Re: When to sell on LC vs. L/O? - Posted by eric-fl
Posted by eric-fl on March 15, 2001 at 22:07:45:
The main reason to buy a property subject-to, and then resell on a wrap or l/c is to get medium-to-long term cash flow. That’s going to be tough with an underlying loan at 14% in today’s market, even with a marginal buyer. L/O would present the same issues, perhaps even more so, as L/O buyers typically have less to work with than L/C buyers. Of course, you are right, you could make a short-term L/O to offset your cash-flow situation, but if someone can’t buy now, they probably still can’t buy 6 months from now. Only about 50% of L/O ever exercise their option, and when they do, it’s typically 18-24 months or longer from inception. Since this property is a pre-foreclosure, their is presumably not enough equity to make a straight buy and sell possible, else the seller would have already refinanced.
Although I have criticized others on the board for saying “Pactrust” in answer to difficult situations, I think it would be the best solution here, and I’ll tell you why. That rate stinks, but it’s probably not worthwhile to refinance. You need a buyer who will pay over FMV a year or two from now, but it’s hard to get people to do that without offering terms. Plus, you need to get some money upfront and at the end, in order to offset your negative cashflow and make this thing worth your while. You basically need a land contract, but only for a short term, and everything spelled out so you know where the money is. That’s exactly what the Pactrust is, and if I remember correctly, the Pactrust documents even default to a period of 5 years before cash-out. In this case, since you would be offering the tax-writeoff, and all other benefits of ownership via the Pactrust, you could get a higher down payment than a L/O would, which does not offer those same benefits. You could then set the Pactrust to get the lion’s share of appreciation when the property is refinanced at the end of the term. Of course, even this may not be viable depending on the numbers, but it may be worth taking a look at.