Jeff - Truly curious - Posted by Russ Whitney
Posted by Russ Whitney on March 12, 2001 at 20:32:36:
Here’s a couple of tips for pulling some cash out at closing or shortly thereafter.
Here’s a real life example that my 23 year old daughter recently used, And yes, without Dad’s money or co-signature,but Dad’s advice.
Take a 5 unit building in run down, beat up shape. Property is in need of paint, clean up, tons of yard work and debris removal, some kitchen counters, sinks, minor interior partitioning, some doors, rip off some door overhang porch rooves, carpet, some vinyl tile in baths, etc.
Probably about $20,000.00 worth of rehab, cost. The owner will have to hold the financing, unless the buyer can demonstrate some experience with this type of rehab.
The seller wants $95,000.00. My daughter negotiates an $85,000.00 purchase price with $5,000.00 down. However, even offering the 5k down,after the pro-ration of rents and security deposits my daughter will come up with little or nothing down. The seller accepts the offer.
The seller lives in Pennsylvania, the property is in Florida. That makes it difficult to manage. The property is in a moderate income neighborhood. Not a horrible neighborhood, but one that would be more management intense than the guard gated sort… Thus, the seller is motivated,as the property is showing more and more cosmetic deterioration…
The offer is made with a financing contingency and subject to a more scrutinous interior inspection…
Now, while the property is tied up and off the market, my daughter gets a realtor to give her comparables of other properties like this one in that area that have sold. The comps are of properties that are in good shape, though.
Comps come in at $135,000.00 to $150,000.00. Remember though, that is only if they are in good shape,this one is not. (that is part of making this technique work). Now we have documentation on the comps.
Now we get contractors estimates for the repairs that need to be done. Contractors come back with about $30,000 in repairs. Remember now, I said, we felt that my daughter could hire the work out for about $20,000.00.
Now we have comps documented from a credible realtor and some estimates for repairs from a contractor (actually several contractors) for 30k. And we have an offer accepted by the seller (with some contingencies,so we can back out if needed,but he can’t if we want to proceed).
Now we go to a bank and show the bank the deal with the 5k down (even though we will get most back at the closing via the pro-rations,the bank still sees equity going in the deal. Obviously, we don’t point out the pro-rations,not necessary)
We show the banker the comps at the 135 -150. Show him we have a contract accepted by the seller, locking the property down.
Now we show the banker the contractors estimates for the repairs of 30k. We let him know that in order to do this deal we will need either a 2nd mortgage, or a home improvement loan for the 30k, to do the improvements. We prepare a rent roll, expense and debt statement, showing the banker that even with the additional 30k, the property will still cash flow out, handsomely…
If my daughter buys for 85k and borrows 30k in a second mortgage, closing immediatley after the first,the property will still only have 125.000 in financing on a property, that fixed up will be worth about 150k. Still a good, safe deal for the bank…
My daughter, did in fact, buy this property, secure the 2nd for 30k. The trick to the deal though,is that she was able to get all of the work done for only $20,000.00.
End result is,she buys the property, gets her 5k back out of the closing proceeds, puts a second in place and walks out of the deal with a 5 unit builing , no cash in it and puts $10,000.00 in her pocket with weeks after the closing!!!
That is one of about a jillion techniques I could share with you on how to consistently pull cash out at closings, every day in every city and town in America. There are not 8 techniques, there are 800! Old Donald there must have been talking to a rookie consultant…
This is a good topic. Perhaps tomorrow, I’ll write about how to get the seller to hold a second mtg, and allow you to put a first on a property and pull cash out. Perhaps, I’ll discuss the old repair and redecorating allowance techinque that is always good for 5 to 10 thousand in cash out at the closing,
Hope this, being a real life example and explained as such, is helpful and easier to understand,since you say you are a beginner.