Luxury Home Sub-2 HELP

General Real Estate Investing
1

OK, I have a deal I would love some feedback on. These people are begging for help but I don’t want to take on alot of risk.

ARV 550K, Mortgage Balance 440K, Payment 2,500
Repairs (carpet, paint) 10K

Owner is looking for 15K in pocket and will walk allowing me to take sub-2. Property needs some work like paint and carpet(she took old carpet out and can’t afford new).
The ARV is firm based upon appraisal and comps.

I know there is profit here but I don’t have the 25K for here and repairs and another 5K+ holding costs.

She is needs cash to move and I don’t want to take on the mortgage resposibility.

Any suggestions?!?!?!

Tony

2

If the ARV is $550,000 and she owes $440,000, why doesn’t she take that $110,000 in perceived equity, buy new carpet or make other repairs and sell it on her own? This is a half hypothetical question and a half true question.

Naperbill

3

Naperbill,

She has no extra cash and her credit is shot. She got the house when she divorced from her doctor ex-husband. She had the house listed for 510K all summer and fall last year, but with no carpet and very little furniture she had no luck. Thanks for you feedback.

Tony

4

How bad is her credit? I bet if she looked hard enough (with your help) a bank could be found that would give her a second mortgage for $25K. She can give you $10K for repairs and walk away with the remaining $15K. Just a thought. Good Luck. Let us know how it turns out.

5

David,

Is this how someone could approach this?

Give her 15k to take over her $2,500/mo payment providing the bank doesn’t step in with a DOSC. If that happens, buy the property from her for $455,000 and put 15k into it. Now you’re into it for $470,000 plus monthly carrying costs of probably more than 4k. The day you buy it you’d better put it back on the market because at that level of monthly expense you’re going to chew up potential profit in a hurry.

Selling it for $550,000 means a 33k commission for the real estate people, so you’re down to $517,000. If everything clicks you’re 47k to the good. But I’d still worry about carrying costs and market time for the properties in that area.

Naperbill

6

We’re new. If we knew those tactics we wouldn’t be asking the questions.

Give her 15k take over the $2500 payments and let’s say it takes 4 months to sell (25k). Put 15k in for repairs so now you’re all in for 40k. Sell it in best case for $550,000 and, since your last name is ReMax, we pay no commission and walk away with 70k–best case scenario and 30k worse case.

Naperbill

7

Dave,

I’ll give you an apology for the lack of appreciation I’ve shown on this thread because it’s the right thing to do and I mean this with complete sincereity. Anyone who offers up help deserves at least that from those of us trying to understand these deals.

With that said though, from the first post on what have you offered in the way of help to tony and anyone else reading this thread? I’ve done exactly one RE deal in my life (my own house) and with the questions I’m asking in this thread and the responses I’m making I can promise you there’s not a person on this entire site, veteran or newbie, that would disagree with the fact that I’ve done more to help tony, and in turn myself, understand this process than you have with–

“This is a slam dunk you can make a quick 40K on and everyone wins.”

“I wouldn’t pay a dime in realtors fees, nor violate the DOSC. Knowing different tactics pays dividends in this field . This would be a win-win-win scenario all around, everyone would get what they want and walk away smiling.”

So while I appreciate your credentials and assumed ability to do the types of things that we’re all trying to do in RE, I would also expect a similar amount of respect due someone who doesn’t quite get it yet, but who’s at least making an effort at educating both himself and others. If you’re going to come here primarily as a “mentor”, and your credentials point in that direction, mentor. If that’s not what you’re primarily here for then I’m mistaken and your responses are completely accurate for your goals.

regards,

naperbill

8

Dave,

No hard feelings on this end at all…I’ve read almost everything that’s been posted on the REI site for the last 10 days and there’s a group of people, yourself included, who’ve done a lot to educate many of us. I don’t want that to get lost in these past couple posts. I want to do 1,000 RE deals in my life and it’s guys with the experiences you have that can help make them work so everyone wins.

Thanks for the insights.

naperbill

9

tell her u can help but there is no gaurantee. as long as she is not behind, or not too far behind u can offer something like this:

get it under contract with $10 consideration so u have equitable interest, then u can market it and sell it. make finding a buyer a contingency by X date, like maybe 30 days. tell her u will need to find a buyer. market it as a “$20k down, owner finance, $2650/mo, U Fix, No Bank Qualify, , xxxxsf, 4 bdrm, 3 bath and whatever else u can sell someone on”

the key is to market with non bank qual, becuz there are plenty of folks that have $ but can’t get a loan. the u fix part will take care of no out of pocket fix up cash for u. u can offer a discount for them having to do the work. u have $100k to work with in equity. don’t try to make a killing. making $20k upfront and $20k on the bkend is better than no K. and don’t talk sales price with ur buyer, sell the terms. the price will be discussed in the end. mo pmnt should be higher than hers to make $ on the margin.

u as an investor can offer something banks cannot: creative financing. that’s what this business is all about. sell it on LO/or CFD and offer your seller a note for her $15k payable when the house refis at the end of the contract with ur buyer, or a fixed amount from the $20k u get upfront for a deposit from ur buyer, the remainder at the end of the contract.

if she is truly motivated, tell her it is the best u can offer without risking too much urself. u can always say u have a couple deals right now taking up a lot of cash, or u can’t pull money out of places it is working well in right now, but i can do this…

10

david,

i think the OP was confused and as a result, a bit upset becuz u said there commented that there was $ in this deal but would not elaborate. and then u asked others for help in structuring it. y even respond in the 1st place unless u r going to offer a solution, rather than just a statement?

11

Maybe since the original poster wanted some answers, it might have been nice to offer how you would structure the deal. That is what a forum is supposed to be about, helping people. Maybe I missed something. Sorry, nothing personal, but this post really bothers me.

12

I would say, Bobo, that if you take issue with exercising creativity, maybe creative real estate isn’t a good fit?
Regards,
Dave

PS Obviously no one else was up for the challenge either, except Tony; who I doubt needs practice.

13

yproperties,

At Bobo’s request, I will structure a deal. Always glad to help out. Creativity is needed.
You asked: "ARV 550K, Mortgage Balance 440K, Payment 2,500
Repairs (carpet, paint) 10K

Owner is looking for 15K in pocket and will walk allowing me to take sub-2. Property needs some work like paint and carpet(she took old carpet out and can’t afford new).The ARV is firm based upon appraisal and comps. I know there is profit here but I don’t have the 25K for here and repairs and another 5K+ holding costs. She ineeds cash to move and I don’t want to take on the mortgage resposibility."

I would offer her $15K cash now, and $25K in 3 years. I take full responsibility for maintenance and repairs as well as property taxes and mortgage payments for 2 years, 11 months, and 29 days – on a triple net lease.

I ask her to place the property in trust in her own name for which I WILL PAY ALL COSTS and to name a trustee, who takes title to the property and who must act at her direction and for her best interest. She then assigns me a 90% interest in the trust. Her property is never at risk.

I then sublet on a triple net lease to my tenant. I offer him/her the opportunity to have all the benefits of homeownership with no bank or credit qualifying, and no down payment. (If you want your $15K returned immediately ask for it as a down payment). I ask only for my closing costs (advertising, trust costs, etc.), plus 3 lease payments, 2 of which are held in a reserve account in the event of default.

If they will agree to live in the house, make payments on time on a 3-year triple net lease, and take full responsibility for maintenance and repairs, I will immediately grant him a 50% interest in the trust. As an owner of the trust, the IRS considers the tenant/beneficiary as an owner of the property for tax purposes. He is now able to writeoff the mortgage interest payments, property taxes, and I also offer a 50% share of future appreciation. I will grant him these rights in exchange for a HIGHER RENT.

His after-tax situation is improved. There are plenty of qualified carpenters and handymen who would make ideal tenants and who will be happy to share in the profits. In 3 years, he has first right of refusal (not an option) to purchase the property at FMV. If he wants to walk, he can. He REFINANCES, and pays off the mortgage. The seller receives his $25K equity as agreed, and has improved his credit because payments were made for 3 years in his name. He now assigns me his 10% interest in the trust. He is happy.

Now, here is where you will make money. Your offer to the seller was $480K. Your MAV (Mutually Agreed Value with your Tenant is $515K, with a $10K “allowance” for needed repairs. Your tenant’s rent returns you a $300 per month positive cash flow.

When the tenant buys out the Trust in 3 years at FMV. say: $575K, here is the breakdown:

Seller: $25K

Tenant: 50% of everything over $505K or $35,000, plus the return of the closing costs paid upfront. Tenant has also enjoyed the tax writeoffs for 3 years and did all this with no bank or credit qualifying. He is happy.

You Receive: $25,000 (diff bet $480-$505K);
50% of everything over $505K = $35,000;
36 mos. cash flow x $300 = $10,800.

You have earned $70,800 (minus your down payment which you could charge your tenant if you so chose) over 3 years without having your name on title or on any loan. Your seller and tenants are happy and you have made a nice chunk of change with the protection of a trust.

Da Wiz

14

Gary,

Thanks for the explanation. Even a newbie like me can work through that and put the puzzle together.

If I were interested in a shorter term solution, something from 3 to 6 months, do you see a way to put that deal together? At this point the ability to make $20k in three months is more attractive to me. Although if I had 10 deals like the one you describe I could make a nice living, but I think that’s a bit much to bite off until I felt more comfortable on the experience level.

Thanks again for the insights.

Naperbill

15

I notice that some of David’s harsh replies have been deleted (applaud). I suppose anyone could get on here and say, “$40,000 in profit, idiot, don’t you see it, if you don’t, too bad!”

I think if you were my mortgage lender, and i was sitting across the desk from you and you talked to me the way you responded to Naperbill, I’m sure i would reach across the desk and box your jaws.

Keep up the good work, Dave! (read as sarcasm).

16

yproperties, a few questions before I say what I would do with this kind of a lead:

what general area is this property located?

where in your market does a property like this fall? is it a regular bread and butter middle class property? upper end? How long are houses on the market there? Upper end houses usually take longer to sell. The current market conditions may tell you why she hasn’t sold it yet.

Is she current with her mortgage payments? Does she foresee having problems making the payments in the near future (do NOT ask her these 2 questions, you have to find out without asking her these questions. They can and do make sellers embarrassed by and resentful of). Do your due dilligence and you can find this stuff out withouit asking those questions. As someone who had many financial disasters in my past, those questions would get a negative comment from me. I would tell you what I have said, but this is a family website. You get the idea.

Does she absolutely need the up front money, or could she possibly wait a couple of years?

I would look deeper into the market, and why her house didnt sell for $510K. Do more homework on the $550K ARV. If you are already sure, my apologies, just be sure one way or the other.

I will gladly give a better opinion knowing the above. I would want to do this with no upfront cost, with the possible exception of paint and carpet. You might get away without that too. Her motivation and needs must be determined to give a better opinion. This is a perfect sub 2 deal, if you can get in without giving her the $15K RIGHT NOW. I will give a detailed opinion of how I would handle this lead if I know some of the above.

Now, the above being said, I’m going to give an example, using a 5% annual appreciation, and assuming she needs out really bad, and soon. Also assuming you can do it without giving her cash right now. I will also use your $550 current ARV

BUY…take sub 2 her balance of 440K, no upfront cash. REMEMBER to factor in any possible holding costs.

SELL…land contract, 30 year ammo, payments of $2700-2800, buyers have 2-3 years to refi. Sell for the $550 ARV + 10% (5% annual appreciation times 2 years), means sell for around $600K. get $25-30K down if possible, or maybe take a little less if the new buyers will take care of the carpet and paint. Thus, no upfront cash out of your pocket. The appreciation value I used is what I will use for my area. Your area may be different. This is just an example of what I would do if I got this lead in my market.

With regards to the sellers equity, negotiate to give her a certain amount or a certain percentage of the difference between her mortgage balance and your future sale price. This can be a great way to negotiate that you don’t give her anything now. Yuo can offer to give her double the $15K she wants, if she will wait until your buyer cashes you out to get it.

Final results:

You make an upfront profit of $25K

Monthly, $200-300 per, depending on what payment you charge your buyers, so $2400-3600 total over 2 years.

Back end, $600K you sell for, less her $440K mortgage getting paid off, less the $25K your buyers put down, less the #30K you give the seller when your buyer refi’s, leaves you a backend profit of 105K.

Seller wins…her mortgage will be paid off, and if she can wait, she will get double the $15K she asked for as a down payment for her equity.

Buyer wins, gets in without qualifying

You win by making money and solving the sellers problem

Everyone is happy, life is good for all of the above. But the above assumes the things I listed. The sellers needs and motivation have to be determined first, especially regarding the upfront money.

17

In my above example, if for some reason the house doesnt appreciate enough to appraise for the $600K in 2 years, work with the buyers. If they have paid on time and are good buyers, do whatever it takes to get them in the house. Don’t ever let greed get in the way of morals and ethics and doing what is right. You can either take a second for small monthly payments, or if necessary, even lower the price.

18

I notice that some of David’s harsh replies have been deleted (applaud). I suppose anyone could get on here and say, “$40,000 in profit, idiot, don’t you see it, if you don’t, too bad!”
Not my intention at all. Sorry you feel that way, I actually deleted my posts myself. I was simply trying to use the example to inspire a creative brainstorming session and my tone was misinterpreted. My apologies to the board.
Regards,
Dave

i was sitting across the desk from you and you talked to me the way you responded to Naperbill, I’m sure i would reach across the desk and box your jaws.
I doubt very seriously that would happen. Ask me how I know. :wink:
Dave