First deal--help on creative financing

Financing, Hard Money Lenders, Private Money
1

After a few years of reading, researching, and saving, I am ready to buy. I found a place that grosses ~1200 a month for 65k (will negotiate lower if I can). Tenants pay all utilities, and taxes are ~1200 a year. The landlord is at his wits end, and he’s willing to do creative financing, lease option, etc to get rid of the place. What would my best route be? I’d take a loan out on this place, but my wife and I are going to buy our first home next spring (once I graduate) and we don’t want to be declined on account of having another property/ buying too many places in too short of a period.

Ideally, we would take a loan out for this place in the next 3-4 years. Would I be better off doing a lease option, or would I be better off doing a contract for deed? I don’t see myself wanting to not own the property in the near future, but a lease option would be beneficial if I decide to opt out.

Any ideas as to how I can take over this property without conventional financing? I’ve read about various techniques, but I just want a ‘mentors’ suggestion at this point. Thanks for the help!

2

Seems like a decent deal.

$1200/mo gross x 12 months = $14,400. GOI
Taxes $1,200/yr
Insurance $600 (estimate)
Misc. (3%) $430
NOI = $12,170.00

At $65k purchase price (at zero down), 15 year term, 6% interest payments =$548/mo ($6,582/yr)
$5,587 cash flow after debt service.

If you put down $5k, this will give a great ROI. If you get it for less than $65K even better. I would suggest go for straight owner financing, where title transfers to you and seller has a 1st mortgage on the property. Better control for you. Contract for deed, seller still controls the deed.

You may want to try this approach, offer $65k(or lower), $5k down balance to be paid $500/mo for 10 years. See what he says. If he says yes, you just got the property with owner financing at zero interest.

Go for it. Good luck.

3

ask the guy to finance the purchase of the property for as long as he will. Rent out and pocket the difference. Make sure you figure money for vacancy and repair.

4

I know for a fact he doesn’t own the property outright, so how would that hinder the decision making process on which strategy I should choose?

5

I think your concerns about qualifying for financing on a second property are misplaced.

The property you are considering seems to be a cash flow generator which will only improve your creditworthiness in the eyes of the lender when you are applying to finance your own home purchase.

Yes, it is great to try to get the seller to carry back financing if you are willing to pay full price (his price, your terms). If he insists on being paid in cash, you will have to bring your own financing to the table. This should give you some leverage in negotiating a lower purchase price (his terms, your price).

In this marketplace, it is usually easier to qualify for a primary residence purchase than it is for an investment property. Before you do anything else, talk with the residential mortgage loan officer at the financial institution where you do your banking. The depth of your banking relationship is a factor in your favor when applying for a loan.

6

Thank you very much for the reply Dave. I’m going to be talking with the owner today to discuss terms and a price. I’m going to let him set the terms and negotiate from there. I don’t even know if he wants any money down, etc, at this point as it seems he’s just done with the place.

Another concern regarding conventional financing is our credit. We’ve been repairing my wife’s credit for a few years now and it’s just now getting to 620. My credit is good, but I have no income as I am a full-time student. My wife is an RN with great income, but unfortunately they aren’t willing to look past her credit score number, nor should they. She made the mess, and now we’re rectifying it, but we went to buy our primary residence (first home) just a few months ago and were turned down with 15% down, so I don’t think we’d qualify for an non-owner occupied loan. We will be good to go next year at this time to buy our own primary residence. I have absolutely no doubt that we would be able to get financing for this place (the rental property) in 2-3 years when I am working/ we have another residence under contract with equity for collateral, etc, and better credit scores, but I don’t want this place to pass on by.

On that note, if it can’t be done based on terms and price, then it can’t be done and I won’t try to make it work just to buy my first property. I understand how important it is for my first deal to be a winner as it will set the precedence for the rest of my career, or weigh heavily on it anyhow. I’m going to talk to the owner tonight and will report back on what terms/ price we discussed. Thanks again guys!

7

Chris do you have cash or no? Does this place need rehab or it’s ready to go?

8

If there is equity in the property, then contract for deed would be preferable to a lease option.

9

I have 12-15k cash, but I want to keep as much of that in reserve as possible. I’m going to let him put the terms and price on the table instead of me telling him how much I have because honestly he might now want any money down at all, and if that’s the case then this is a done deal with easy cashflow.

As far as rehab goes, it needs nothing major. Some paint/ siding eventually and a new roof within 5 years (estimated by him), so I’ll start putting away for those, but the gas furnaces are newer and the electrical is updated. The one side is rented and has been for 3 years by a known acquaintance (how I found out about the deal) and they don’t plan on moving anytime soon, and the other side is vacant as of this Saturday.

10

I talked to the owner tonight on the phone and we have a meeting set for Thursday to discuss price/ terms. I’m ‘willing’ to pay up to 70k for the cashflow, but no more than 70k unless I can set some very favorable terms.

11

What do you guys think of this lease option term?

Currently there is a 900 dollar water bill on the vacant side (reason why tenants left) because their toilet was broke for 3 months and didn’t notify the landlord.

I will offer 5k + the 900 dollar water bill in return for a sales price of 60k in 3 years
We will allow them to keep current deposits as well
(both the above are based on a ‘they’re broke’ scenario and are in need of cash)
Also, we will allow them to keep the 5900 and not be obligated to apply it to the 60k price, so essentially we would be paying 65,900

However, we pay their mortgage at their rate and their insurance/ taxes

We basically give them 5900 to walk away from the property right now, figuratively speaking, and come back in 3 years and sell it for 60k

Assuming they owe 60k (someone informed me they paid less than 50 for it, but this is hearsay), on the property with a 30 year loan @ 6% int, their mortgage is roughly 360/ m (overestimated to be safe)
360 + estimated ins/ taxes of 200 = 560 debt obligation each month
1200 - 560 = 640/ m
640 - 200 (misc) a month = 440

440x12 = 5280 fcf/ y

90% ROI in the first year alone–did I calculate that wrong? 5900 invested, divided by 5280/ year

I’m also going to advertise to families with dogs/ cats to bring a broader renter base in. Every ad in our local paper advertises no pets, and that alone will bring me a good number of prospective tenants in.

There hasn’t been a single vacancy in the last 2 years, but I still accounted for 1/ year in my numbers.

I really see no holes in this deal as long as the terms are met and the price remains low. I’m going to gauge how desperate they are based on their equity in the home. Something tells me they don’t have a lot of equity built up. They bought the place 5 years ago, and have had trouble paying the taxes on it the past two years (talked with the one tenant). The owner owns his own business and works 70+ hour work weeks, so he really has no time for the place either (expressed this to me several times).

If the place has a decent amount of equity, which I don’t think it does, should I consider a contract for deed instead?

12

Lets see how this works out.
1200/mo gross
600/mo expenses ( remember the 50% rule of thumb)
600/mo profit if it was paid for.
60,000 @ 6% int for 15 yrs =508.38
600-508.38=91.62
91.62 x 12=1099.47
5900/1099.47=.19
I know that when you find these deals they look really good. When analyzed properly things look different. What I would want to know before I signed a contract on any kind is why is the current landlord at his wits end with this property. Most likely he is not making any money and that why he is broke. You will add to the financial problems by adding another layer of management with out fixing the underlying problem. If the problem is bad management what makes you think you can do better than an experienced one. I would check with the city or township for violations and reputation and I would make arrangements for any corrections before signing a contract.

With the potential for profit of only 1000/yr and the risk of one of your tenants trashing the place that could cause several thousands I personally would pass on this one. Unless you can raise the rents or vastly reduce the expenses in some way over a 10 year period you will make only 10,000 on your investment. Will it go up in value over that time? Not likely unless you raise the rents.

Redhawk

13

If the guy’s biggest goal is getting rid of the house and there is existing financing, you can take the house subject to the existing mortgage if the rates are favorable.
You get the deed.
He leaves the current mortgage in place, but you foot the bill.
You could work out the difference in a lump payment in the future or over time.

14

well reading all this discussion I need some “creative” financing ideas to do so as I have virtually nothing to get started with except an exceptional credit rating. Is there anyone out there who can help me that has done this before?

15

ferrorolvans this is a borrowed money business. You need to find where you are going to borrow the money and under what conditions so that you are ready to pounce when a good deal comes along. Creative financing is working out the problems in a deal so that all involved win. There is no set way of doing that. If you only have one way of approaching a deal then either the banks ,Realtor s, title co, or seller will tell you why it cannot be done.
First set up a team of professionals
Financing
Realtor
Title Co
Accountant and so on.
With the team in place decide on a strategy of both entrance and exit.
Read about both of the entrance and exit strategies on this forum.
Now look for properties that fit your strategy.
When you find your first property, negotiate hard
go over the numbers carefully and be sure of your profit.
Repeat the process.
Redhawk

16

REI_Chris,

Did you get the property?
What were the terms of the deal? Are you happy?

Furnishedowner

17

I know you said you have no money, but I would try to see if you can find a 4plex in your area, and do owner financing / subject to. If you moved in and you owner occupied 1 of the 4 units, you can then refinance with an FHA loan based on the lesser of the original purchase price or the appraised value. But you can do this to 97.75% of the lesser of the 2 numbers. By doing the owner financing / subject 2, it can give you a few months that might be need ted to scrape together the 3.5% down payment required by the FHA loan. PM me and I can give you more info.

18

In this market, usually easier to qualify for the purchase of a principal residence for an investment property. Above all, talk to the residential mortgage loan officer at the financial institution where you do your banking. The depth of your banking relationship is a factor in their favor when applying for a loan.