Posted by JohnWe (NoCA) on January 21, 2000 at 10:53:25:
Actually, the contractor makes an honest estimate, but you have a skilled handyman that will do the work for half the cost.
I need suggestions - Posted by Rachel
Posted by Rachel on January 21, 2000 at 07:09:34:
Hi!
I am looking at a house and I’m trying to structure a deal.
He’s asking 185,000. The house is worth 200,000 after repairs. It needs 40,000 repairs. It is currently rented for $1950.There’s an assumable mortgage for 110,000. The owner is willing to carry some paper but wants some cash about 25%. I would like to structure a deal and then flip it. Any suggestions?
Thanx!
Think they’re 203(k) rehab loans nt - Posted by Michael
Posted by Michael on January 21, 2000 at 12:23:49:
mb
Re: Well, OK, here’s one - Posted by Bill Gatten
Posted by Bill Gatten on January 21, 2000 at 11:58:09:
Pretty simplistic, but…
Why not sell him on the concept carrying (via a PACTrust, of course). Then show him that he could pull out his cash (maybe $20,000 to $25,000) by refi’ing first (depending on the pre-rehab appraisal and the LTV he could get, of course). Or…he might even get an “escrowed loan (there’s a better term for this, which escapees me at the moment),” which would even advance the moneys incrementally for the [your] rehab in order to bring to the property full appraisal prior to final release of funds.
In other words, he refi’s first. Then he puts the property into the PACTrust™ (after receiving his money). He then assigns to you your beneficiary interest in the trust (i.e., naming you as, say, a 50% beneficiary interest holder, with an agreement to forfeit his 50% at termination. This allows you to end up with 100% of the profit upon disposition or refinancing). Your agreement is that at the termination of the trust and related triple-net lease in a few years, you will either sell, or refi in your own name. At that time you will repay him any equity he may have had at at start (equity that he wasn’t able to pull out with his refi).
In the meantime, the seller hasn’t had to transfer title to you. He hasn’t had to unduly compromise the due-on-sale clause in the underlying loan. He hasn’t had to worry about your personal or legal problems ever affecting the property’s title (while he’s still on the loan): or you, his. He has the best recourse and safety in the event of [your] default. He can continue taking the passive tax loss (depreciation) along the way. And, all the while, you have virtually 100% (and then some) of ALL the benefits of fee-simple real estate ownership: even though the seller’s trustee holds (quite effectively shielding) the property?s title. In this scenario, you might even take a Power of Attorney from the seller to “vote” all of his 50% “Power of Direction (over the trustee)” throughout the course of the agreement.
When you approach him on the issue, you start this way: “I think I might have come up with a solution for you that can truly benefit us both. In so much as we were planning on my taking the existing loan over anyway: why not just make that loan bigger before we start?at my expense of course. This way, you can get the cash you want, with a lot more security; and even though my payments will be a more, it’ll allow me to take the property off your hands…”
Bill Gatten
Earth to Seller…Come in Seller - Posted by JohnWe (NoCA)
Posted by JohnWe (NoCA) on January 21, 2000 at 11:13:39:
You have to manage this seller’s expectations, and find his motivation. If there’s no motiviation, move on. If he is motivated, then you have to temper his expectations.
Get some sales comps of the area (www.octitle.com) to show him what the FMV of his house is, then take Ron’s advice, and get a contractor to walk through and give you a written estimate. Then explain to him that you’re an investor, and you don’t work for a charity (in a nice way of course).
If your numbers are on target, then here’s what you have:
FMV: 200K
Repairs: 40K
Closing: 5K
RE Agent: 10K
Investor’s (You) Gravy: 10K
Murphy: 5K
Max Purchase Price: 130K
That’s 130K with good terms! So here’s what you would have in mind for how the offer would settle.
Assume his 110K mortgage, give him $5k, seller carrys back $15K
Of course you can’t start here or else you don’t have any room to negotiate. So I think I would start the negotiations with simply assuming his mortgage.
Good Luck.
Re: I need suggestions - Posted by Chenel Moore
Posted by Chenel Moore on January 21, 2000 at 10:34:42:
All sellers want 20% or more down. Don’t let that discourage you, it means absolutely nothing when it is time to negotiate. As best as I can see it, do you know what the properties are selling for in that neighborhood?
All of this depends on some factors, you can’t pay his complete asking price upfront. There’s no profit involved if you do. Try to sell him on the paper he will be holding, the tax benefits, the interest rate, yada yada yada. At any rate, what type of repairs are we talking, minor cosmetics or major structural issues?
Conduct a complete fair market analysis of the properties in the neighborhood and then deduct repairs to find a realistic offer. Then you can figure out how much cash you can afford to give him maybe in the form of a 2nd mortgage after you know how much equity you are really working with. It sounds like you are saying that the house is only worth $160,000 currently.
Start from there.
Re: I need suggestions - Posted by Ron Thompson
Posted by Ron Thompson on January 21, 2000 at 09:55:38:
Let me start by saying “I’m no expert”
Sounds like the owner has an unrealistic expectation of the value. I’d make an offer subject to the owner doing the repairs before closing. This offer will most likely be rejected, but will make the owner aware of the cost of repairs. I read an article on this web site about “the contractor factor” or something like that. It talked about taking your pet contractor along on inspection who will write a repair estimate on the spot. Of course your deal with the contractor is for much less than his estimate. I seem to recal the article said half.
Good luck and keep us posted.