My Second Success Story(LONG) - Posted by John Butler(Stl)
Posted by John Butler(Stl) on January 20, 1999 at 01:04:18:
WARNING: In my usual writing style this story is LONG and detailed. Hopefully it will help some of you make that final decision to come to the convention and do that first deal!
I actually completed these deals back in November but just got around to writing them up now. For my first success story you can look under the story titled “$24,000 Cash, $138,000 Equity and More.” This will give you a little more info on my background and experience. As my first deal did, two properties and two different financing plans came into play on this deal.
It started when I saw an ad in the paper from an individual who had 4 properties listed with his name and phone number. The one that caught my eye was 3 bedroom 1.5 bath house that was rented for $350 with an asking price of $25,000. Well, even in St. Louis, $25,000 for a 3 Bedroom house is low so the price excited me. I also knew that the 2 BR 1 BA apartments in my 4 family I had in the same area were renting for $400. I felt that the rents could definitely go higher than $350.
I contacted the owner and found out that he did own it free and clear and had bought these properties to retire on the income. After he retired, he found out that he would enjoy travelling more which precluded always being there on the 1st to collect the rents. He seemed somewhat motivated and the fact that the property was owned free and clear appealed to me. I explained that the way I normally buy property is to purchase it with a nominal amount down with owner financing with plans to refinance it within 90 days(sort of a 90 days same as cash if you will). While he was not thrilled with the idea, he figured that as long as he did receive the money in 90 days, that is pretty much the same as today.
The offer that I came up with was this $20,862(always use those uneven amounts!) with $862 due at closing and the rest in 90 days. I was very afraid that this offer was too low and might insult him so I prefaced it with “I don’t want you to be insulted be this offer, but it is just a place to begin negotiations.” We went over the contract line by line explaining what closing costs I was responsible for and what he was responsible for and then got to the total amount. I let the silence fall as he saw the purchase price and we must have sat there for 3 minutes. He then said, :if you can take care of my closing costs then we have a deal. What? No negotiations on price? OK with me. Sold! The interest rate? NONE! I didn’t include it in my contract and he didn’t question it so I wasn’t complaining.
Well, this deal went to closing and I ended up paying ~$400 to close on this property (remember by closing on the 2nd of the month I receive the security deposit and the majority of a prorated rent~700 in this case.) So I now owned this property and had 90 days of free rental income before I had to come up with the remaining $20,000. I then went in and notified the tenants that the rent would be increasing to $500 and they would have to sign a 1 year lease with me to stay. Of course they then moved out, but that allowed me to go through the property and fix all of the deferred maintenance (read neglected repairs) on the property. I also spruced up the outside somewhat. I then ran an ad in the paper at what I though was an aggressive rent of $550. I was deluged with calls and had $1050 in hand(sec deposit and rent) within 2 weeks of placing the ad.
Now that I had my ducks in a row, I began to work on financing. Using my mortgage broker I had used before, I had the appraisal done and it came back at an aggressive $50,000. I was then planning on getting a 70% LTV no income verification loan. It was at this point that I found the second property involved in this deal. I saw an ad in the paper for a 4 family in the area where this property was with two bedroom units for $59,900. I called the broker and found out that it had been under contract once and fallen through due to financing and had just gone back on the market. Since the rents in this one should be the same as my other 4 family that meant $1600 a month in gross rents. Nice! I went to the broker and ended up getting it on pretty nice terms. I would get a new mortgage on it with a sales price of $57,000. However, the sellers would pay $1500 of my closing costs and the broker agreed to take a note for half of his commission (another 1700.) Each of these was designed to reduce my out of pocket expenses.
My plans were to use the proceeds from the first property’s refinance to pay for the down payment on this one. Now, of course, just like last time, things did not go as planned. Two weeks before my 90 day’s was up on the first property, my mortgage broker tells me although we had almost finished the refinance, the company had decided to discontinue the loan program I was using. This seemed strange until I learned that the lender was Southern Pacific Funding which ended up going bankrupt 1 week later (See JPiper you weren’t the only one inconvenienced by that:)). And it is when the chips are down and you have a balloon note coming due in 2 weeks and another purchase that was contingent on those funds that you REALLY get creative. What I came up with to get me out of this predicament was a note sale. Since I had read so much on the board about this, I said “why not?” I created a note for $40,000 30 years at a 10% interest rate that had a payment of $351/mo. With the rent income of $550 this should be no problem I figured. I then discounted this note and sold it to a buyer I had found on the board for $36,000. While I probably could have gotten more for it if I had time to shop it around or season it, I had to close quickly(