Good Lord, BankRobber,
I am having trouble following your rationale here. I don’t see how the seller could be out anything since he will have received half of the value of the property at closing and has the other half secured by the second. There is this thing called foreclosure which protects him from loss in case the buyer does not or cannot make the payments. That, along with the good credit, legal documents, promises, and personal reputations of the participants are the checks and balances which make any system of trusting one another work. I would ask you to take care when implying that any respected professional on this board would deliberately conspire with another respected professional, risk prison time, and their reputations on such a convoluted, plan, especially for such a piddley small amount of gain. There is really nothing in ANY Real Estate agreement, save those checks mentioned above, that could keep any participant from abusing the arrangement if they were determined to do so. So, then, are we to assume no person can be trusted and all of the recorded agreements in the world are worthless scams?
I think not,
Michael Murray
P.S. Fellow CREOLits, weigh in here. Am I all wet, or is this person? I would really like to hear other opinions on this.
Hi Bud,
Actually, this is not their principle residence. It was owned and occupied by the seller’s mother who died and left it in their hands. I am not clear on what their tax situation is, just that the Realtor said they did not want to take the entire sales amount at once. The L/O idea was rejected twice previously with other people’s offers. The Realtor is reluctant to share the details of those offers.
Thanks,
Michael Murray
The note buyer just provides you with the face amount of the note less the amount required to season it. In short, he/she buys the note at a discount and ups his yield.
Great to meet you at the convention by the way. I’m looking forward to the next one. Hope this helps. Later.
Sandy,
The self-seasoning money must be paid simultaneously in one lump with everything else or there would be no incentive for the note buyer to discount.
I too am just learning about this “note stuff”. It seems the more clever ideas I read about, the more creative I feel in combining some of the ideas. I don’t know if this idea will really work, but I hope some of the more knowledgeable people here can tell me if I am on the right track.
Thanks,
Michael Murray
Posted by BankRobber on April 03, 1999 at 12:40:15:
A $250K 2nd DOT behind a $375K hard money 1st DOT on a $495K SFR is almost worthless. If the holder of the 2nd DOT were to sell it to a note broker he would be fortunate to get $50K for it.
Okay, if it was inherited then it should be stepped up to market value and they have no tax consequences. The trouble appears that you are dealing through the realtor. Reserve the right to present your offer directly to them. With a full price offer unless you can trade them some mortgage that you have bought at a discount or over encumber the property we’re talking hot air. You do need to know how much it is worth. I’ll live there and keep it up until they get the offer to their likeing.
Sandy, the reason the prepayment is interesting is the the artificial seasoning (in addition to everything else mentioned) increases the YIELD of the note - it’s the old Time Value of Money thing… it’s AMAZING what even I can learn from Behle’s tapes!!
Carol
OK, BankRobber,
I think I am getting a grip on what you have been trying to say. So, your main point is that the first DOT should not be for more than whatever percentage is left after the 2nd were satisfied? Otherwise the value of the 2nd would be diminished by the amount which the sum of the 1st and 2nd exceeded the FMV since the 1st would be satisfied first in a default? That makes sense to me. However, in previous posts in this thread, I mentioned that I would be using whatever cash I came away from the closing with to pump back into the property in the form of improvements, increasing the value of the property to more than the sum of the 1st and 2nd DOT’s. Your next question to me, I suspect, will be “how do the sellers know that I will really do that?”. Well, I guess that is why they call it a deed of TRUST. I know I will have a nearly impossible task of convincing the sellers that this is a good deal. But, as David Alexander said, “You don’t know till you ask”
Thanks for your comments,
Michael Murray
Here’s the problem. You get the seller to take $250k cash and secure a second for $250k. Mean while you actually end up putting a new first against the property for $375k. What happens if you defaulted for some unexpected reason? The seller would either have to step in to foreclose on you and get stuck with the payments on that $375k first you put against the property just to secure their interest in the property. Or if the first foreclosed on you before the second did, then the seller will have to pay off the $375k first to secure their interest on the second. The question is, why would a seller want to put themselves into that kind of a position? They only received $250k from the first and now they would risk having to cover a $375k first should you happen to default for any reason. Is this something you would be willing do yourself if you were the seller? I know I wouldn’t do it. You already stated that the sellers are not motivated to sell this property, so why would they be willing to put themselves at a risk for more than they got out of the deal?
Now this doesn’t mean they wouldn’t be willing to do this. Maybe they don’t understand the risk they’re up against should you default on the first. But I would venture to guess that once they present this deal to their attorney to look at, their attorney would strongly advise against this pointing out all potential risks they would have should you default on the payments. But, hey, you can always try. I know others that have been able to pull this type of deal off in the past, but usually they’re dealing with a motivated seller that needs out from under the property.
On the other hand, if you were to get the sellers to agree to holding a 20% second giving them 80% cash and get them to pay all closing costs for giving them their full asking price, chances would be better that they may go along with that. Once you own the property you can get estimates on the what the repairs will cost that you want to do that would increase the value to the $650k you feel it would be worth once the repairs are completed. Then you can package that deal based on after fix up value supported by an appraisal. Then refinance the property based on fix up value, pay off the new first and sellers second. Now you have a new first at a good rate as an owner occupied loan. In the end you saved thousands in inflated costs from selling a first and over paying for a property in it’s current as is value. If your credit is good and your income will support the payments to qualify for the loan, this should be a slam dunk if the seller will agree to holding a small second for a short period of time while you get the refinancing to do the up grades that will increase the properties value.