Need Creative Ideas On My First Deal.. - Posted by Gary Chung

Posted by Doug Pretorius on March 30, 2000 at 07:50:26:

That scared me too! Must be getting the loan for the money to pay on both, just until she gets that new job :slight_smile:

Need Creative Ideas On My First Deal… - Posted by Gary Chung

Posted by Gary Chung on March 29, 2000 at 23:23:31:

Calling all creative minds. I?m a newbie who attended the Atlanta CRE Online Convention. Just placed my first ad last week after having listened to LeGrand?s tapes on lease/options and cash flow through seller financing. Got my first serious call today. I need feedback on my thinking and strategy and also any other creative offers. Here’s what I learned from the caller on her single family home.

$428k = Appraised value (from 7/99 refi)
$328k = First mortgage (from 7/99 refi)

  1. There are no other liens.
  2. Will miss this month’s payment.
  3. 3400 square feet, 1.25 acres
  4. 5 Bedrooms/ 3.5 bath
  5. Home is in hot San Diego market.
  6. Owner is willing to be creative. They originally purchased property on lease/option and exercised option in 1997 for $288k.
  7. House is less than 10 years old and in very good condition.
  8. She called me to see if there were other options besides listing with a real estate agent.
  9. Monthly payment of $2,700
  10. Does not make enough income currently to make the payment.

Having listened to the LeGrand tapes on L/O, seller financing, I plan to offer the following this Friday or Saturday:

Offer 1: All cash for $380k. Just made this figure up. No firm basis for this number. Not sure where I can come up with a lender for this on short notice. Ideas?
Exit strategy: Flip it and get my money out and pay back lender.

Offer 2: L/O from owner for $400k.
Exit Strategy: Lease option to T/B for $3,100/month + 3-5% option money with an option price of $450k. I chose $3,100/mo since a 30-year loan of 90% of $450k at 8.5% interest is $3,287/mo. Any thoughts on this?

Offer 3: Take property ?subject to? existing loan. Maybe create a second with owner financing if owner wants some $$ for part of his equity.
Exit strategy: see exit strategies for offer 1 & 2.

Offer 4: Your creative offer with exit strategy is needed here. Got any?

I will get a property analysis with comps from a local title company tomorrow. Owner is motivated. From their point of view, why would they go with one of the offers above versus just listing it with a realty? I?m a newbie, so I need all the sound advice I can get about this.

Re: Need Creative Ideas On My First Deal… - Posted by ScottE

Posted by ScottE on March 30, 2000 at 22:35:01:

Gary,

Just curious, but what did your ad say that got these folks to respond?

Keep us posted…

Thanks

Scott
Scott

Re: Need Creative Ideas On My First Deal… - Posted by David Alexander

Posted by David Alexander on March 30, 2000 at 21:36:49:

Gary,

Besides rechecking your numbers, and what steve said, you need to pay attention to the fact that houses in that price range have fewer buyers.

Example I Buy alot of houses subject to in the Dallas area in the price range from 60-90k. I sell them with Owner financing and my ohone doesnt stop ringing.

On the otherhand houses above 100k, I have one now I’m marketing for 115k running the Owner financing ads, and it doesnt matter. The people in this price range have cash or financing on their own, but the people are also few and far between. I get 1-3 calls a day on my ad as opposed to 40-70. Now go up in the price range your in and that will go down to 1-3 a week.

Fact is you could be setting on this house for a year, and that’s ok as long as you plan for it.

David Alexander

Am I the only one who noticed this yet??? - Posted by SCook85

Posted by SCook85 on March 30, 2000 at 16:53:09:

Gary,

You say that she owes $328k for a home that appraised for $428k.

I can tell you right now that she is going to accept your offer of $380k, she is a bigger fool then you if she doesn’t. Don’t take offense to me calling you a fool, but if you offer her $52k above what she owes and she is on her way to foreclosure you are paying way to much. You offer her $328k- PERIOD (or less because she should owe less then that now). You may give her $1-2k for moving expenses, and only if she leaves the home clean. This offer is contingent upon you taking over payments, not paying cash. For an all cash deal according to Legrands formula you would need to offer around $280k (provided that the appraisal is not inflated, you need to do your own analysis). You can’t just make numbers up. You must be able to justify your offers.

Gary, you do need to slow down. You don’t quite understand yet what you should be doing.

This woman has two options, let you take over her payments, or go into foreclosure and lose everything, screw up her credit, and get a deficiency judgement against her.

Of course if she is talking to others she may have other options (as far as buyers) but if you continue with what you wanted to offer, you will beat them all out, I can assure you of that. Sellers who can’t pay their mortgage are not in a position to ask you to pay it plus give them cash.

Be Careful!

Steve

Re: Need Creative Ideas On My First Deal… - Posted by PatrickMD

Posted by PatrickMD on March 30, 2000 at 11:36:06:

Go slow, Gary, go slow. Do your neighborhood comps and find your own financing backup, first. Then, insist (nicely!) that you meet with ALL of the decision-makers. A woman who teaches sales success courses told me that you need to talk to the person who has the authority and the ability to make the decision to close the deal. Where’s this husband? If the wife is so adamant about waiting for a second, it doesn’t sound like they’re likely to go your way, anyway. How are these sellers going to afford to finance to you when they must have OTHER creditors waiting in line? And the meter’s running! Sounds like they need a big infusion of cash, not monthly payments you can afford. People in a hurry aren’t going to look out for your wellfare. How about contacting their banker and offering to discuss buying it when THEY take it back as an REO? Remember to plan your escape route. I always try to imagine what’s the worst-case senario involving me and what can I do to make it right? Do any other residents in that neighborhood have a 3100. rental agreement? I conceed that San Diego is a pretty flash neighborhood, but is there a large available market just waiting for a chance to pay that kind of RENT? What are YOU going to do with a 450,000. mortgage responsibility and no takers on the horizon? Now, consider instead if you were to buy 45 mobile homes @ 5,000. each. Mightn’t you be able to find a client for a single 10,000. committment a lot faster than one for a 450,000. one? And, if you only sold 1/2 of them, you’re covered. But 1/2 of 450,000 is still a 225,000.loss. I’m not trying to talk you into the mobile home business. But, as Lonnie Scruggs says, “I like to keep the numbers small. I don’t like a lot of zeros on them numbers.” Carleton Sheets puts it well: "I’m not suggesting ANYONE jeapordize their home or their financial security by investing in real estate. That’s why you should always do your due diligence beforehand!"
Our Boy Scouts instructor taught us about safety when trying to save a drowning man - keep at a safe distance and use something to reach them with other than your own body. Why? Because when someone’s drowning, all of their reason is overshadowed by the need to survive. In their panic, they could kill you in the process of saving themselves. This sounds a little too much like a drowing. I’d swallow hard and look for a better deal.

I hope this has been of some help. Pat.

Re: Need Creative Ideas On My First Deal… - Posted by Steve

Posted by Steve on March 30, 2000 at 01:04:18:

What is her asking price? lowest she would go with all cash.

Steve

Re: Need Creative Ideas On My First Deal… - Posted by Gary Chung

Posted by Gary Chung on March 31, 2000 at 24:54:47:

Very simple ad. It reads:

“I’LL BUY/LEASE YOUR HOUSE!
Make your payments, any area/price, quick closing. Call 123-4567”

Re: Am I the only one who noticed this yet??? - Posted by Gary Chung

Posted by Gary Chung on March 30, 2000 at 17:53:17:

Steve: Thanks for the info. Fool? No offense taken whatsoever. In fact, I’m very appreciative. I’d be a bigger fool if I didn’t heed the warnings from you and other posts. If she calls, which I expect since I can’t see how she could qualify for a second, should I offer to take the property ‘subject to’ the existing loan only and go find a buyer? I need to remember that she needs me, I don’t need her. Also, is lease option still a credible second strategy here?

Again, thank you for being the voice of reason.
Gary

Need Creative Ideas On My First Deal…(Bill Bronchick?) - Posted by Gary Chung

Posted by Gary Chung on March 30, 2000 at 11:57:05:

Pat: Thanks for the wisdom. I also heard from another wise investor with similar advice. The higher the price of the property, the fewer and fewer available tenant/buyers are out there (that is, don’t get caught with an alligator where I have to make payments on a vacant house because I can’t find a buyer or a T/B). This being my first deal, I might be biting off more than I can chew. So I know I won’t buy (due to fear of alligators). How about this strategy: control instead of buy using a lease/option with the seller and then sandwich lease/option to someone else and I sign the lease/option with the seller as an agent of an LLC or a trustee of a land trust. Not sure if either asset protection strategy is right. However, the goal is to limit liability away from my personal assets if I can’t find a tenant/buyer. Is this a credible strategy? Let me know if this is bad thinking or there’s no deal here.

Thanks for the ideas and advice.

Re: Need Creative Ideas On My First Deal… - Posted by Gary Chung

Posted by Gary Chung on March 30, 2000 at 01:30:19:

Don’t know yet. She was non-committal on her call today because she wants to see if she could get a second to solve her problems. She’ll find out tomorrow or Friday whether she can get a second. I’m assuming she can’t. Then she’ll be stuck with no funds for house payment. I did ask her if I came up with the cash, what’s the minimum she would take. She didn’t want to talk specifics until she hears about the second in the next day or two. Therefore, I have to explore all possible offer strategies prior to meeting her and her husband. Any thoughts on how to deal for the lowest cash offer? I’m concerned with offering such a lowball offer that they become offended and run away from me to an agent or some other investor.

Re: Am I the only one who noticed this yet??? - Posted by SCook85

Posted by SCook85 on March 30, 2000 at 21:19:28:

Gary,
I’m glad that you received my post the way that it was meant to be taken.
I’m not a fan of “subject-to’s” and Lease Options therefore I don’t do them. However, from what I know about them this seems like the ideal situation for you with this property. I think that whichever way you go whether it be getting the deed or a lease option it will work out OK.
I would only caution you to not make promises to the seller that you can’t keep. If you do not intend to make payments on the property if it is vacant be sure the seller knows that and does not think you will make the payments no matter what. Also, since I am not familiar with San Diego I have no idea what the turn around time could be on a home like that. Have you run test ads in the paper to see what the market is like?

This deal looks as though it could be a big winner with the following type of scenario.

You get the deed and assume the $328k that she owes. You Lease Option it to your buyer at $430k with $20k or more down and payments of $3900 per month. You would make good up front money and over $1000 per month cash flow with only one property.

Keep us posted.

Steve

Re: Need Creative Ideas On My First Deal…(Bill Bronchick?) - Posted by PatrickMD

Posted by PatrickMD on March 31, 2000 at 08:51:42:

Gary, Check out the following post: Motivated Seller- My definition! - SCook85 21:37:14 03/30/00 (1).Pat.

Re: Need Creative Ideas On My First Deal…(Bill Bronchick?) - Posted by PatrickMD

Posted by PatrickMD on March 30, 2000 at 22:36:09:

Gary, You’re welcome. I think it’s not the house or the finance plan that just doesn’t feel right; It’s the players and the market you’ll want to sell the idea to. Here’s a thought. Let’s get off this particular house and think about what’ll work in your area. San Diego is a seaport with beautiful vistas and yacht clubs, right? Lots of emphasis on the marine wildlife aquarium and the ocean? And I know a friend from my teen years who’s father was a U.S. Navy doctor stationed there, so the navy hospital is there, as well as some pretty good municipal hospitals, I imagine. You know what all those factors have in common? Professionals who move around a lot, who probably are single or married with no children, who like to live near the water. They also, unfortunately, have a rather high divorce rate. Now, a way you could benefit from all these demographics would go something like this: Find a property with a distressed owner situation, such as 1. a divorced doctor or biological scientist who has to sell because he or she’s moving to another city to start over; 2. some other professional or military personnel who is being transferred; 3. A professional couple who are starting to raise a family and want to move to a larger place in a nice school district. These ficticious properties would be nice townhouses located near the hospital or the water. They’re upscale properties with litle to no maintenance problems that have to be sold fast and are attractive to busy professionals moving into the area with no time to putz around with repairs. Nurses and scientific and engineering technicians are a good moderate income housing market. They need more reasonably priced housing close to work, and they move a lot, too. Now, you get in between the seller and the buyer with your lease-with-the- option-to-buy plan and BINGO! You make your living without the complications of big, expensive barns that most people can’t afford anyway. If you work it right, you don’t even have to take title. It might be easier to work with a sympathetic RE broker in this area because of their ability to bring flexible sellers and eager buyers to you. Make yourself a webpage. I’d also keep my eye on the newspaper notices about hospital, aquarium and scientific personnel, and military transferring in or out. Marina staff who know about new yachts showing up from other cities or leaving and foriegn car repair shops often know about relationships of their customers. They’ll let you put up your business card or a notice on their bulletin board. A good place to find a good home was one of the favorite conversations amoung staff in our hospital. Happy hunting! Pat.

Huh? - Posted by ScottE

Posted by ScottE on March 30, 2000 at 01:52:06:

They’re waiting to see if they are going to get a second to solve their problems???

Ummm…if they can’t handle the payment on the first, how do the expect to make a payment on the (new)second?

Maybe I’m just an idiot, but that sounds pretty foolish to me!!!

Scott

Re: Am I the only one who noticed this yet??? - Posted by Gary Chung

Posted by Gary Chung on March 30, 2000 at 23:08:10:

Test ad sounds like a great idea. I’ll try this in the weekend paper. I’m not sure of the average turn around time from listing to sale is in this market. I’ll find out from a realtor but I believe it’s in the 30 day time frame. Also, in the San Diego market, the median house is about $200,000. We pay extra for the year-round sunshine. Thanks Steve and others for the sage advice and for saving my bacon. --Gary