My first L/O deal- update (and it ain't good) - Posted by rayrick

Posted by Brad Crouch on January 26, 1999 at 21:57:30:

Johnboy,

I was looking at this as a tenant buyer. I keep hearing about the $600 per month rent credit, but looking at the total monthly outlay, we’re talking about $2,100 per month. As you said, mostly interest.

If the guy lives there for the full three years, only $600 per month is reducing the ultimate selling price. He’s still paying $2,100 per month!

If he exercised early, and as his primary residence, wouldn’t he be able to deduct all that interest and actually come out ahead?

I know that as a RE investor, we’re not supposed to take tax benefits into account, but shouldn’t they be considered when calculating the position of the folks who are an integeral part of out exit strategy?

I guess this deal doesn’t matter anymore since I read above that the deal had been lost. But this might be a chance for me to learn something, so it’s still a good exercise.

And if Rick came to me with this deal to assign to me, I can’t see where I would want it. What am I missing? Why would anybody be hot to accept this assignment?

Brad

My first L/O deal- update (and it ain’t good) - Posted by rayrick

Posted by rayrick on January 25, 1999 at 10:00:35:

I’m learning karp. I really am. Thanks for sparing me (and the other unfortunate chat room visitors) more wheel spinning last night. So the guy told me he paid 240K four months ago. He actually only paid 221K. This I learned from my first ever visit to the recorder’s office this morning. (found the same info on line within 2 minutes of getting to my office, but hey, it was a learning experience)
By the way, are recorder’s office folks crabby by nature? What is up with those people? Let’s just say that “serving the public” probably isn’t the first item on their office mission statement. Apparently smiling doesn’t appear ANYWHERE on the statement. But I digress…

So the guy only put 5% down, so his equity is almost nil (though that still amounts to 11.5K on this house).

Now, here’s the question- is there any point in trying to do business with this guy? He’s clearly willing to lie to me, and this did not exactly make a good first impression.
Should I just offer him some sort of low-ball offer that he can take or leave, or not even bother? He’s obviously got a problem on his hands. Beautiful house with almost no equity and a payment that’s about $500 over fair market rent.
Should I try and do one of these land trust mortgage switcheroos subject to me finding a suitable buyer? Problem is, I don’t really no how to do that and don’t have the necessary forms. What do people think?

I know I should expect this sort of crap, but I’m offended, I really am. Guess it’s time to add another layer to the ol’ skin.

Ray Richardson
aka rayrick

Re: My first L/O deal- update (and it ain’t good) - Posted by phil fernandez

Posted by phil fernandez on January 25, 1999 at 12:55:50:

ray,

Thought you said yesterday that the sellers a nice guy.

I would ask the seller again what he paid for the property and after he responds tell him what you found out he actually paid for it.

Like you mentioned sounds like he’s in a tough position. He has to do something about his problem, you don’t. You’re in the drivers seat as far as I can see.

Re: My first L/O deal - Posted by JPiper

Posted by JPiper on January 25, 1999 at 12:21:18:

Having read your comments and those below here?s a few comments:

  1. Who cares whether he told the truth?? Expecting a seller to tell the truth is rather virginal isn?t it?? Whether the seller told the truth has nothing to do with whether this is a deal.

  2. Make independent investigations and verifications. Check the comps in the area, both as to market value and rental value. WHAT THE SELLER PAID FOR THIS PROPERTY IS IRRELEVANT. ONLY WHAT THE HOUSE IS WORTH IS RELEVANT. Verify the loan balance, monthly payment, origination date, etc. Verify the condition of title.

  3. Acknowledge reality. Reality is that YOU can?t afford to sandwich yourself on this deal. You can?t make $2100 payments if someone doesn?t pay you. So the idea of sandwiching yourself, wrapping loans, deeding into trusts, etc DOES NOT WORK for you. The risk to you is too high, for way too small a reward.

  4. DO NOT negotiate a deal that you will stay in, that entails paying him less than his mortgage payment, WITHOUT having some means of securing his payment of that difference. You?re new and I suspect you don?t have the experience for that type of deal anyway. Chances are if that is the ONLY way that this deal can be done, you shouldn?t do it.

  5. The ONLY way I would do this deal if I were you would be to negotiate a deal that pays the full payment over the course of let?s say 3 years?.with a monthly credit for the amount that the payment exceeds the fair market rent. Add the loan balance, the total credit, and an assignment fee. This gives you the purchase price that the potential new buyer will be agreeing to. How does this price compare to the fair market value of the house?? If this value is within 5%+/- of current market value, you have the potential of a deal that you could assign to a new tenant/buyer.

  6. If you do a deal you need to verify ALL information, to include loan information, title information, and market value information.

  7. If you do deal, you need to put in place protections for the buyer, to include performance mortgage and a third party collection account to receive payments and pay the loan.

  8. Make certain you have signed releases from the seller and the buyer.

  9. Acknowledge that you may be a weenie?..and that karp may be a weenie as well.

JPiper

Re: My first L/O deal- update (and it ain’t good) - Posted by karp

Posted by karp on January 25, 1999 at 11:06:43:

Rayrick,

The truth will set you free, but not until it has pished you off first…

I would still proceed…don’t be too neg’d out. Figure this: NOW he has laid his cards on the table. NOW you have seen him slip the ace from his boot. So hey, it is good practice…why not learn and milk this thing as much as you can for its sheer educational value?

Mind you, not at the expense of doing OTHER real deals…

I would offer a newbie promotion if I knew how…nice job so far, Rayrick…

karp

Rule # 1 - Posted by PBoone

Posted by PBoone on January 25, 1999 at 10:34:21:

You have done a great job in the due dilligence, you found out the actuals vs the perceived thus the purpose of "subject to’s"
We turn down alot of houses after offer has been accepted because of what we find.
Anyhow RULE # 1 - The seller is probably exagerating the facts. This rule also applies to realtors
Pat

Re: My first L/O deal- update (and it ain’t good) - Posted by rayrick

Posted by rayrick on January 25, 1999 at 13:23:48:

I had the same idea, Phil. Karp says no go. Calling the seller a liar, however gently, does NOT create a good climate for future negotiations. And the seller IS a nice guy. That’s why I was surprised about the selling price. We really hit it off. I talked bugs and houses with the guy for an hour and a half easy (he’s an exterminator) Heck, I even got his card and said I might need him for wood destroying insect inspections in the future!

So my approach is going to be, “based on my research, it looks like you might have overpaid for this property. I think fair market value is closer to the low 220’s…” We’ll see how that goes.

And as I said to Karp, I think I AM in the driver’s seat. It’s knowing where to drive that’s the tricky part!

-rayrick

9 IS most Important?!?! - Posted by Scott(AK)

Posted by Scott(AK) on January 25, 1999 at 15:36:32:

JPiper,

Great words of wisdom. But I think you should add number 9 to your four rules…Make it 5 now, LOL

See you online,

Scott(AK)

alright folks… - Posted by rayrick

Posted by rayrick on January 25, 1999 at 13:16:57:

First, let me thank everyone for their help. Sometimes I can’t believe my luck at having this incredible resource at my disposal.

Second, in response to Jim’s “virginal” comment- of course it’s virginal! This is my first deal! The perfect time for virginal attitudes. Glad I got them out of the way without getting in the kind of trouble that some naive virgins do (if you catch my drift)

Now, how does this sound. I think 221K is pretty close to FMV. There’s another house in the development for sale on a less desirable lot for 229K and the previous sale price on the house in question in 1996 was 211K and the area has appreciated since then. I’ll try to get on my broker buddy’s computer tonight to do comps.

The seller’s loan is 209,500, 30 year amortization. So in a year the principal will be about 207500, and in three years it will be about 203K. Fair market rent based on the opinion of two brokers and a builder is $1500. I will offer the seller 2 choices:
Choice 1: 3 year lease, exercise price 215K, 600/mo credit for the first year only.

Choice 2: 3 year lease, exercise price 224500, 600/mo credit for all three years.

In each case, the amount of cash the seller will receive upon exercise is almost exactly his mortgage principal.

In both cases the deal is subject to me finding a suitable tenant buyer. And I make it clear that I may EITHER sandwich the deal or simply assign it.

I offer the house for sale, rent-to-own, for 232K, 2100/mo. This is exactly 5% above the 221K FMV.

I assign my interest for 7500K, which puts the buyer right at the 224500 price (which I expect to be the one the seller chooses)

I take care of all the deed in escrow, performance mortgage, third party mortgage payor stuff.

Sound like a plan?

-rayrick

Re: Rule # 1 - Posted by Sandy FL

Posted by Sandy FL on January 25, 1999 at 10:57:11:

Hi Pat! Thanks for that great referral by the way.

I thought rule #1 was to make your money going in…
(where have I heard that before??)

Anyway, yes Rayrick, welcome to the real world.
Gov’t clerks can be dour and unhelpful on Monday
mornings. Sellers can misrepresent (was 221k the
price of the house, or the size of his mortgage?
And is 2100/mo his P&I, or his PITI??)
And yes realtors, sellers… even investors and buyers
and renters can stretch the truth. Go figure, LOL!!

Your posting gave me a chuckle, thanks.

See ya in the chat room Rayrick, I have a feeling karp
is not done with you yet :slight_smile:

Sandy FL

P.S. I like that line Ray, can I use it?? I could have
used it last Friday … to the lady with the 3 kids
crying in the background … “You want to lease my
house, with no deposit, you have no credit & no
references, are getting a divorce, and have no job, and
you’re mad I won’t just throw you the keys?? I am
offended, I really really am.”

Re: alright folks… - Posted by Brad Crouch

Posted by Brad Crouch on January 25, 1999 at 14:58:54:

Rick,

> Choice 1: 3 year lease, exercise price 215K, 600/mo
> credit for the first year only.

> Choice 2: 3 year lease, exercise price 224500, 600/mo
> credit for all three years.

Just a thought . . . what if your tenant/buyer exercises his option after only one year? And your seller has already accepted “choice #2”?

Brad

worried… - Posted by rayrick

Posted by rayrick on January 25, 1999 at 11:10:52:

karp already thinks I’m a weenie. That much is established. (The possibility exists, of course, that the reason he thinks I’m a weenie is because I AM a weenie). I hate to think what he’s going to say to me now that I have proof that it’s a cold hard world out there and my pollyanna “let’s just all tell the truth and think win/win!” approach ain’t gonna fly (at least not always). It could get ugly… LOL

-rayrick

Re: alright folks… - Posted by JohnBoy

Posted by JohnBoy on January 26, 1999 at 10:53:24:

Hi Brad,

If the seller takes choice 2, the tenant/buyer that Ray assigns the deal to will have the same terms as Ray had, the only difference being the assignment fee which would be above the $224,500. If the tenant/buyer chooses to exercise the option after one year they will have a balance of $217,300.

Original option price of $224,500. After 12 months the tenant/buyer would have $7200 in rent credits (12 x $600 = $7200). $224,500 - $7200 = $217,300.

Although the tenant/buyer would have the right to exercise the option after only one year, why would they want to do this when they’re getting $600 a month in rent credits that would be buying down the principal?? If they got a new loan they would have a LOT less going into the principal with most of the mortgage payment going towards interest.

The smartest thing the tenant/buyer could do is keep renting for the full 3 years and take full advantage of the $600 a month in rent credits. Otherwise they loose $14,400 in principal over the last 2 years of the lease.

If there’s another point your trying to make here, I’m missing it. Can you expand on what point your trying to make on this if this hasn’t answered your question?

JohnBoy

Re: worried… - Posted by Sandy FL

Posted by Sandy FL on January 25, 1999 at 11:27:07:

Naww, He doesn’t think you’re a weenie. He would tell
you to your face if he thought you were a weenie.
(case in point - Laure. You were there - enuf said)
Karp is one of those people who can help thicken your
coat for dealing with real live weenies in your investing
community, its a tough love kinda thing. I would say more,
but I don’t want to give the impression that I
understand him. Haha!

Scott and Karp are shootin ya straight. Keep going with
this one, you are getting value out of the experience
(educational) and when the seller wakes up in about six months …
$12,600 down the road for him … you may just get
another kind of value out of it. (the kind that folds)

Good Luck!

karp… - Posted by MichaelR (NoVA)

Posted by MichaelR (NoVA) on January 25, 1999 at 11:25:27:

Thinks everybody is a weenie until they prove otherwise. And even then, he still normally thinks that. Seriously though, take what he says to heart, and he’s very helpful and dare I say friendly. Just don’t tell him I said that, he doesn’t want his rep ruined.

Michael

That’s OK - Posted by Redline

Posted by Redline on January 25, 1999 at 11:24:46:

Don’t worry about it … Karp thinks I’m a weenie too. Karp thinks MOST people are weenies! :wink:

Good luck and keep fighting. Karp is probably just trying some ‘tough love’ on you.

RL