I need your help on two issues concerning this deal. - Posted by Thurman

Posted by SCook85 on June 06, 1999 at 18:50:18:

First Lien $36,000
Second Lien 30,000

Total Liens 66,000

Sell with L/O for $69,000 with $4000 down, they now owe you $65,000 less rent credits. You are upside down because you owe more for the house then what they owe you.
You will at this time have $4000 option consideration and what is left after all costs of the $6000 that you are supposed to get.

This is a creative no money down deal that I see as being only a rental. You won’t have a back end spread with the numbers you are talking, and your front end will be minimal.

I would ask the hard money lender if they would make your loan assumable, or since it is an equity loan I would see if anyone could get it. Then I would look to assign the contract to someone else and make an assignment fee plus maybe a small 3rd mortgage. I think this would work out best for you.
You want to limit your risk and the way that you are proposing you are taking all the risk you could possibly take with the exception of putting your own cash up.

I think you should be able to put a deal together you just may have to do it differently.


I need your help on two issues concerning this deal. - Posted by Thurman

Posted by Thurman on June 06, 1999 at 11:46:06:

Hi everybody!

Tomorrow I will be signing a purchase agreement with a seller of a 3 bedroom, 1 and 1/2 bath ranch style house on 1.2 acres in the country. Here are the details:

Selling price: $60,000

Down payment: $30,000 (major portion of loan from a hard money lender)

Seller’s second mortgage: $30,000 (20 year amortization loan with 10 year balloon payment at 7.5% interest)

Fair Market value: about $70,000 (seller paid $68,500 in 1995)

My plan: Lease/option house for $69,000 for 1-2 years with $3,000-$4,000 option consideration.

I need you help on 2 issues:

  1. I will be applying for a 60% LTV loan ($36,000) from a hard money lender of which $30,000 goes to the seller and $6,000 goes to me. The seller was told that $6,000 was to be held back for possible cosmetic work to be done both inside and outside of the house. This statement of the $6,000 going to me was made verbally and is not stated in the purchase agreement.

Question: For my protection against future misunderstanding from the seller, should I insert a paragraph in the purchase agreement stating my intention or attach a Disclosure Sheet explaining my intention? Or am I being overly concern about this matter and should forget about inserting this paragraph?

  1. Although my plan is lease/option the house to a tenant/buyer, this may not be the best way to sell the house. My goal is to sell the house quickly at maximum profit with least amount of risk.

Question: Does anybody have a better plan of making the most profit out of this deal?

Thank you all for your consideration and time.


Re: I need your help on two issues concerning this deal. - Posted by Thurman

Posted by Thurman on June 06, 1999 at 23:00:36:

Hi everybody!

Sometimes when a real estate investor, who hasn’t purchase a property in weeks and gets desperate to do a deal, will make a number of mistakes as I was about to do tomorrow morning with the signing of the purchase agreement for the 3 bedroom house deal that I wrote about in my post above.

My goal is create deals that would give me much needed cash flow with the least amount of risk. However, the way that I structure the deal was, while it answered the seller’s problems ($20,000 mortgage debt relief and about $10,000 moving money), creating problems or mistakes for me (very little cash flow and a lot of risk).

Mistake #1: I was about to create a big debt that I would be responsible for until I found a buyer for the house.

Mistake #2: Even though I would have a little equity ($3,000), it is not enought to take care of any contingencies(1 to 3 months of house payments plus time and cost in finding a qualified buyer)

Interesting, I felt, at the time I was structuring the deal, that I was making a mistake but I, also, felt that I needed this deal. However, my fellow real estate investors, after reading the responses to my post, jarred me back to reality. Thanks Stacy, Joe, Richard and especially Steve for your inputs.


Re: I need your help on two issues concerning this deal. - Posted by Richard Roop

Posted by Richard Roop on June 06, 1999 at 14:55:46:

Your purchase agreement should say that your are getting a $36,000 first, the seller is getting $30,000 cash and a $30,000 second. If it says that then no need to explain the extra funds unless it comes up.

When I buy like this I verbally tell the seller that the extra money is for “any repairs and my other costs”.

You don’t want to tell the seller that you’ll use the money to better the condition of his collateral unless you really plan to do so.

Chances are he will be happy just to have his $30,000 cash.

  • Richard M. Roop
  • Woodland Park, Colorado

Two things . . . - Posted by Joe Kaiser

Posted by Joe Kaiser on June 06, 1999 at 13:24:12:

Hard money loans and lease options don’t often mix. The very nature of a hard money loan (high interest, high payments) means it’s usually more suitable to buy/sell deals where the funds are used to get in and out.

Hard money loans, additionally, often have high up front costs (ten percent or more) so your $6k may end up being closer to $2k when all is said and done.


Re: I need your help on two issues concerning this deal. - Posted by Stacy (AZ)

Posted by Stacy (AZ) on June 06, 1999 at 13:20:25:

Just a few quick thoughts-

If you L/O, make sure you sell for more than the FMV. When you add easy financing to a deal it makes it worth more. Consider $75K to $79K.

I would document the $6K…it will do no harm, and it keeps everything above board.

I don’t see anything wrong with the L/O strategy, as long as the numbers make sense. Make sure you can get enough monthly rent to either cover your monthly payments, or give you a spread. Check the market rents in the area.

To get out quickly, you could consider selling with owner financing, and selling your note, but this would probably defeat your goal of maximum profit. Personally, I like the L/O better, and if you screen your buyers well, you could find one that could refinance soon, and get you your back-end profit quicker.

I’ll be interested to read what others have to say.