We FINALLY got one!!!!!!! (long) - Posted by Kathie E.

Posted by Kathie E. on June 07, 2000 at 23:31:51:


Appreciate your advice and Jeff Taylor’s website address.

I guess the comment about “renting to the highest bidder” was a bit of a euphemism…today just felt a bit surreal to us when we had so many people interested in our house. We’ll, of course, check out the prospective tenants as thoroughly as we can and get as much legal advice as possible before renting to anyone.

We’re happy that we’re hanging on to this asset, too!!! What WERE we THINKING? I know~~it was the quick $15,000 profit potential on our first investment. We’re back down to earth now and being more rational and long-term goal oriented. smile

Thanks for your help…I’m off to visit Mr. Landlord. :slight_smile:

Kathie E.

We FINALLY got one!!! (long) - Posted by Kathie E.

Posted by Kathie E. on June 06, 2000 at 19:18:07:

Hello, everyone!

Hope someone out there remembers me…it’s been awhile!

At last posting, my husband and I were consulting with some rather unsavory characters who were trying to sell us some single-family homes for 80% of FMV and taking back a 2nd mortgage for us as the down-payment and then “forgiving” the 2nd mortgage in 30 days. We ran from them swiftly after advice from some in this forum as well as our attorney.

We then went back to the drawing board…meeting with mortgage brokers and banks to find a way to use our current home equity to begin purchasing rehabs or foreclosures to rent or flip. Every mortgage broker told us the same thing: We couldn’t obtain an equity line of credit on our home for the amount that we needed and we would have to refi our home and pull the money out of the property that way (we owe appr. 25% of the FMV of our home after 11 years). We closed on such a loan and left feeling defeated…this was NOT what we wanted to do! We didn’t even have a house in mind to buy and we were facing a $900 increase in our monthly payment for money that we were borrowing and not able to use right away…not to mention that we had no rent or other income to make up the difference in our payment amount. We went straight to our own bank that we’ve had an account with for almost 10 years (having been turned down a year ago, we felt we had to try one more time!) and after a 20-minute phone conversation with someone in the bank’s home office (placed by the local bank’s loan officer on our behalf due to our 3-day clause on the loan we closed on that day), we were guaranteed an equity line of credit for 80% of our home’s value and had a check book for that line in 7 days. Needless to say, we cancelled that day’s BAD loan deal right after we left our bank.

We went to that week’s sheriff’s RE auction and watched the 11 houses (out of that day’s 75) that we were interested in either get bought back by the mortgage company or by people who were willing to bid higher than the limit we set on each property. We knew that it took other people sometimes a year or more to get their first one at the auction, so we assumed we had awhile before getting started. Meanwhile, it just felt great to know that the money was THERE if we needed it! Our bank officer set up a system for us to call her on Wednesdays with the amounts of the cashier’s checks that we needed for that Friday’s sale and they were waiting for me at 9:00 a.m. sharp with the checks on Friday morning (waving the normal $5 per check fee, I might add.) By the following Wednesday (week #2), we had done driveby’s and title searches on 23 properties that we were willing to bid on for that Friday’s sale. (They now know me by name at the courthouse records departments…) I picked up the 5 checks totalling $46,500 that we needed in any combination to by any of the 23 houses we were to bid on and met my husband at the sale. It was our daughter’s 5th birthday. A home that was TAX appraised at $45,900 in a really nice, well-kept and low-crime neighborhood, had a $30,000 mortgage on it taken in '98 and in my research, I’d found that these owners had skipped town and this was their 4th and final property going on the block. I told my husband that if we were going to get ANY of these 23, that probably would be our best chance. He said that a lot of others at the sale may be thinking the same thing. Two of them WERE. The mortgage company made opening bid on the home, my husband battled in $100 increments with two other sharks in the pool and we won the bid at $35,500!!! We had confirmation in less than 2 weeks…the locksmith drilled the locks out and we were in the same day. The house is in GREAT shape! Needs the usual painting and carpet-steaming and some minor repairs (bathroom caulking, etc.). 3 BR, FR, LR, kitchen and 1 bath. The yard is a field, naturally, so we hired a guy to come out and mow, but he hasn’t shown up yet…which gets me to the GOOD news! We went out to check the yard to see if the guy was there today…he wasn’t and we decided he’s “fired” already as our RE lawncare service…haha…My husband checked the mailbox and found the following note in it:

“To Whom It May Concern:
I am interested in buying this house. Please give me a call at Home (#), Pgr. (#) or my office at (#) (Ext.). My name is (name)…Give me a call.”

There was laughter heard within a 10-mile radius from our vehicle as we drove away and grabbed the cell phone to see what this guy had in mind. It seems he is currently renting a home 2 doors down from ours…recently divorced…has no down payment saved and was going to buy the home he is living in now, but he says the house we bought is in MUCH better shape than the one he is living in that the owner wants to L/O to him for $45,900. He is interested in L/O on our home…says he’s interested in paying $50,000 for it and will do ALL maintenance, etc., and we “wouldn’t have to worry about A THING.” We know that we’ll have to check him out thoroughly, but what does everyone think of this?

Sorry so long…we are just amazed that we didn’t even get the grass mowed yet or have to lift a finger to do ANYTHING to the property and are now looking at making $14,500 in 2 weeks doing NOTHING but picking up some checks and bidding at a sale. Is this too good to be TRUE? Also, if you are involved in a L/O to someone on a property, can you still pull a mortgage out of it at 80%?

Thanks for reading…hope everyone is doing well!
Kathie E.

Re: We FINALLY got one!!! (long) - Posted by JPiper

Posted by JPiper on June 08, 2000 at 03:18:36:

Just a couple of comments that may well have already touched on in this thread…but just to reiterate.

To make your strategy work, you will need a lender who does not require seasoning to loan based on the appraised value. There are MANY lenders who will not loan on the appraised value UNTIL you have owned the property a year. Not saying they aren’t out there…perhaps your bank is one of them.

If you sell with a land contract, and if you plan to do this as a strategy where you do more than one…you should familiarize yourself with the law in YOUR state concerning how you would terminate a land contract. In some states an eviction would be the process…in others you might have to foreclose…a more expensive and time consuming process.

Also, a land contract is a sale…and therefore if you are doing more than one of these on a regular basis (a strategy that you are implementing), you will be a dealer, and therefore owe tax on the entire profit at the time of sale, eventhough you have not received it. Make sure to keep these types of dealer properties segregated from investment property.


Re: We FINALLY got one!!! (long) - Posted by Kathie E.

Posted by Kathie E. on June 07, 2000 at 13:18:50:

Hi, all…

Been reading a lot of posts on here today. Have a call in to our tax accountant regarding the capital gains tax issues if we were to sell this property right away or on a L/O. He’s out of the office and I’m very curious as to whether or not capital gains taxes apply or are stiffer when you flip as opposed to L/O at end of two years. I know that most of you don’t want to give tax or legal advice, but I’m simply curious as to how it works and hate to wait until tomorrow for a return call from our CPA!
Thanks a bunch!
Kathie E.

Re: We FINALLY got one!!! (long) - Posted by B.L.Renfrow

Posted by B.L.Renfrow on June 06, 2000 at 22:11:15:

Hi Kathie,

Good to see you back again! I am happy to hear you decided to avoid that other deal you were looking at before, with the lender fraud involved.

Congratulations on your deal! Before you write off that potential buyer who can’t get financing, do this: I think you are joking about calling Ed Garcia…BUT that is EXACTLY what you SHOULD do! If not Ed Garcia, then at least sit that buyer down with a good local mortgage broker and see what it will take for him to get financing in a year or so. If it can be done, and the guy has the required option consideration and can make the payments, and checks out otherwise, then L/O to him for a year.

Alternatively, if you want to get your cash back out sooner, have one of the note buyers pull his credit and see what kind of a discount you’d need to take on an owner-financed note sale at closing.

As to whether to put a loan on the property to pull out your cash while you L/O, this could be avoided if you go the note route. But if you don’t want to take the discount, or you can’t find a cash buyer right away, it probably would make sense. At least that way, your personal residence wouldn’t be at risk if something catastrophic or unexpected happened and you couldn’t make the payments on the home equity line you’re using now.

Brian (NY)

Forget the L/O - Posted by Dan (NY)

Posted by Dan (NY) on June 06, 2000 at 19:55:05:

I have done a fair number of number of rehabs, and my advice is to avoid doing L/O’s. The object in rehabbing is to get in and out as quickly as possible, while making a decent CASH profit.

There ought to be plenty of buyers around for your house if it is in decent condition and in a reasonably desireable area. Don’t hold a mortgage, let them get their own financing.

The cash from your equity line is very precious, don’t tie it up by getting into an L/O or owner financing. Hope this advice helps!

Dan (NY)

Re: We FINALLY got one!!! (long) - Posted by MDonovan

Posted by MDonovan on June 07, 2000 at 14:58:49:

Cap gains are at your regular tax rate if you flip. If you L/O and hold for the longer term (12 montths or 18, I forget, the rates are 20% (I believe) and 15% if you fall below a minimum income. These change OFTEN. It is guaranteed to be dfferent in 2 years.

Your option should say that it is only exercisable after a certain date, one year into the future. (or 18 mos)

Also, you can 1031 these L/Os and pay no taxes at the sale. It rolls over to your new properties.

Re: We FINALLY got one!!! (long) - Posted by Kathie E.

Posted by Kathie E. on June 06, 2000 at 22:43:48:

Hi, Brian!

Actually, I WASN’T kidding about calling Ed Garcia! :)I’d appreciate it if you or someone else would email me his telephone number or post it on here.

I think the broker that we “quit on” that day (with the refi) is motivated to do whatever he can to help us get started. His boss was calling us for weeks after we cancelled trying to offer us ANYTHING to regain our trust and our business. I want to speak with Ed first before contacting them, however. The first thing I learned on this board was that Ed Garcia is the KING of Financing!
Many thanks for your time and advice, Brian!
Kathie E.

Re: Forget the L/O - Posted by Kathie E.

Posted by Kathie E. on June 06, 2000 at 20:47:34:

Hi, Dan!

Thanks for the advice! We just hung up with the interested buyer. He can’t get financing right now…bad credit after bad divorce…same old/same old… Wants to rent the house from us or buy it on L/O. Either way, he loves the house and wants to live there. What now? Calling Ed Garcia! LOL…

What if we were to L/O it to this guy for two years and meanwhile pull a mortgage out of this place to buy down the $35,500 on the equity line that we used and go after another one of these? We still have $20,000 on the equity line at our disposal, but we don’t want to use it ALL, naturally! We agree that our equity line is precious and can’t be used unwisely, but I don’t see how we can lose if we are selling for $15,500 or $16,000 over what we have in it. Our original plan was to rent the homes we bought at sheriff’s sale and pull out mortgages on them as we go to pay for the next one…not realistic? Our banker assures us that she can get us a loan for each property we own “free and clear” after the sale. We would get far enough ahead of this equity line and just pay it off and use each property to buy the next and let the tenants make our mortgage payment and also provide an income above that. Too risky? It sounds good, but does it WORK???
Thanks again…:slight_smile:

Thank you! (for both posts regarding our situation) (nt) - Posted by Kathie E.

Posted by Kathie E. on June 07, 2000 at 15:09:16:


Re: Forget the L/O - Posted by Mark

Posted by Mark on June 08, 2000 at 02:01:28:

What price can you sell the house for now without the L/O? Is the area appreciating ver quickly? If you can sell the house now for close to the same price as the L/O, just sell it outright and payoff your line, and 1031 the profit into another property. Why wait a year or two to capture the profit? You may be able to flip and profit on a couple more properties during the same time you are waiting for this L/O to run it’s course. Also, the buyer may not ever exercise the option to buy. Good Luck.

Re: Forget the L/O - Posted by Vic

Posted by Vic on June 07, 2000 at 02:31:36:


Congratulations!!! Sounds like you have done well.

I’m not a mtg. broker, but I don’t see any reason why you couldn’t pull 80% of the appraised value out of the property. However, keep one thing in mind, if you do enough of these, you will have many open loans on your credit report, which could have an adverse effect on getting future loans. Another thing is that your debt to income ratio will be effected as well. It’d would probably be best to discuss this with a good mtg. broker before you do it.

If you’re going to get the financing done the way you described it, you might want to also consider selling on a land contract to this guy, as it will not effect your ratios as much. Selling on a land contract will help your debt to income ratio, but you’ll still have the loan in your name.

Overall, I think in this case, you might do better just to sell it yourself outright for cash & be done with it. If you found one buyer, you probably can find another. Just advertise the property with owner financing (where you would owner finance & sell the note to a note buyer) & you’ll get people calling. Chances are you’ll find at least one that can qualify for a regular bank mtg.

Good Luck!


Re: Forget the L/O - Posted by Kathie E.

Posted by Kathie E. on June 08, 2000 at 11:12:11:

Hi, Mark,

We bought it for $35,500 and can sell it for $50K or a little over that. We are meeting with an RE attorney in the next day or two and will learn about 1031. This week is the first I’ve heard of that and it sounds VERY interesting. We are leaning more toward renting it and keeping this investment long-term. We’ll know more after the meeting with the attorney, though.

Thanks very much for your input.

Kathie E.

Re: Forget the L/O - Posted by JPiper

Posted by JPiper on June 08, 2000 at 03:05:26:

Flipping a profit in the manner you describe will disqualify you for 1031 use. The property must be held for investment, and exchanged for another “like-kind” property, one held for investment. Check with your tax advisor.


Re: Forget the L/O - Posted by Kathie E.

Posted by Kathie E. on June 07, 2000 at 11:49:46:

Hi, Vic!

Thanks for your time and advice.

Our DTI ratio would actually be BETTER, with the tenant providing us with anywhere from $200-$300 more a month than what our loan payment is. The rent monies coming in are considered income in that calculation from what we have always understood. If we become landlords (not our fondest wish!), we will be increasing our DTI ratio every time we buy a home and then rent it for more than we are paying for it monthly.

We haven’t researched selling on land contract yet. So we are in the dark in that area. We didn’t realize we’d have offers this early in the game to sell this house, so it’s something we need to look into and FAST!

We are meeting with the potential buyer (or at the VERY least-RENTER…he wants to live in the house no matter what we all decide)this Saturday. Will keep everyone posted on what transpires in the next week or so.

Many thanks again!
Kathie E.

To clarify a point… - Posted by Vic

Posted by Vic on June 08, 2000 at 24:45:38:


Hi! Stacy already pointed out that because you are renting for more than your note - that does not mean that your DTI ratio will be improved. It will not be improved.

To further clarify. Let’s say that your note on a particular piece of property is $750 & let’s say you rent it for $1000. Stacy indicated that this would be a wash, since 75% of $1000 equals $750, but that doesn’t paint the whole picture.

Your back end ratio will definitely be effected by that $750 payment. For example, let’s say your back end ratio is 36%. This 36% would include all of your debts. That means that the full $750 gets deducted from this 36%. So you would be starting at 36% -$750 -all your other debts. Unless your income is high, this will effect how much you qualify for if you’re going full doc. Your income will be increased by that $750, but in essence only 36% of that $750 is being counted.

Just wanted to clarify. I would also advise to slow down & think through what it is that you really want to do with this property, before you commit to anyone.


Re: Your overall strategy - Posted by Stacy (AZ)

Posted by Stacy (AZ) on June 07, 2000 at 14:07:48:


I just wanted to chime-in and give you my opinion about your overall strategy of using your equity-line repeatedly. This man’s opionion- I think it’s a good strategy. Actually, it’s very close to what I do. I have various secured and unsecured credit lines I use.

A couple of things to think about:

If you L/O these properties, or simply rent them, the monthly payment you receive from your tenant will be reduced by approx. 25% by any lenders calculating your debt/income ratios. If you are paying 25% less on underlying loans than you are receiving in rent, this should be a wash. However, your FICO may very well improve by paying-off multiple loans in a timely manner. If you sold on a wrap (Land Contract), the lender would most likely consider 100% of your incoming payment instead of 75%, when calculating your D/I.

Also, regarding what to do with these properties once you buy them: What are your short and long term goals? I think most experienced investors agree that for the long term, we need to accumulate good rentals. Allowing tenants to pay-down our debt over the years to eventually end-up with a serious amount of equity and cash flow is a common long-term strategy. So, selling ALL your properties on L/O, or on contract leaves you with no long-term ownership. So, if you have the chance, it may be a wise move to keep some of these properties as rentals…the ones that are in good neighborhoods and are destined to attract good tenants.

And last, you may want to keep in mind that after you have completed a number of these transactions, and have a track record, a working line of credit may be the way to go. I’ve learned about these from Ed Garcia and Terry Vaughn in posts here and at the Lender’s Workshop. With a working credit line, you are not risking your home to do deals, and the credit line can eventually be MUCH larger than an equity line. I spoke to a guy at the workshop who has a $1Million working credit line (at one-half point above prime) and another half-million line. I know it bothers me using my home equity-line, risking the place my family lives.

Just my opinion, for what it’s worth.


Re: To clarify a point… - Posted by JPiper

Posted by JPiper on June 08, 2000 at 03:02:52:

Not true Vic. You’d make a mighty tough underwriter…we’d all be out of business. The net difference between the gross rent (minus 25% for expenses) minus the mortgage payment is used for the purpose of back end ration. If it’s positive it improves the ratio.


Re: Your overall strategy - Posted by Kathie E.

Posted by Kathie E. on June 07, 2000 at 14:53:25:


Thanks for the advice…you’ve all been so helpful to us!

Our long-term goals have changed over the last year since we started studying REI. Initially, we wanted to buy at the sheriff’s auction and do rehabs for quick sale. My husband is very handy…can do nearly all of the work himself and save us money; he is also self-employed and can arrange his schedule accordingly. We then discussed buy/hold…and becoming landlords. Several people have told us about the common “headaches” of dealing with tenants and major/minor problems that can occur overall. We feel that the long-term rewards can be beneficial, but it’s certainly thrown a wrench in the works to have this guy wanting to buy the house we bought only two weeks ago! $14,500 profit for VERY little effort combined with the $13,000 in rent over the term of the L/O is very appealing to us. The rent from this home would pay the $350/month on the equity line that we used and still bring us $200-$300 a month in income. So we are trying not to be too impulsive in making this decision. The buyer is highly-motivated…and will settle for renting the house for the time being. I think we’ll stick with that for now, but will know more after we meet with him on Saturday.

You may have answered this and I’m just not clearly understanding…if this is what you’ve been doing (using your home equity line), are you then pulling a mortgage on the homes you buy with the line and then paying down the line with part of that? We have $20,000 still available on the equity line…if we borrow $45,000 (80%) on the rental and apply, say, $25,000 of that to the equity line, would that be similar to how you are making this work? Keep buying the equity line down as much as possible and eventually using the previous property to buy the next one? We had this all mapped out when it started and now we are hearing about other options that are BETTER than what we had planned…we’re like sponges over here…we are trying to absorb everything so we don’t jeopardize our family’s home, too! I feel I’ve done my homework in a lot of areas, but we’ve still VERY VERY much newbies.

Thanks for your time, Stacy. (by the way, I emailed Ed Garcia…anxiously waiting to hear from him!)

Kathie E.

Jim, are you saying that… - Posted by Vic

Posted by Vic on June 08, 2000 at 19:03:43:

…they only use the difference in calculating the back end ratio?

In my ex. - $1000 rent minus 25% equals $750. Now if the mo. note is $750, are you saying that this would be a wash & would have no effect on the DTI ratio?

It seems to me that in the past I’ve had clients where the full pmt. on rental property was counted against them (after factoring in the 25% & the income). Now I have to wonder why that was. Would you have any ideas as to why?

As always I appreciate you clarifying my clarification. :slight_smile:

If nothing else, it will clear up an issue that I obviously misunderstood.

Thanks for you insight.