Please help me look at this deal - Posted by Raphael

Posted by gk (MO) on January 12, 2004 at 20:42:39:

Yes…I hope it turns out well for you Raphael. What would happen if you didn’t take out a first - or a second and simply negotiated an option price (say 230K?) and then lease/optioned the property to a buyer in the next 3 years (as per your plan B) at full list price (or above)? You get the spread between their payment to you and your payment to the seller, plus the difference between your option price and their full list price. Plus you don’t have to jump through the hoops and qualify for a conventional loan. Just a thought…

Please help me look at this deal - Posted by Raphael

Posted by Raphael on January 12, 2004 at 09:12:11:


Could someone help me analyze this deal.

I am interested in a property listed for $299K. I want to pay the full listing price. But this is how I want to pay for this property. I want to make this offer to seller. So tell me what you think about this offer, and the deal generally. Here goes:

I will offer seller the following deal:

  1. I’ll get a First Mortagage for $60K
    (payable to Seller at Closing)

  1. Seller to hold a Second Mortagage for the 239K balance
    5% interest on this 2nd Mortgage
    10 year term
    Interest only payments for those 10 years
    The full balance (239K) due after 10 years

The 5% interest payments equal $11,950. per year
So the monthly payment on this 2nd will be $995.83
This means I’d pay $119,500 on interest for the 10 years
In addition I’ll pay back the $239K at the end of 10yrs

So altogether the 2nd Mortagge will cost me…
$119,500. + 239K = $358,500,(if I pay it off in 10 yrs).

What do you experts think about this ? What am i missing ?


Randy SD, gk MO, Micheala, and David Alexander - Posted by Raphael

Posted by Raphael on January 12, 2004 at 14:29:43:

Thank you Randy SD, gk MO, Micheala, and David Alexander for your input.

I have summarized all your points as follows:

  1. PRICE
    Do not pay full price. Get a discount. Make money now. Do not bet on future appreciation.

    5% interesst rate on the second mortgage may be good, but you could get an even lower rate than that.

  3. TERM
    10 years while not being that bad, perhaps you can negotiate not to maake any payments for the first 2 or 3 years.

    The cash you pay seller at closing should be enough for seller to pay off any remaining mortgage on the property, and also enough to pay broker commission, and of course closing costs.

In light of these wonderful observations, I have decided to modify my offer as follows. (By the way, this is a buy and hold. I intend to hold for at least 5 years, perhaps up to 10 years).Anyway I will modify my offer as follows:

PRICE: Note that the price is typical and normal for the area in question. But I will make an offer for $230K.

IST LIEN: Owner has about $15K left on the mortgage, Owner also has to pay his Broker commission. Owner also has to pay his own closing costs. So I will offer to take a Ist Lien for $60K (This is the LEAST amount my mortgage company will lend). So $60K will be payable to seller at the closing table.

I will ask seller to hold a 2ND lien for $170K.I will still go for a 10 year interest only loan, but:

a. I will ask for a lower interest rate. I will ask for 3% interest rate for those 10 years.

b. I will ask for the interest to ACCRUE for the first 3 years. This means I will not have to pay back any principal or interest for those first 3 years, although the interest for those three years will accrue, and add onto the $170K (amount of the 2ND lien).

c. At the end of the 3rd year , I begin to make the 3% interest only payments for the next 7 years.

d. At the end of the 10 years I pay seller his balance which $170K plus $15,300 (the interest that accrued for the first 3 years)

The idea is that if I can get the property for $230, I would have gotten it at a discount. Also if i can get the seller to hold the second at a 3% interest rate, I would have rented his money for lower than I could have rented from a bank. Additionally I get a 3 year no monthly payment holiday which I cannot get from a bank either. Plus I get an interest-only loan which reduces monthly payments.

Finally the idea is to refinance after about 5 years or so.

Thanks for reading this far. But what do you think now ?


Your missing alot… - Posted by David Alexander

Posted by David Alexander on January 12, 2004 at 12:00:26:

Or your not posting the details…

First… Making Offers… shotgun approach… Is usually used when buying all cash or for ferriting out the motivated sellers… looking for counters… etc…

Is the Seller Motivated?

If he is… Can he even make a deal… He might owe $298k…

If he can make a deal… The structure will come from there… where there at…


Re: Please help me look at this deal - Posted by michaela-atl

Posted by michaela-atl on January 12, 2004 at 11:37:14:


in addition to what has already been said, you did not indicate, that the property is actually free and clear owned by the seller. Maybe there’s mortgage on it?
if so, then that will have to be paid off before any new financing can be put on the house. Chances are, that a 299k house has a larger than 60k mortgage, subsequently, the seller would ahve to come out of pocket for the difference to pay off and for the commission.

As has been said, unless you’re in a super hot market, like california, why bother paying full asking price?
If you’re counting on future appreciation, then what you’re doing is ‘speculating’, not ‘investing’.


Re: Please help me look at this deal - Posted by Randy (SD)

Posted by Randy (SD) on January 12, 2004 at 09:56:08:

I would not recommend an interest only loan for 10 years, I assume you?re trying to buy this with no money down and you feel the property is worth the seller?s asking price. You should know that typically the top 10 or 20 percent of the asking price or list price is fluff; the seller and his agent expect some discount. I suggest you reversed your numbers, get a new first lien for 80 or 90 percent with the seller carrying a second to give you 100 percent LTV. You haven?t indicated rather you have a down payment, but if the seller is getting the majority of their cash at closing they might be inclined to structure the second lien at very low interest rates with no payments for one or two may be even three years. Have you asked the seller what he needs?

Re: Please help me look at this deal - Posted by gk (MO)

Posted by gk (MO) on January 12, 2004 at 09:26:39:

Why would you want to pay full listing price? Have you asked yourself if the property will cash flow during the 10 years? Have you thought about a lease option if this is truly a motivated seller? (If it’s not a motivated seller, why are you wasting your time?)

Just some thoughts…


hmmmm… - Posted by gk (MO)

Posted by gk (MO) on January 12, 2004 at 14:56:02:

If your strategy is to buy and hold, then what would it matter on not paying interest during the first 3 years - especially if you are accruing the interest and have to pay it at some point? If your cash flow is that close is it really a deal?

You mentioned that 230K is a discount but your first post said it was asking or list price? What’s your exit strategy with it then? I guess I’m not seeing the “deal” here. Your profit center would have to be from appreciation of the property over time and the amount of discount you purchased it for minus holding costs. (You’ll have loan originaltion fees for your first, plus all of the other costs of holding it)

Are you really dealing with a motivated seller? How deep is the discount you are purchasing? Perhaps I’m missing something…


Re: Please help me look at this deal - Posted by gk (MO)

Posted by gk (MO) on January 12, 2004 at 10:30:41:

I too am trying to learn here…what’s the point of pursuing this unless he is buying at a discount? No money down isn’t a big deal unless there is a profit somewhere…but where? I doubt that buying it at the full list price is going to be beneficial for him if he’s looking to make a profit (unless he’s thinking of appreciation of 10 years?)even if the property is truly “worth it”. Maybe his strategy is buy and hold?


Re: hmmmm… - Posted by Raphael

Posted by Raphael on January 12, 2004 at 18:17:35:

Hello Gary,

The list price of the property is $299K, but I will be offering $230K. So thats about 20% plus discount.

My profit center will be (1) the discount; (2) appreciation over time; (3) money saved on 2nd Mortgage which I got from seller at only 3%.(I would have saved anything from 2% to 5%) since regular interest rates are at least 5%, and will go up in the next few years)

My costs will be the origination fees for the first lien; the holding costs of the house.

Regarding holding off making payments for the first 3 years, although this is a buy and hold, but if I find a buyer within those first three years, I would sell. Therefore I would have sold without having had to make any payments on the 2nd to seller.

Does this make any sense ?


Your flunking… - Posted by David Alexander

Posted by David Alexander on January 13, 2004 at 12:15:56:

the first grade and need to go back to kindergarten…

I say that tongue and cheek…

You keep talking about the numbers…

Find a motivated seller first… Actually find 30 motivated sellers… first… Then start weeding through the deals…

Your knack and desire for workin the numbers will then be applied there…

Once you find a motivated seller… you will understand… and then you’ll never ask again…

David Alexander