Posted by Brent_IL on February 13, 2002 at 24:19:25:
Check out http://www.landtrust.net/wwwboard/messages/6118.html for the opening.
“One time only” revisited one more time. - Posted by Brent_IL
Posted by Brent_IL on February 12, 2002 at 19:01:59:
This post, referencing a prior statement, is for Vladimir, Dave M, Susan, Jean, Don, Dianne, William, and anyone else whose name got pushed too far down in the email stack for me to find. I?ll try to answer your questions.
In one of my posts I said that I routinely sign up deals where I agree to pay 100-115% of FMV with 35-40% of the selling price paid in Monopoly money. Dave asked for examples. The first example I gave in the ?one time only? post was a textbook zero-interest deal. No interest offsets the higher price paid for the property.
I gave the second example because I had the numbers easily available from a futile and ultimately failed attempt to explain that transaction to my wife. I said it was one time only because it is only an example of what is possible, not a roadmap. This isn?t an investment approach like subject-to?s, or seller wraparounds, although it could include both of these.
I think what threw people off were the ten year balloon, the fact that it was free and clear, and the re-sale of the house. I didn?t go into the how-to of the financing because a deal that contains seller-financing, substituted collateral, quasi-sold partials, and unsecured promissory notes and that is being sold well under purchase price is not a Charlton Sheets type of offer.
If you are unsure about the missing details, it would be unsafe for you and the seller to do this kind of a deal. It isn?t that I don?t want to help. I don?t pass out purchase contracts for the same reason. I don?t want to turn on the Fox network and see my scowling face in an exposé about a seller (widow and orphans) who was defrauded with materials traced back to ?this? man.
Understand that when I do something like this it is one piece in the puzzle. I don?t have to know what piece it is, or exactly where it fits. I just have to know it belongs to the puzzle box. It is primarily used as a means to an end. Recall that I don?t do a terms deal without the right to move notes and collateral around freely.
Here?s my final example of this kind of pattern. This is unrelated to any other example, but may be more common. The only thing I did to the numbers was to proportion them so the asking price came out to $100,000. It?s easier to see the percentages involved. Fractional payments are rounded up to the next full payment.
Seven years ago a seller bought a house for $76,000. He put 20% or $15,200 down. He got an 80% LTV loan, and borrowed $60,800 at 8.00% for thirty years. His monthly payments were $446.13.
Property has been appreciating at 4% a year. When it is listed now, seven years later, the FMV is $100,000. The remaining mortgage balance with the 84th payment is $56,226.28, so the owner?s equity in the property is $43,773.72.
We dispose of the $43,773 in cash idea, so he?s stuck with carrying the financing. But he tells me that if I can?t come up with the same down payment I would to obtain a bank loan, I?m a bum, and he?ll take his chances waiting for a better deal.
I offer to pay him his $43,773.72 equity over a twelve year period or until the note is paid in full. I?ll pay him 14% interest. The monthly payment on this note is $629.09. I?ll also facilitate giving him $20,000, not as a down payment, but as additional compensation. It doesn?t affect the face amount of his equity note. He accepts. The concessions I receive in return are that the first 10% of scheduled payments I make go directly to the reduction of principal, and, although payments are being credited, the first 66 payments need not be made by me (tricky part). I want more, and asked for more, but will settle for this.
At the time the fifteenth payment is made, the loan balance is $34,337.46 because the total payments previously paid, $9,436.26, has reduced the loan dollar-for-dollar. The effect of this arrangement on the loan is that although your payment amount stays the same, because the balance is lower than on a straight amortizing loan, more of each payment goes to pay off the balance. Each month that passes speeds up the process.
The balance of the loan in the 66th month is $18,537.12. The next month the $629.09 will have to come out-of-pocket. The loan is completely paid off in 37 more months with a last payment of $198.61. That?s three years and five months early. Hooray, for me.
Let?s say, for the sake of argument that the $20,000 that the seller received at closing came from an affiliated entity. In that case, the cash payment buys an equivalent amount of equity of $20,000. So my loan for $43,773 is only purchasing the remaining $23,773 of seller?s equity. The total loan payments that I am responsible for paying with cash is 36 x $629.09 + $198.61, or $22,845.63. That?s 928.09 LESS than the equity I purchased and my payments are spread out over 8 years and seven months.
I?m still responsible for the underlying first mortgage and its monthly payments of $446.13.
My payment history for the whole transaction up to the point where the seller?s equity loan is paid off looks like this:
$20,000 to compensate seller at close;
66 monthly payments of $446.13 (on 1st);
36 payments of $1075.22 (1st pmt + pmt on seller held second);
Final payment of $45,777.02 ($198.61 + $45578.41 = balance of 1st and 2nd).
My effective rate on the combination loan package for the non-cash equity purchase of $80,000 is 5.56% APR. No qualifying; no fees; no paying for an appraisal; just 5.56%. Plus, I pick up the pay down on the first.
If I had asked the seller to carry his equity and allow me to take over the 8% interest 1st loan at less than six percent, he would have thrown me out.
Where this really gets interesting is when you decide what you?re going to do next. Just suppose that you can find a full price buyer because you agree to put 5% in the Neighborhood Gold program. Your additional closing costs are $5,000, mostly in legal fees. You pay off the loan in first place. $90,000 of net proceeds minus $56,226.28 balance on 1st minus $20,000 is $13,773.72 unsecured cash in your pocket. You have the same payment arrangement with the seller. The APR for the $13K+ is 7.23%.
Not confident that you will be able to earn 7.23% over the course of 103 months that the loan is outstanding? Try this.
My standard very low down or closing-costs-only re-sale is owner-financed at 110% of FMV for 30 years at 11.65% interest with a 50% equity kicker due when the take-out is financed. Using the present example, the payment on $110,000 is $1101.93 per month. Your back to paying for the first again, but that leaves $665.80 coming to you for 66 months, and the payments after that are still covered by your buyer?s payment to you.
Don?t want to put up the $20,000?
Remember that the loan position of the original seller is not fixed. Would you have trouble finding someone to loan $20,000 on a $100,000 property behind a $56,226.28 first? The LTV is 76%. How about the guys earning 3.00 on a six-month CD. If the lender hates you, and your progeny, and charges you 18% over a term of 66 months, your monthly payment is $479.48. You still cash flow $186.33 for 66 months and have profits waiting at the back end.
My purpose with this series of posts was to offer the advice that money can be made if you don?t decide to climb into a box because there is only one All-American, Divinely-approved way of looking at things. If the seller wants more than the property is worth, smile and give it to him. Give him what he wants to make the sale, put in the clauses that you need to remain flexible, and mess around with the terms until you make a profit.
End of discourse. I sure hope I didn?t add to the confusion. Many people on the board can explain my thoughts better than I can. Now you know why I couldn?t explain this to my wife, either.
Brent
Re: “One time only” revisited - Posted by Rich[FL]
Posted by Rich[FL] on February 12, 2002 at 21:25:31:
Brent - fascinating! It’ll take me reading this a couple of times before I get the complete picture but I like the idea.
I do have one question: usually sellers will say NO to something that is hard for them to understand. How do you (or how did you) go about selling this idea to the seller?
Thanks…
Rich
Re:"One time only - Posted by frank
Posted by frank on February 12, 2002 at 20:41:44:
I tried to follow you but my HP12C caught fire and exploded! LOL Only god and you know what you are doing but it sure sounds like fun. Thanks for the challenges.
Re: “One time only” revisited - Posted by Brent_IL
Posted by Brent_IL on February 12, 2002 at 21:50:58:
Why are sellers like CIA operatives?
Because they’re on a need-to-know basis.
I’ll get back to you, Rich, I’m typed out for today.