Re: Imputed interest - Posted by Edwin
Posted by Edwin on May 17, 2009 at 16:31:24:
Thanks for the excellent example, BTI. Understanding finance and using different ways to accomplish the same thing is valuable for any investor. NOT understanding the differences can be very costly to the ignorant and/or uninformed. In your example, the seller got what he thought he wanted, but chances are he didn’t understand the whole picture. And that’s no one’s fault but his.
Re: Imputed interest - Posted by Edwin
Posted by Edwin on May 16, 2009 at 09:43:11:
No arguments from me on that, Phil. I just think it really needs to be clarified that your chances are slim to none of getting 0% interest on a “normal” purchase transaction. Sure, you might find the occasional “backwoods Barney” type of seller who is so attracted to the “good price” he’s been offered that he doesn’t care or doesn’t notice that the note doesn’t have any interest, but I think the majority of sellers are going to want to see some interest. Of course, there are always going to be sellers who want to sell so badly that they will accept 0%. I think it’s a neat trick when you can pull it off, but I think it’s only possible in certain situations. And probably works best when you’re dealing directly with a seller without attorney’s or agents involved.
Re: Imputed interest - Posted by Kristine-CA
Posted by Kristine-CA on May 17, 2009 at 09:01:53:
Edwin: how many buyers have you bought from directly? Your
commentary is the kind of hear from my friends who have bought all
their properties via an agent. Also, how many motivated sellers have
you bought from? I don’t think you would be so quick to refer to them
as the occasional backwoods Barney if you knew the many problems of
a motivated seller.
You mention that agents will kill good terms. Not necessarily so. They
need to be paid. I have three offers in now on probate properties that
have attorneys (two have agents as well). The terms are less than what
the attorneys and heirs want, to be sure. But they have problem
properties that are sitting and have been sitting in a declining market
with no cash buyers in sight. No cash buyers and problem property
creates a kind of motivation we haven’t seen for awhile in CA. Kristine
Re: Imputed interest - Posted by Edwin
Posted by Edwin on May 17, 2009 at 12:09:00:
Kristine,I assume you meant “sellers” and not “buyers” in your question? At last count I’ve bought four properties directly from the sellers, and probably 20 or so via agents. All four of direct sellers were motivated, but probably only two of them were seriously motivated. You’re right in a sense that agents don’t necessarily kill good terms. But what’s “good” is highly relative. If you’re the only one making an offer and the seller really wants to sell, there’s a good chance the seller’s going to be very receptive to your offer. On the other hand, if you try to offer 0% interest and someone else offers cash or a note paying 8%, you’re going to get laughed out of the room. Just like a lease-option deal usually cannot be done successfully on any house in any neighborhood, so too, cannot every house be purchased with 0% financing. High seller motivation is a key ingredient, to be sure.
By the way, what’s the point of buying with 0% anyway? Let’s say a seller is asking $50,000 for his house. You offer to buy the house for $50,000, zero cash down, 8% interest financing for 120 months, payments of $606 (rounded) monthly.
According to my calculator, that same house should be worth about $73,000 (rounded) to the investor paying 0% interest for 120 months. However, for sellers who don’t know how or don’t care to calculate which is the “better” offer, I think many times they’re going to go with the highest price. Of course, the savvy investor is going to try to get an offer accepted at, say 60k, with the same monthly payment, and hope the seller doesn’t notice or doesn’t care he won’t get 120 payments. I think it is safe to say the prime reason for even offering 0% to a seller is to try to make your offer sound better than it really is. And only an idiot or someone unduly motivated would fall for that gambit.
0% - Posted by Rick, the Probate Guy
Posted by Rick, the Probate Guy on May 17, 2009 at 14:57:45:
You’ve missed the entire point.
The 0% that I was referring to was interest rate.
I disagree that “only an idiot or someone unduly motivated would fall for this gambit.”
Do you regularly purchase properties? Directly from sellers (without an agent)? Would you prefer to pay retail?
Here’s the concept:
Find a motivated seller (people can be motivated for all kinds of reasons…that’s up to you to uncover and discover)
Make your offer for price of X, but you pick the terms
The terms are: No mention of interest rate, just the amount of the note(s) and the installment payments, if any (since this could be structured with a straight note, all due and payable on xx/xx/xxxx).
If there are installments, you negotiate payments that are low enough for the property to still throw off positive cash flow after debt service and other expenses.
THat’s called rental profit.
Then, let nature take it’s course. In time, the odds are good that the seller will want to cash out of the note early. Your first right of refusal clause in the note will prevent them from selling the note to someone else first, allowing you to buy it at a substantial discount.
That’s called a back end profit. I like having surprise paydays. Makes life even more interesting.
So, who cares about zero down?
Re: Imputed interest - Posted by michaela-CA
Posted by michaela-CA on May 17, 2009 at 13:01:13:
Edwin,
just because a seller might accept an offer that may not fit into the parameters of a non-motivated person, does not always mean that they’re unduly motivated or and idiot.
I have bought properties where I had built up a relationship with the seller over 2 years. She sent everyone else to hell and ended up selling to me, even though others offered her more money.
I bought REOs with lower offers than my competitors, because I offered full offer price as earnest money, without contingencies.
Sellers refused to talk to me because I was white or a woman and others sold to me because of those reasons.
A lady was a about to lose her vacant lot to tax auction, but she refused to talk to anyone, because that lot used to have her mother’s house on it and her mother died in it. The city had torn the house down for neglect, but the lady refused to sell, because she felt it was dishonoring her mother. I even tried to offer to donate the funds to a Park Service, who would have put up a bench in her mother’s name to honor, but she wouldn’t sell. Lost it at tax sale.
There may be many more reasons for people to be motivated by than just plain Dollars and Cents. Motivation usually involves emotions and when emotion is involved rhyme or reason may not always pull along.
Michaela
Re: Imputed interest - Posted by Kristine-CA
Posted by Kristine-CA on May 17, 2009 at 12:58:36:
0% interest isn’t my bag. For my purposes, I’m interested in no
payments for as long as possible. So I always offer a decent interest
rate.
Working with lots of sellers gives better picture of the various
motivations and needs sellers have that you can’t really see in a listed
deal. The very fact that the property is listed means they have
something they can list. I work with those that generally can’t even be
listed and/or the ones the agent discouraged the sellers from listing.