Would you do this one? - Posted by LeonNC

Real Estate Investing
1

Posted by B.L.Renfrow on March 18, 2001 at 21:40:28:

Well, that’s not at all unusual for sellers headed for foreclosure. Many, many times they will hold out for a miracle. You’d be surprised how many times the seller’s back up plan is winning the lottery. Once in a while they’ll pull it off. But often not. I wouldn’t beat them over the head with it – not quite yet, anyway. I’d just let them know they can call me when things don’t work out the way they envision.

The $50k loan balance does make it appear to be a better deal than I first suspected. But I still wouldn’t do a L/O with them, just because of all the potential complications which can arise when the sellers are presumably over-encumbered and in financial distress. I do think a PAC Trust would be reasonable. But I still like subject-to.

You could always try offering them $1000 now and another $2500 in six months. That would hopefully give you time to get someone in there and get the cash flowing.

I’ll look forward to meeting you in Atlanta. Less than two weeks!

Brian (NY)

2

Would you do this one? - Posted by LeonNC

Posted by LeonNC on March 18, 2001 at 19:36:10:

I need opions

For anyone new you should read this. This is a live deal in the works that I’m a little tossed about. But might just work.

Seller called. Has a very nice 1993 1000sqft 2/1 in a very nice rural area. It’s in an appreciating area with large houses going up in the area. FMV is approx $73,000ish and needs maybe $250 in clean-up. Rents in the area go for about $600mo. The owners payment is $430mo PITI.

The owner is two months behind in payments and I’m guessing that they are waiting for thier parents to bail them out. They want $3500 cash which includes making up the back payments of $830.

I figure my buying cost is going to total approx $5400 (borrowed at 10.25%) including 3 months holding time. I figure the house will pay for the debt or buying cost in about 1yr 2 months with the monthly cashflow of $195 and $2500 option consideration.

At thier house today I offered to give them the option consideration of $2500 and they held to $3500. So I’m working based on that number. I thought maybe I could put up the $3500 or maybe half of it as security deposit so that it’s refundable. I can get an option price of $62,000 for probably 4 years.

I’d like cashflow from day one but I’m leaning toward doing it anway. It will be $195mo cashflow positive in about 14 or 15 months. And AT LEAST 10k in backend profit.

Worst case (hopefully) is that I only get positive cashflow and and the tenant doesn’t exercise. For that reason I I should make the lease for two years and the right to extend three times rather than two. That would make me feel a lot better. That would guarantee me at least 10k profit and a decent return on the money. Thinking this out as I write.

Help! I need some opinions.

LeonNC

3

Here’s what I’d offer! - Posted by Jim

Posted by Jim on March 19, 2001 at 07:12:11:

Leon,
If the house is in good condition and in a good area, I’d make a L/O offer.

But I’d want to reduce my risk with this deal. L/O for $12,000 + mortgage balance, at the time of sale; for the mortgage payments for 6 months with the right to renew for 9 terms. This way, you’ve reduced the term period to reduce your risk. If the deal goes sour, don’t renew!

As for the deposit, I’d tell them, ‘they already owe $830 in back payments and I need 2 months (after they vacate) before I’d start making payments, so I have time to find a ‘Good Tenant/Buyer’, they’ll owe another $830 plus legal fees at that time; the best I could do was $500. Can’t they see that I don’t make any money until I get a tenant/buyer to closing and I’d have a miserable time getting more from a tenant/buyer for a deposit. I’ve done this before and I’m just NOT willing to get into a trap. I do this for a profit and if they need more I can’t do it and they should call me if they change their minds. BUT the longer they wait, the more they owe, the fewer my options are and the less money I could give. etc. etc…’ If they just have to have more then we wouldn’t be talking about L/O but Land Contract or deeding ‘Subject to’.

If they went for a L/O and the area is appreciating as you say, I’d try to get $80,000 on a “rent to own” and shoot for $3,000 to $4,000 (5%) as a nonrefund deposit. This way, you’ve covered your up front cost and you get your cashflow right away. AND definatelly get a tenant/buyer who’s interested in a ‘Down Payment Assistance Program’ to increase your cash flow that much more. Even if all I get for a deposit is $2,000, if the tenant/buyer wants to kick in an extra $200 or $300/month towards their down payment, I do that in a NY minute. My cost would be covered in a couple of months and I’ve increased the cash flow several hundred dollars per month.

If they went for a Land Contract or deeding ‘Subject to’ then I’d wrap that baby and sell with ‘No Qualifying Loan’ for $85,000 with 10%+ down plus 1/2 closing cost. Oh, the best I give the sellers is $5,000 minus what they owe in back payments minus 1/2 closing cost.

Of course, this is just me…
I don’t know the particulars or the owners. This is just quickly off the top of my head.

jim

4

Re: Would you do this one? - Posted by Erik B.

Posted by Erik B. on March 19, 2001 at 03:36:10:

If they think they can get bailed out… let them. Don’t bail them out yourself! They obviously don’t feel as if they are backed into a corner yet. They probably know daddy will help. However, if the situation changes you will be in a perfect situation to take the house subject to. If daddy doesn’t help and if they are worried about their credit they will pretty much be forced to deed you the property. If you feel very kind, give them a few hundred in moving money… nothing more.

5

No. Not like that - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 18, 2001 at 20:47:20:

You didn’t say what the current loan balance is, so I’m going to make some assumptions. I’ll assume it’s not far below the FMV, since the property is only 8 years old.

The sellers want YOU to pay THEM $3500 PLUS their back payments of nearly $1000, PLUS repairs, PLUS holding costs until you find a buyer. And they want to keep the deed? What are they smoking?

You say you’d have $195 per month cash flow…BUT that’s not for 15 months. And what if you can’t find a T/Ber right away? It sounds as if you’re basing your numbers on appreciation, which is sort of like rolling the dice. You say large houses are being built all around. What if there’s no market for a 1000 square foot house?

Unless I’ve missed something, I wouldn’t give these sellers a dime. They think mommy and daddy will bail them out. Maybe they will. I’d wish them luck and tell them to call me if things change. If they don’t get bailed out, it’s a good bet you’ll hear from them in a month or so, when they get served with a foreclosure notice.

I’d offer to take the property subject to the existing loan. I’d point out that if they don’t get bailed out, they not only WON’T get anything, but their credit will be ruined and they’ll likely have a deficiency judgment against them. No way would I do a lease option with sellers who are headed for foreclosure. You might consider a PAC trust, but I wouldn’t do a lease option.

By taking it subject-to, you’ll only need to put in around $1k, plus holding costs. Doing it like that, you very likely WOULD have positive cash flow from day one – not 14 or 15 months down the road – once you get a T/Ber (or a buyer on a land contract) into the place. You should be able to get $2500 option consideration from a T/Ber, or $5-7k downpayment from a land contract buyer.

I’ve been known to do some deals the “big boys” (and girls) probably wouldn’t look twice at. But I don’t see any way I’d touch this one as you’ve presented it.

Brian (NY)

6

Re: No. Not like that - Posted by LeonNC

Posted by LeonNC on March 18, 2001 at 21:10:21:

Brian,

The payoff is $50,000. They want some money out of the deal. I don’t think they realize they are in as much trouble as they are. Maybe I didn’t hit them over the head as much as I could have with the fact. They are considering renting it themselves. I think that might be an option but I don’t know where they’re going to get the money to get to that point.

I don’t think they’ll go for the subject to deal. The man who built the house offered to buy it from them for $55,000 and they turned it down. They must have a back up plan they are not telling me about. Must be hoping the parents will help.

I have no idea how to base a buy on appreciation and that’s not how I figured this one. Income and outgo.

They need moving money and won’t give the house away but I think we are close. How WOULD you do the lease option? I’m thinking if the house will pay for itself in a year then it’s good. Maybe with that much money I should get a land contract? Not much of a stronger position.

Thanks!

LeonNC

PS. Brian you’ve answered many of my questions lately and I owe you a beer. See you at the convention. Sent the check Friday. Can’t wait!