Re: Looking for Ideas on Contract for Deed deal - Posted by Brad
Posted by Brad on April 24, 2007 at 03:31:24:
Actually, the interest rate should not be that bad, especially since I am going to do a short term interest only loan. I just bought a similar house in the same area, with a rate of 6.25% as an investment property. Since this is a short term deal, I want to pay as little interest as possible.
It will cashflow, approximately $150-$200 per month.
$174K purchase price
$815.63 =$156,600 loan (90%) @ 6.25% 5yr interest only
$120 = estimated PMI
$410 = estimated taxes
$125 = insurance
$1,470 / month piti + PMI, no management fee
Buyer will pay me $1,650/month
$1,650 - $1,470 = $180/month
These are pretty close actual #'s from another similar house I just recently closed in a similar area, except that one was about $8k more, so these estimates are probably a little high, but not much. And actually, since this is a new house, the property taxes are stil based on raw land and won’t get reassessed til next year, I believe, so the taxes should be considerably lower, possibly by $250 to $275/month, which adds to the cashflow. This is how it was on another new house I have in that area, which is a similar deal. Also, she will start paying me when she moves in, and my payment won’t be due til the following month, so I get the 1st months payment as all cashflow.
I spoke with the potential Buyer yesterday and came to an agreement. Here is the deal in a nutshell.
She is putting up the 10% down payment + closing costs, so there should be nothing or very minimal out of my pocket. Now there are about $30K incentives on this house, it is a new house and the builder is offering this incentive for the past weekend, so I decided to split that with her, in the sense that when she finances me out of the loan, I will get $15K on top of the loan amount. In other words, she plans on attempting to buy the house within the next 12 months and when she does, my backend profit is $15K. After 12 months, another $2,500 is added and after 18 months, another $2,500, etc. So, if it takes her 13 months to get financing, then my profit is $17,500.
So, she pays all the costs to acquire the house, I qualify for the loan, and sell the house to her on a contract for deed as an aitd (wrap), or I may do a PAC-trust (I need to review those materials and call those guys up), there is no upfront profit or costs to me, some moderate cashflow, and a good backend profit within a reasonable amount of time. My only risk is my signature on the loan, although she will be motivated to fulfill her obligations, since she will have 10% + closing costs invested up front. If anything goes South, I pay the costs to get her out of the house, and should still have equity, assuming this new house isn’t ripped to shreds. All in all the risks seem minimal compared to the profit with no money involved. Profit percentage is infinite, if all goes well.
So, the profit potential could actually be
- $250/mth (lower property taxes for the 1st year)
$430/month x 12 months = $5,160
$1,650 one time (Buyer’s 1st pmt to me, before MY loan pmt is due)
- $15,000 (assuming she gets financing in the 12th month)
= total of $21,810 (this is very realistic, based on my experience in similar deals). She really wants to buy now, but can’t qualify since she is just moving into the area and needs to establish a steady income stream in her new area. But, she has enough to keep her afloat for a while, from the sale of a previous house she had.