Posted by JohnBoy on February 20, 2000 at 15:37:32:
JD,
To answer your question about being able to do a land contract at 0 interest, the answer is yes. You can write up what ever terms you and the seller agree upon.
The problem I see with this is that the seller would have to be pretty stupid to do this on this deal since he has an underlying loan balance of $133,000 remaining on this property.
At the end of 5 years your loan balance would be $87,000, but the seller would still have a loan balance of approx. $130,000 leaving $43,000 that the seller would have to come out of pocket with to deliver clear title to you. Now, of course the seller may have that kind of cash laying around to fork out to unload his property or he could even get a new loan against his new home which he claims is paid off so he can cover the difference owed on his mortgage, but the question is, “Is he that desperate to get rid of this house and that stupid to absorb that much of a loss when he doesn’t have to?” He could dump the house for more than that to get a quick sale and save himself $20k - $30k.
As far as doing a wrap, what is there to wrap? You would be offering $129,000. He owes $133,000. You would be buying for $4,000 less than what he owes. Your payment of $700 would be $200 less than his payment of $900.
The way a wrap usually works is where the buyers payments are higher than the sellers current payments. You could actually do a wrap by paying less than what is owed but by adjusting the interest rate to where the buyers payments exceed the sellers payments would work under a wrap. Since your purchase price and payments would be less than the current balance owed and lower than the current payments, there’s nothing to wrap.
Putting the property into a land trust does not protect the underlying loan from being accelerated. The purpose of putting the property into a trust is to help hide the fact that the property has transferred titled to a new owner. This is usually done when the buyer is assuming the underlying loan “Subject To”. This simply means your agreeing to take over the sellers loan without telling the lender. The seller places the property into a trust and assigns his beneficial interest over to the buyer thereby transferring ownership. The trust is recorded but the beneficiary of the trust is not. If the lender was to check title on the property it would reveal the name of the trust as the owner but it would not reveal the name of the beneficiary.
In your case your talking about doing a land contract, so whether or not the property is put into a trust or not won’t help you in hiding the fact the seller has sold the property on contract. The only way you can hide this from the lender is by not recording the land contract which then leaves the buyer unprotected from any future liens being recorded against the property and protecting the buyer from preventing the seller from taking out any loans secured against the property against any equity the buyer may have. To protect your interest as the buyer you will need to record the land contract which would not be hidden behind a trust to prevent the lender from finding out.
If the seller is concerned about the lender from finding out then what about seeing if the seller would be willing to refinance his new home and pay off the underlying loan on the old home. Then he sells to you on contract without any concerns from a lender since he would own the old home free and clear. Then you can even up the price in order to get 0 interest to make the deal more attractive. At 0 interest you would be applying 100% of the payments towards principal only. At least this way you eliminate any potential problems with the seller having to come up with $43,000 out of pocket in order to deliver clear title to you in 5 years.
You don’t say what the market rents for this house is. If market rents are going for about $900 + per month, then I personally like the sellers plan on giving a L/O at $123,000 for $700 per month. I would shoot for 50% of the rent to go towards the purchase price if I was to exercise the option. I’d start with asking for 50% but I’d even be happy with $200 of that going towards the option price.
Assuming this house would get around $900 as a rental, I would offer it at $1200 under a one year lease option. I’d get around $5,000 down as “non-refundable option consideration” with an option price of $134,000. This would put $5k up front in my pocket plus $500 a month positive cash flow. At the end of one year if my tenant was to exercise their option I would collect another $6,000 at closing. That would be a total profit of $5k up front, $500 x 12 = $6,000 cash flow, $6,000 at closing, = $17,000 profit in one year, PLUS any rent credits I was able to get from the seller during that time!
If my tenant didn’t exercise their option in one year then I start the process all over again which just means I make MORE MONEY!
If this particular house wouldn’t bring in $900 + as a rental, then I would just assign my contract to a tenant/buyer and be done with the deal.
The way I would handle assigning my contract would be to first get a suitable tenant/buyer into the property under a L/O agreement between us. I would set their monthly payment at least $100-$200 a month above mine, get about $5k down as “non-refundable option consideration” and set their option price at $130k - $135k.
After they have signed the contract and moved in, I would approach them and explain that I have a much better deal to offer them if they could come up with another say, $5k??
I would say, Mr… Tenant, would you be interested if I could lock your purchase price in at $123k instead of $130k - $135k AND lower your payment down to $700 instead of $800-$900 AND give you 5 YEARS instead of only ONE YEAR to buy this property at the lower price???
Now do you think Mr… Tenant would be interested in a deal like this? Heck yeah he would! Ok, I’ll tell you what I’ll do for you Mr… Tenant, if you can come up with $5k cash I’ll sell you my contract on this property that will give you those terms I just offered to you. Sometimes they will have the money and sometimes they won’t. They might be able to borrow from a relative or they might be able to get an unsecured loan from a finance company or they might be able to get the cash from a credit card. But the beauty of this is that you will already know if they can come up with the extra cash because you will have prescreened them BEFORE you entered into the original L/O agreement with them. You will have already verified their credit which will tell you if they could get a small loan from a finance company and their credit will show any credit cards they have which shows the credit limits and outstanding balance owed on them. So you see, you would be in complete control. You would control a house that doesn’t belong to you and you would control who you put into this house and you would control how much you make on this deal. You have limited your liability by just controlling a strangers property Vs. adding liability to taking ownership and committing to buying.
You could also limit your liability on the 5 year L/O by structuring the deal with a one year L/O with the right to renew for 4 more one year terms. This way your only limited to 12 months at a time should something not work out. If all is going ok, then simply renew for another year, otherwise walk away at the end of 12 months be out from under any further liability.
Whatever you do, I would be careful on how you present your deal with this seller based on your post. You already claim he’s hung up on price and he’s concerned about how much you would stand to make on this deal. If you present an offer that sounds like your trying to take advantage of him or playing him for a fool he’s liable to slam the door in your face and refuse to do anything with you at all. He’s already offered you a L/O for $10,000 less than what he owes and $200 a month less than his current payment. Don’t let going after his greed button back fire on you making yourself out to be the one with the greed button.
Which sounds better?
Driving by a property and saying, see that house there? I own that liability. All I have to do is make payments for 5 years and then be able to get a new loan on it to pay off the seller and committing myself to a new 30 year liability or at the very least, pray to God that I can sell it to someone really quick providing property values maintain or increase 5 years from now.
OR
Driving by a property and saying, see that house there? I control it! Or I made a quick $10k on that one without ever purchasing it! OR, I control that baby for the next 5 years and I can walk away in any 12 month period should I decide it’s just not profitable enough for me to mess with any longer. I can hold for cash flow, sell for a quick profit, buy it in 5 years if property values go up enough to justify my risk or pretty much whatever I decide is best for me! How did you do that? Are you a realtor or something? Nope! What did you put down? Nothing! Then how can you make $10k on something you never purchased or owned? How can you make money on something you don’t even own over the next 5 years? How can anyone do that? By CONTROLLING! So how do you control something you don’t own? KNOWLEDGE my friend, KNOWLEDGE!