a deal like that and get a 9k check for something you pretty much forgot about.
GINO
ps: nothing illegal about this deal in AZ, check with your state RE laws 
i POSTED MY REPLY to… - Posted by Gino
Posted by Gino on March 02, 1999 at 19:55:33:
…everyone on this board on my messageboard. I hope it clears it all up.
Gino
Not really. You actually SOLD it for 93% FMV and… - Posted by FJW
Posted by FJW on March 02, 1999 at 14:49:30:
made a nice healthy fee. I don’t know if it’s totally legal or ethical or whatever, and I don’t want to rain on your parade(and I’m sure I won’t…seems to be raining pretty good there), but I have to agree with the others about the refi situation.
The present value(PV) of the five year partial the seller will be selling is $65,043.36. That’s what your investor would be paid if it were to be paid off tomorrow. Subtract that from $148,500 and you get the balance: $83,456.64.
So, IN TODAYS VALUE, the seller gets:
$ 83,456.64 which is the remaining balance
$ 62,000.00 from the partial discount
$ 8,000.00 up front
$153,456.64 TOTAL PV
Even if you add your $8,500, it doesn’t come out to $165,000.
Like I said, I have to agree with the others, you better have a very hefty pre-pay penalty or this could blow up in you face if one of your sellers figures out what’s going on and decides to do something about it. For that matter, I don’t know if there’s some kind of usury limitations on pre-payment penalties even if you did manage to make it big enough.
It is very creative, but it’s a play on words on a partial discount of a note. I’m not sure, but I bet John Behle probably even knows a name for it. I hope it continues to work for you.
FJW
Re: How i paid 125% of FMV and made $17,000 - Posted by JPiper
Posted by JPiper on March 01, 1999 at 20:29:40:
Gino:
I certainly wouldn’t be one to quibble with $8K upfront, plus another $7K on the back end if everything works out as you hope. But here’s a few comments.
What you’ve really figured out here is a creative way to present what is actually just seller carried financing. You didn’t actually sell this guy’s house for $206K. You sold it for $165K with 10% down, the balance carried at 11% interest over 30 years. In 5 years the seller would receive approximately $237,500 if the loan were paid off at this time?.and assuming no further cut for you.
Instead though, the seller wanted some cash. So you sold the first 5 years payments. This gave the seller an additional $62K in cash, plus his portion of the $16,500 down payment?.or about $70K. Left this way, a payoff in 5 years by the buyer leaves the seller with around $214K.
But one further wrinkle?.now you sell the note thus giving the seller $143K you say, minus your additional fee, resulting in $206,000 to the seller. In essence, this seller is earning about what any seller would earn through owner financing, except that he has sold a portion of the note up front, and then sold the balance when it is seasoned (assuming the seasoning is satisfactory.)
All in all what this represents is a creative way of presenting owner financing.
The only problem I really see here is that on paper, you have a buyer who doesn’t appear to qualify for this sized loan based on income or even job, and the seller is financing him with a 90% LTV loan. No problem here really unless the buyer defaults because he can’t make the payment. This risk is born by the seller, and by the investor. Even 5 years from now, barring appreciation, if the investor does agree to purchase the note he’s still at 87% LTV?not exactly the safest scenario one could hope for.
Frankly, I wonder why you didn’t offer the seller $509,000 for his house?really make him salivate. This of course is the total payments for the loan over 30 years. Either way, you made a fee, the seller sold his house and got some cash, the buyer got a house. All that’s left is for the investor and the seller to collect.
Whew! You sure do go to a lot of lengths to make a buck?.but then again, don’t we all.
JPiper
Re: How i paid 125% of FMV and made $17,000 - Posted by phil fernandez
Posted by phil fernandez on March 01, 1999 at 17:53:21:
I don’t see a problem with Gino’s idea here. In fact I find it very creative.
Risky for the seller. I dunno. Certainly the sellers greed glands are working overtime. Hey keep in mind the seller is selling his property for $41,250 over market. Where there is reward often there is risk.
I’d be interested to see what Jim Piper says about this scenario.
What if . . . - Posted by JoeKaiser
Posted by JoeKaiser on March 01, 1999 at 11:53:24:
Okay, so what happens when the buyer refinances one year out, or does your note have a $65,000 prepayment penalty?
Joe
Re: How i paid 125% of FMV and made $17,000 - Posted by Irwin
Posted by Irwin on March 01, 1999 at 05:44:22:
If I understand what you’re doing, and I probably don’t, how do you get the seller to deed the home to your buyer without getting paid in full? He would have to deed it in order for you to create the note and mortgage to sell to your investor wouldn’t he? Since the seller is only getting $70k and carrying $136 for five yeears, ($206 - 70k downpayment),what security does the seller have for his $136k remaining debt? If the seller has a mortgage, who makes the payments for 5 years since all of your buyer’s payments go to your investor with $0 to the seller. In truth, isn’t all you have done is add interest to the seller’s money and called it an increased purchase price? What seller, other than a complete idiot, would go for that?
Re: How i paid 125% of FMV and made $17,000 - Posted by JohnB
Posted by JohnB on February 28, 1999 at 23:45:02:
Gino,
I went over that deal. I happen to like the way you structured it. I do have two questions, though. One, can you tell me how you were able to get your note buyer to purchase the remaining balance on the note, $145k, for the face value. I understand that it is five years old and well seasoned. But I just can understand the number. Could you explain? I must be missing something.
Also, in todays interest rate market, how did you find a buyer willing to sign a mortgage with a 5 year prepay penalty at 11%. He must have had past credit problems to be willing to take on that size payment at 11% when with todays rates you can get an ARM at 5% with the yearly and lifetime caps and not pay that much. Even people with not so good credit can get loans much cheaper than 11% unless they are poor credit risks. Can you elaborate on this point.
But again, I like the structure of your deal. Creative it is. I would like to learn more about these types of deals and the things you do to CYA.
Thanks and good investing.
John
Re: How i paid 125% of FMV and made $17,000 - Posted by JohnB
Posted by JohnB on February 28, 1999 at 23:45:02:
Gino,
I went over that deal. I happen to like the way you structured it. I do have two questions, though. One, can you tell me how you were able to get your note buyer to purchase the remaining balance on the note, $145k, for the face value. I understand that it is five years old and well seasoned. But I just can understand the number. Could you explain? I must be missing something.
Also, in todays interest rate market, how did you find a buyer willing to sign a mortgage with a 5 year prepay penalty at 11%. He must have had past credit problems to be willing to take on that size payment at 11% when with todays rates you can get an ARM at 5% with the yearly and lifetime caps and not pay that much. Even people with not so good credit can get loans much cheaper than 11% unless they are poor credit risks. Can you elaborate on this point.
But again, I like the structure of your deal. Creative it is. I would like to learn more about these types of deals and the things you do to CYA.
Thanks and good investing.
John
Hmmmm… - Posted by HankM
Posted by HankM on February 28, 1999 at 18:42:17:
This looks a lot like the discount bond scam except with seller financing taking the place of the bond … I can’t understand how someone who “understands the time value of money” would sign this deal?
As for legal, I can’t comment(but I’m concerned), but I question the ethics.
HankM
Hmmmm… - Posted by HankM
Posted by HankM on February 28, 1999 at 18:42:17:
This looks a lot like the discount bond scam except with seller financing taking the place of the bond … I can’t understand how someone who “understands the time value of money” would sign this deal?
As for legal, I can’t comment(but I’m concerned), but I question the ethics.
HankM
Re: Not really. You actually SOLD it for 93% FMV and… - Posted by Craig
Posted by Craig on March 03, 1999 at 10:44:30:
I agree. I hope you didn’t tell the home seller that he was actually getting $206,250 for his home. What he is really doing is lending a percentage of the real value with no payments for a period of time. During that time the principle compounds with interest and you end up owing him alot more. Just because you have this high prepay penalty does not make that any different. If you are explaining exactly whats going on to the seller then more power to you. But if your just telling him that you will pay 125% of value and that’s it, then that’s effed up.
Re: How i paid 125% of FMV and made $17,000 - Posted by Redline
Posted by Redline on March 02, 1999 at 13:01:34:
As a follow up to Jim’s comments and Joe Kaiser below … this is all fine and dandy EXCEPT if the borrower refinances! You say you have a 5 year prepayment penalty but is it > $60,000? Even if he refinances after the 5 years, you won’t be able to produce the same numbers.
RL
Re: How i paid 125% of FMV and made $17,000 - Posted by Gino
Posted by Gino on March 02, 1999 at 24:27:12:
Piper,
I think you understand it but it sure does sound alot harder when you say it.
This works great for a guy who needs some cash but not all. I can just sell 2 years or even 1 year if it fits the situation. All i did on this particular deal was give the seller exactly what he NEEDED. He was happy and so am I.
To me doing a Lease Option is more work to me than that.
Then, uh-uh. . - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on March 03, 1999 at 24:33:36:
I was waiting for someone to bring it up… I know that you know, but for those who don’t.
Well, here’s what Gino says in response to a question about a problem with buyer’s default and foreclosure, which has, essentially, the same effect on seller as a refinance by buyer.
>>Learning how to structure a note properly so all >>persons involved have their butt covered
>>is very important. People that look at this type of >>deal and are scared of it for an unjust
>>reason are robbing themselves. This is CREI. Do what >>feels right for you.
I assume that means Gino has seller sign a nice little disclosure explaining that if buyer refi’s, the first $65K (less present value of payments already received by a note buyer) will go to a note buyer and seller will collect remaining balance of about 83K (less principal paydown). That would bring seller’s total receipts of cash (with a part of buyer’s downpayment collected upfront) to about $153K. A far cry from $200K+ promissed, but not too bad considering the small discount from seller’s original 165K.
Now, the same principles will apply if buyer goes in default, but things, likely, won’t go as nicely for seller as in the case of refinance. In the refi case the cash comes from the new loan proceeds, nice and easy. In the foreclosure case the seller will have to front the $65K cash to a note buyer to take over the 1st lien position and foreclose himself. I wonder if the seller may have to sell off some of his stock/bonds. Of course, in addition to that there will be costs of foreclosure, lost interest, possibly rehab, and a whole new resale process. I wonder if seller would sell it again on the same terms.
I found this “creative raising of cash” method of seller financing to be very easy to sell to sellers. That is, … until you actually make a full disclosure of “what if” scenarios.
hey, at least it sparks some convo… - Posted by Gino
Posted by Gino on March 01, 1999 at 18:09:51:
Glad my posts always get everybody thinking. I hope everyone understands that what i do works for me and is completely legal where I live. You really should check with a RE attorney in your area and give him the scenario before attempting it if you do.
I have had 14 positve responses to this technique by very well respected people on this board. I would appreciate it if you all could just post it publicly.
Since the people who only have negative to say make a point to post publicly.
I think its only fair.
Thanks,
Gino
Re: How i paid 125% of FMV and made $17,000 - Posted by Redline
Posted by Redline on March 01, 1999 at 12:38:09:
Irwin - I see where you’re coming from and agree. But I can see why a seller MAY take a risk to get this (added interest as you say) … which is really an increase in purchase price but it does seem like a big risk. Very big.
And like Gino says … in a mortgage state this is not that cut and dry. I think there would need to be a judicial forclosure in case of a default here. Costly and time consuming.
I’m still thinking about this whole thing … I’m not sure WHAT I think!
RL
Paralysis of Analysis… - Posted by Gino
Posted by Gino on March 01, 1999 at 11:38:19:
I dont know what your talking about but this deal is quite simple.
The seller is carrying the entire thing. All he’s doing is selling the first five years of his payments so he can get upfront cash and not have to deal with collecting payments. In five years he will start collecting payments again but will immediately sell the note back to the same investor for full face value or at least 98%.
It is sold on a Real Estate Contract most likely where you are. In a mortgage state this type of deal is a pain to get back but in a Deed state it really is’nt much of a problem. The seller has the home as collateral, he merely gets it back should the buyer default.