Basically, investor A finds developers who have extra properties remaining in their inventory after construction is complete. This is due to other investors falling out of contract usually from not being able to get financing. So investor A negotiates with the developer to sell the properties to a number of other investors ready to buy at a discount percentage from the full purchase price… using group buying power. The developer wants to sell these units so they can get them off their books in order to move onto the next project. The individual investors get a portion of the rebate up front which also covers negative cash flow during year 1 of owning the property, but each investor is responsible for the mortgage payments and getting tenants for the property. I want to do this in the future. Is it a bad idea or a good opportunity? Thanks
I have heard from attorneys that if the lender has no knowledge of the rebate then this is bad.
If your agreement is between yourself and the builder, then the builder shouldn’t care nor have any concern over the amount of rebate you give your investors.
Here’s how I see the whole thing working.
First between you and the builder. Negotiate a large discount from retail if you purchase all his inventory in bulk. Say the builder has 20 properties to unload and you negotiate a 15% rebate for purchasing them all with rebate paid at settlement as each property is settled.
Now that you have all the properties under contract, sell one or more of them to each of your investor partners. Use a joint venture agreement whereby you sell one or more properties to the investor/partner at retail. Under the terms of the joint venture agreeement, you give the investor a 10% rebate two week after settlement for each property the invetor purchases with you.
The builder sells all his inventory at a 15% discount, you resell all the inventory at a 10% discount, keeping the 5% spread as your “transaction fee”.
If you can negotiate with a professional property management company to put tenants or even lease option tenants in each of the properties, you might be able to get a discounted management fee with the bulk purchasing power your group can provide.
Next, line up a mortgage broker or a direct lender who will originate 95% loans with no more than 5% in closing and settlement costs for your investor group. Yes, make full disclosure to the lender that you intend to rebate 10% of the purchase price two weeks after settlement, therefore it is done off of the HUD-1. The lender may charge a higher than market rate for making a 95% loan, but this will be done with the knowledge that the investor really has no “skin” in the game. There are lenders that will do this.
Now, you can offer each of your joint venture partners a 10% rebate on the purchase which covers the 5% down payment and 5% closing and settlement costs resulting in a no money down deal for your partners.
If the property will at least breakeven as a rental in the beginning, the investors get a property that may cash flow after a year or two AND the profit from the future appreciation – all with none of their own money invested in the deal.