How to structure the offer options? - Posted by buyslake

Real Estate Investing
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Posted by joe Kaiser on April 26, 2007 at 23:09:42:

BTI,

Understand, and much thanks. Yours is an opinion I value.

The issue Brad addresses is likely the result of me planting that
fiduciary bug in his bonnet.

It’s a long story and one I don’t need to get into, but rest assured,
there are ignorant people in authority who suggest that the mere fact I
have a seller’s POA automatically precludes me from making a profit,
even though the POA is used exactly as the seller authorized and
intended.

And no, I kid you not.

Joe

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How to structure the offer options? - Posted by buyslake

Posted by buyslake on April 24, 2007 at 24:24:32:

Ok,

I found a for sale by owner sign. This house is only a block from one for my rentals. This is a decent house. I remember the people bought it just a year ago and I was interested in buying it at that time. She said they paid $35,000 for it and they put $5,000 into remodeling it. But it still needs carpets, some siding replaced (because they tore some of it off when they replaced some windows), a few more windows, and the kitchen needs to be remodeled.

The lady called said she wants 40,000 or BO. Now 40,000 already is a below market value. The tax assessment value is $75,000. She said she does not have any mortgage on the property.

This house is bigger then my other rental which I get $550 a month rent but $57 goes to city every mo. for water, sewer, garbage. So I know I could rent it if I am unable to sell it to cover my loan payments.

I’d like to flip the house. As a second option if I can’t flip it within a couple months I would advertise it as owner financing. If I propose a contract for deed, Can I sell it to someone else? Can I sell it owner financing?
As a last option I could rent it and come out with a positive cash flow.

I am a little confused between a contract for deed and a lease purchase. I lease purchase gives me the right to buy the house within a year and the contract for deed is I really own the house? The seller is only like a bank in regards to the house correct? What is the typical down payment expected for a contract for deed and interest rate? 8%? $3,000 down?

Any way, I am thinking of offering 2 or 3 options to the seller.

The reason for selling: The husband is a truck driver and wants to wife to be on the road with him now so they are selling the house. I asked the lady when she wanted it sold by and she said she was in no hurry. Unfortunate for me. Therefore, I am not sure if they will come down close to the $30,000 mark but it may still be a good deal at $35,000.

Offer #1) $30,000 cash. (I am getting ready to refinance another property which is where I plan to get the $30,000 cash)

Offer 2) Contract for deed ($32,500) $3,000 down, 8% interest for 15 years. monthy P&I ~$306

Offer 3) Lease with Option to Purchase (1 year term, with right to renew 3 times) $2,000 down, Purchase price $35,000)

Could you experts take a look at this and put forth any suggestions you may have. I know there is another investor in this area that will snatch this house up as soon as he finds out about it. Or he will tie it up in a lease purchase.

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Re: How to structure the offer options? - Posted by William Flood

Posted by William Flood on April 30, 2007 at 13:19:03:

Buyslake,

You have a wonderful setup there. Here’s another idea. $40,000 with nothing down, 6% interest with a 5 year balloon. That way, you get in with nothing down - at their price (win/win), at below market rates for most investors, which equates to lower payments. The owner gets 6% on their money, which is probably better than they’d get anywhere else, and it’s secured. Plus, there’s a possible tax deferment for them if they finance.

You have 5 years to get the value up, put a tenant in there to collect rent…and if you are really slick, put the tenant in there on a lease option to buy at your predetermined price.

Feel free to contact me if you want to dig into this idea.

William Flood
whflood@yahoo.com

4

Re: How to structure the offer options? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 25, 2007 at 01:51:26:

This is a Blue Pen Flip?

(1) Investor Up (get the seller to agree it’s okay for you to be an
investor who requires a quick profit and that you’re not interested
otherwise).

(2) Get it under contract at a price that’s fair, (one that allows you to
make a profit)

(3) Secure the contract with a performance mortgage to get a
stranglehold on your profits.

(4) Use an addendum to the purchase agreement that allows you to
market the property.

(5) List the property with an Agent in the MLS

(6) Assign the resulting offer to the seller and monetize the mortgage
(it will now have an actual dollar amount - the difference between what
you’re paying and what you were able to sell it for).

  1. Cancel your original agreement with the seller (it’s no longer needed
    and you’re out of the buy/sell loop completely)

(8) Get paid (you now hold a mortgage for the amount of your profits
that needs to be paid off when the sale closes).

Getting the property under contract is what puts that property in play.
You put a property in play, you now own the game. Let other investors
get in their and do their thing.

Focus on making deals and putting properties into play.

Let the other guys swing hammers. That’s all they know and that’s
okay. No, that’s actually perfect.

You stick to the sidelines, out of harm’s way, and make your profits
because of your skills as a deal maker and, of course, your brilliant use
of that shiny blue pen.

Joe

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Re: How to structure the offer options? - Posted by buyslake

Posted by buyslake on April 24, 2007 at 22:46:10:

Ok, How does this offer look?

I am wondering if I should skip the first paragraphs and just go right to the offers. In the first part I guess I am justifying my low offer.

Offer to Purchase
Tuesday, April 24, 2007
Property: 703 7th Ave.

Dear Ronald & Natalie,

I toured your property on ________________, As an investor I consider all aspects of the property. I am prepared to make an offer within this letter. My offer is based on several factors. In this time of uncertainty in the housing market I have to ensure my offer is based on sound judgement. I have talked with several realtors and appraisers. All have informed me that the housing market has really slowed down, i.e., there are a lot more sellers than buyers and houses are staying on the market for long periods with many not ever receiving an offer. Therefore the value of houses in the area has continuously been declined. I just had a newer large 3 bedroom house in Grand Rapids re-appraised last week. The appraisal came in at $110,000 and three years ago it was $125,000 (the property is in the same condition as it was 3 years ago). Therefore, I have taken the current market situation in to consideration in the determination of my offer. Based on the amount of time & repairs needed I am expecting to put another $25,000 into the property. When considering the following offers. I?d like you to know that my credit score is 750 and I have never defaulted on any loans. As an investor I cannot pay full price for a house in which I need to expend additional money to remodel. However, I can offer you a very fair price based on the current market situation, close quickly, and save you any future commission fees you would pay a realtor if you were unable to sell it.
I am submitting 3 offers below in order to best accommodate your desires.

  1. Offer: $30,000 with a closing within 30 days

  2. Contract for Deed. The title is transferred to buyer at time of signing. Sellers would hold the financing similar to a bank. Price: $32,000. $3000 down, 8% interest for 15 years @ payments of $305.81/mo. Buyer has a right to pay the entire remaining balance at any time without penalty. If the sellers held the financing throughout the 15 years, total payments would equal $55,000 + $3,000 down payment = $58,000.

  3. Lease with Purchase Option, Lease for 1 year. The property is leased for 1 year and it can not be sold to another party. The buyer has the right to purchase the property at any time during the year for a price of $34,000. At time of lease start date, $1,500 option consideration money is presented to the seller (100% is to be applied to purchase price if purchase option is exercised within 1 year). Payments $350/mo. 25% each month is to be applied toward purchase price. The remaining 80% is yours to keep as additional profit. Within year buyer is to obtain financing and purchase the house minus the down payment and monthly rent credits applied to purchase price. Under a lease purchase agreement the price is set at the time of signing and the seller can only sell the property to the leasee. Buyer has the right to renew the lease option 1 more year with second $1,500 option consideration. If the buyer fails to purchase the property at the end of one year the sellers keep the option consideration money and the 20% of the rent which was to be applied to the purchase price.

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Re: How to structure the offer options? - Posted by DavidGOR

Posted by DavidGOR on April 26, 2007 at 15:29:32:

Joe, How do you flesh out ‘monitizing the mortgage’ after it has been recorded? Or, I would assume that it is not recorded with an amount; so what document(s) do you use to justify to the title company the amount due to you when they request a payoff?

DavidGOR

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Re: How to structure the offer options? - Posted by redave

Posted by redave on April 25, 2007 at 11:13:38:

Joe,

“(5) List the property with an Agent in the MLS”

Listing agreements are between agent and owner, how do you do this in CA if you are not the owner?

Dave

8

Re: How to structure the offer options? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 26, 2007 at 17:29:35:

It’s done with an assignment agreement at the time a new buyer makes
an acceptable offer.

The agreement assigns the offer to the seller, cancels the original
purchase and sale agreement between the investor and seller, and
monetizes the assignment with the seller signing a promissory note for
the difference in price.

1, 2, er, 3.

Joe

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Re: How to structure the offer options? - Posted by BTI

Posted by BTI on April 25, 2007 at 12:46:07:

Dave

I take it you have a California real estate license. I can’t speak on the current MLS rules but up to a few years ago there were no prohibitions about putting my rights to buy a property for sale on the MLS even thought is was assumed there was and in the early years I often had to fight with the MLS, So I insisted they put the rule in writing and warned I was going to sue for damages on 3 issues if they did.

However confused MLS workers and agents suffering from brain freeze caused me to change Joe’s #4 somewhat. I finally added a limited power of attorney to that part, so it was really no different then many other cases, such as probate, etc, and it melted the brain freeze epidemic.

BTI

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Re: How to structure the offer options? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 25, 2007 at 12:38:58:

Dave,

You’ve negotiated the right to list the property into your purchase
agreement. Ask your agent what you need in order to list a property
you don’t own but have the right to market.

Joe

11

Re: How to structure the offer options? - Posted by redave

Posted by redave on April 25, 2007 at 15:25:53:

Limited power of attorney was my answer to the blue pen flipper that asked me this question originally, but he seemd to feel the POA would somehow bind him to a fudiciary duty, thus moving away from the whole blue pen flip philosophy of staying out of the line of fire should things go wrong.

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Re: How to structure the offer options? - Posted by Joe Kaiser

Posted by Joe Kaiser on April 25, 2007 at 14:05:36:

Only 3?

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Re: How to structure the offer options? - Posted by redave

Posted by redave on April 25, 2007 at 15:14:36:

One of your blue pen flip students asked me this exact question, I don’t know the answer, I thought maybe you did. As far as I know the listing agreement is between the agent and legal owner. I spend more time investing than listing (I?m licensed) so I asked another borker, she didn’t know either.

I know most of the creonline readers will just write me of as another stupid licensee, but I?m guessing most licensees are going to have same question, thus leaving blue pen flippers with with some nagging issues.

If you run across the answer please let me know.

Thanks, Dave

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Re: How to structure the offer options? - Posted by BTI

Posted by BTI on April 26, 2007 at 24:10:20:

Dave

I can see their thinking but there is no conflict. The seller wants to sell for the amount that they agreed to, and your duty is to get that deal completed so they can get that amount. The purpose of the POA is just a tool to complete the deal with the seller which is in line with the sellers goals, not adverse to them.

Don’t confuse agency duties with the power of attorney duties and the purpose of the POA. And how often do we investors get a POA for several types of transactions we do, to use in case the seller takes a hike or disappears down the road. Again, it only serves to complete the original purpose and intentions of the seller.

BTI

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MLS ? Are you kidding me - Posted by James

Posted by James on May 02, 2007 at 17:46:31:

I hate to bust your bubbles we have nice houses sitting on the MLS for a year or more in Texas. I don’t see a motivated seller having that much time to sell. Maybe I’m missing it but enlighten me.

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MLS ? Are you kidding me - Posted by James

Posted by James on May 02, 2007 at 17:46:22:

I hate to bust your bubbles we have nice houses sitting on the MLS for a year or more in Texas. I don’t see a motivated seller having that much time to sell. Maybe I’m missing it but enlighten me.

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Re: How to structure the offer options? - Posted by Brad Crouch

Posted by Brad Crouch on April 26, 2007 at 13:42:50:

BTI,

“Don’t confuse agency duties with the power of attorney duties and the
purpose of the POA. And how often do we investors get a POA for
several types of transactions we do, to use in case the seller takes a
hike or disappears down the road. Again, it only serves to complete the
original purpose and intentions of the seller.”

How confident are you about this statement?

Are you saying there in no “fiduciary duty” associated with a POA? Or
are you saying that the existance of “fiduciary duty” depends on the
“goals” that you have in mind at the time the POA is issued?

Or are you saying that “common usage” determines the way a POA is
judged?

“I can see their thinking but there is no conflict.”

Should I base my financial well being on this statement?

Just curious . . . not trying to be a smart @ss

Brad

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Re: How to structure the offer options? - Posted by redave

Posted by redave on April 26, 2007 at 11:08:09:

Sounds good to me.

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Re: How to structure the offer options? - Posted by BTI

Posted by BTI on April 26, 2007 at 21:50:16:

Brad

I don’t intend to start a course on this. But there are no fiduciary duties being violated when the POA is used in the situation stated in the manner stated.

Of course, one in entitled to use or not use my personal opinion, and if they don’t they are keeping a useful tool in the toolbox.

As of this coming August. I will have been an investor for 52 years and a broker for 42 years in one of the most litigious states in the union, California, and I have yet to have anyone ever successfully sue me.

I used my first power of attorney in 1957 and got an unexpected education but won in the end. A long story but it involved a elderly gentlemen and a greedy lawyer son in law who wanted his wife to inherit certain assets.

BTI