Posted by SCook85 on May 09, 1999 at 09:51:52:
A few things to consider:
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You are paying 9 points on a transaction that will put you in at above market value. I know it has been preached many times to not worry about the points when the deal is good enough, but in this case it isn’t.
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You are not considering that 4 closings have to take place and the cost of 4 closings will come out of your $20,000. On top of that you have to get 2 full appraisals most likely from National appraisal companies (another $700). In Maryland where I’m from those 4 closing would run you about $10,000 and that is taking into consideration not paying for taxes twice or for title insurance. It is probably less where you live but may not be. So you could potentially walk with less than $10,000.
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The tax implications to your partner (friend) are not attractive. Has this been considered?
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The note buyers won’t tell you what to do in your best interest, they just want to broker a note and don’t care what happens to you, the note, the property etc…
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Pulling off a 90% first in the secondary market as a NOO (non owner occupant) is very difficult and the rates will not be attractive. Have the actual note buyers been informed that you will not occupy this property? What rates have you been quoted? With good credit you may get 9.5%, will you have a positive cash flow, or are you willing to sacrifice that for the up front cash (not a smart thing to do; $10,000-$20,000 will be gone before you know it, especially if the property does need repairs)
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If the end buyer of this note catches wind of how this transaction is going down you deal won’t happen. They will not allow you to do these types of deals.
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I would venture to guess that the settlement company that you are using has never closed one of these types of transactions and you will most likely become an educator, trying to teach someone to do something you have never done before. I have only come across one title company so far that picked up on this concept right away and understood it. Most of them can’t see the real way the transaction is taking place. They can’t think outside of the box. They can’t see that the note buyer is not the lender. Where a hat and keep your hair inside otherwise you will pull it all out.
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Realistically these type of transactions are supposed to settle quickly. That is what everyone preaches. But I think most who come to this site who have done these types of deals will agree that 3 weeks (especially if you are just getting the process started) is not much time for one of these deals. You will go back and forth numberous times with the note seller and can find yourself 6 weeks from now still trying to put the deal together.
I’m speaking from personal experience. I like the way you think, my second deal that I ever did was just like this except on one property. I will never do it again. Closing costs cost me $8,000 to pull it off. I had a larger spread in my deal then you do and mine was smaller so from a percentage standpoint my deal looked much better then yours.
Others may have had better experiences then I have, and I’m not saying that this is the way that it has to be, but I have been involved with 7 note deals to date and everytime I think that it will get easier. It hasn’t.
I’m not saying do this deal but I am asking you to take a lot harder look at it. It doesn’t come out as rosy as it looks.
SCook85