Posted by Brandi_TX on April 28, 1999 at 01:08:24:
Bud-
I was making the assumption that this property would be bought right. (shouldn’t they all?) Then IF and ONLY IF they couldn’t find a buyer for some strange reason, they could refi. Last Resort.
I wanted to be sure it was realized that these were 2 separate transactions, and that they do not need to offer the buyer the same terms they got.
Thanks for lookin’ out for me. It was great to meet you in Dallas.
Brandi
Wholesaling a split-funded offer - Posted by Jim Beavens
Posted by Jim Beavens on April 27, 1999 at 19:10:13:
One of the multiple-offer strategies I’ve heard of with junker properties is to make a low all-cash offer, and a slightly higher split-funded offer (like $5K down and the rest in 6 months, no interest or payments…obviously this is only done with individual sellers, as opposed to banks, since the only thing they understand is cash).
I’m not quite sure how this would work if my intention was to wholesale flip the property to another investor. Let’s say that I would normally offer $65K cash for a property with an ARV of $130K. But I go ahead and say I’ll pay $70K if I can only pay $5K now and the rest in 6 months. They accept this split-funded offer, and now I go looking for an investor to flip to. Do I tell the investor that the price is $75K, with $10K down and the rest in 6 months, and have them assume the “loan”? What if the investor wanted to borrow the money for the purchase and rehab through a hard-money lender? (there’s already a 1st mortgage on the property). Or would I not even be wanting to deal with an investor who didn’t have $10K cash on hand?
I realize the alternative is to assign the contract for cash, but I’m trying to see if this would work in a simultaneous-closing situation. I’m currently just making cash offers, and was thinking of trying a multiple-offer strategy in some cases.
Treat it as 2 totally separate transactions. - Posted by Brandi_TX
Posted by Brandi_TX on April 27, 1999 at 22:52:20:
If I am not mistaken, you would have a normal closing with your seller. Your seller is taking 5000 down and financing the rest. The terms are between you and the seller with a seller financing note signed at closing. You own the property as of the date of closing. You can do with it whatever you want. If you do not pay the seller in 6 months they foreclose on you.
As for the note, you pay it off when you sell to your buyer. If you have a buyer before you close, do a simultaneous close. If you don’t get a buyer, and have fixed it up, refinance the house to pay the seller off.
Hope this helps.
Brandi
That “split-funded” thing… - Posted by Sean
Posted by Sean on April 27, 1999 at 21:55:28:
…is basically an option, right? You are giving the person $5,000 now for the right to buy it in 6 months all cash at a predetermined price with 100% of your option money credited towards the purchase. Present it to your assignee that way. Just include a clause in the contract that in case something goes wrong the $5,000 will be forfeited as liquidated damages and you’ve got yourself an “option-by-another-name.”
Re: Treat it as 2 totally separate transactions. - Posted by Jim Beavens
Posted by Jim Beavens on April 28, 1999 at 12:47:16:
What I was trying to do was get a higher price from my buyer by offering the same good terms I negotiated with the seller. If I determine that a rehabber would pay $70K cash for this house, then I would normally offer $65K cash to the seller. But I was trying to determine if I could offer $70K with only $5K down, and then turn around and sell it for $75K with better terms.
Perhaps a better way to ask this question is to pretend that I’m rehabbing it myself; forget about the wholesaling part, I just want to clarify how split-funding works. Suppose I find a house that’s worth $130K after repairs that cost $15K, and I offer a $70K split-funded offer; $5K now and $65K in 6 months. Now in order to buy and rehab this property, I need to come up with $20K cash. Assuming that the $65K mortgage is a first mortgage, then we’re already at 50% LTV. Adding another $20K mortgage would get us just above 65% LTV, which is really pushing it for hard money. Some tweaking of the numbers could easily get this to 70% or 75% LTV, and I’m out of the hard money area.
Perhaps my mistake is assuming that the mortgage to the seller is a first mortgage. If I were to make such an offer, perhaps I should put a subordination clause in the mortgage to the seller, so any new financing would have a first position. I could even offer the seller more cash now in such a situation. For example:
*$70K sales price, $20K now, $50K in 6 months with a subordination clause.
So getting back to wholesaling, I’m wondering if most such split-funded offers are usually done by making the balance that the seller carries as a mortgage subordinate to new financing, thereby allowing maximum flexibility for the rehabber (whether it’s me or somebody else).
Heresy - Posted by Bud Branstetter
Posted by Bud Branstetter on April 27, 1999 at 23:50:56:
Brandi,
How dare you want to refi. Find a buyer. The mortgage broker can finance the person that wants to buy. It is just the LTV that has to be lower. If you make a mistake and buy too high without a plan for escape is the only reason to want to refi. Build in an escape on that balloon. Higher interest, additional cash that you can get your hands on or a very long foreclosure period.
Re: Treat it as 2 totally separate transactions. - Posted by Baltimore BirdDog
Posted by Baltimore BirdDog on April 28, 1999 at 14:01:43:
Jim,
I think the real question you want to ask yourself is, “Do you want to be financing your flipee’s rehab?” Do you really want to take that risk in a situation you don’t have complete control over?
Although split funding is a great idea for buying from FSBO’s if you’re going to do the rehab yourself (assuming you have some cash to do the repairs or are able to sell the seller on a subordination clause so you can put a first mortgage on the property to fund the repairs), I don’t think it’s a good way to flip properties. I’m pretty sure LeGrand’s intent was to present it as an idea if you’re retailing houses and I think somewhere in one of his tapes he states that wholesaling is a cash business…period, followed quickly by a statement that he’s taken a seminar on financing other people’s rehabs.
Hope this helps. Good luck in your REI prospecting and in putting up with your job until you reach the finish line (a.k.a. “I’m upping my income so up yours!”). See you at the next convention.
-Jeremy