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.
- Get a new hard money 1st for $45K; $20K to seller, $15K for rehab, the rest for holding costs and up-front cash in pocket.
- Upon selling for $130K, pay off $95K in total mortgages, leaving $35K for selling costs and profit.
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).