Please help me out. Calling all creative thinkers...

General Real Estate Investing
1

Hello-

OK, here is the scenerio:

I found a lady that is ready to sell her second home. She has rented it to people that she knows and has had a terrible experience with it. She is VERY eager to sell and wants to sit down and talk about doing something soon. She said that the bank has been threatening to foreclose, but she always paid up what she owes before they go to the next stage. The house is in a nice area right off the freeway and I think that it would be VERY easy to rent.
Here are the numbers that I am working with:

Current Rent = $850
Her Current Mortgage = 600 (not including an escrow?!?!?!?!)
Her Taxes/Insurance = approx 2000 year / 170 month (seems high?!?!)

Amount Owed = 69,000
County Value = 81,000 (questionable)
Comps from realitor (2005) = sold 75,000 - 81,000

Here are my questions:

  1. Would you just buy the house, sub2 and take over her note or any other creative ideas?? I think that if I took over her note and added an escrow account I would be losing money each month.

  2. If you bought this property straight out, how much would you offer? I was thinking of offering about 60,000…leaving her with 9000 to pay off. Do you think that would offend her?

3 If I do take out a loan as an investor, would my rate be atleast 10% or could it possibly be lower??

  1. Can you tell me what all is included in the ESCROW? I don’t know if I calculated that right??

  2. Should I just walk away and keep looking??

Thanks in advance to answering ANY of these questions!! This site it the best!!

Thanks
New Invester Trying To Learn

2

knb,

(1) That would be the easiest way to go…and I concur, you would have an alligator at her rates.

(2) Would it offend her? Depends on how much of a “don’t-wanter” she is. If she really wants out and is sick of it, it my seem great. I would think however, she might want something around the payoff…

(3) I buy properties, fix them up, and refinance them. I currently pay about 6.75% interest…it’s going to depend on a lot of factors, mostly the lender and your credit…it costs nothing to ask!

(4) Escrow accounts include real estate taxes and the insurance. $2000 a year would be about right, I should think but that is VERY regional…in some places, taxes are astronomical…the last house I insured cost over $800 a year for insurance but it was right after the hurricane and ths is Louisiana.

(5) If you’ve not made an offer, why would you walk away? There’s probably a deal here and at $70K-ish and $850 rent, this is very do-able for a buy-and-hold property. I think her interest rate is probably high…a $75K mortgage at 7.5% would be under $525 a month…the taxes are going to be what they are but you might also get lower insurance with a little research.

Keith

3

THANK YOU, THANK YOU FOR YOUR ANSWERING MY QUESTIONS!!!

That was very helpful information!! I read somewhere that most lenders won’t give you less that 10% rate. If I could get a lower interest rate, that would be great. My credit score is around 660. I am going to look into it!

The owner is currently paying 10% on her loan because she did a refi on her house and her credit wasn’t so good. We will definitely stay away from a sub2!!

I think instead of offering her 60,000, I may offer her 71,500 and ask my agent to let me have the 5.5% commission and maybe give her $1000 or so. I found the house myself and did all of the due dilligence. She would basically make a quick $1000 just to write up the contract and I would get the house for around 65, 000. What do you think? I guess if the agent refuses, then I could look into writing the contract myself?!?!?!

K. Bradley

4

Your questions are all over the lot. If she’s facing possible foreclosure, how do you expect her to come up with $9.000? What kind of investor loan are you talking about? This can be a good deal for you. Keep it simple.

I would tell her the I will offer her $70,000 and take over complete responsibility for payments, maintenance and repairs and property taxes for 3 years, if she will remain on the loan.

Place the property in a NARS trust in her name for 3 years and you get the option to Lease it on a triple net lease. You lease it from her at $650 per month *she makes $50 per month), then sublet it to a Tenant (Resident Beneficiary) at $850 per month giving you a $200 per month positive cash flow for three years.

Your “Mutually Agreed Value” with your Tenant/Buyer is $85,000. Your tenant has responsibility for maintenance and repairs and the Trustee collects the monthly payments and pays you your positive cash flow.

At the end of three years, your Tenant Buyer is able to refi and buy you out. You have made $7200 in positive monthly cash flow and another $15,000 upon sale. That’s a profit of $22,500 and you are on no loans or title and have paid out zippo. You have had no responsibility for maintenance and repairs, have no worries about vacancies, and no management duties. Keep it simple and you’ll be successful. I’m happy to help.

5

That is a very interesting concept. I have never heard of a NARS trust. Ok, here are my questions:

1.)If I am only paying 650/month, who is responsible for taxes? She pays 650ish a month (not including taxes). If she had it escrowed in she is looking a note of about 800ish. I don’t know if she would be willing to take only 650…one of us will come up short.

2.) If the tenent doesn’t exercise the option to buy does the house just go back to the owner? Do you usually do the Nars trust over and over until you are ready to buy or is it a one time thing?

Thanks again for you advice!!

6

to me if the house is worth 75k and she owes 70K, you will have to pay some closing costs right? sounds like it might not be such a great deal. Is the rent 600 or 800? Sounds like there is not too much room to move on this one…

7

The current rent is $850…if he buys for $70K-ish, there’s plenty of room…

Keith

8

ok so if the rent is 850 thats better -but what if the tenant moves out… she did say the lady’s experience was “bad”… also if the house is listed with a realtor then it is on the open market?
Current Rent = $850
Her Current Mortgage = 600 (not including an escrow?!?!?!?!)
Her Taxes/Insurance = approx 2000 year / 170 month (seems high?!?!)
Amount Owed = 69,000
County Value = 81,000 (questionable)
Comps from realitor (2005) = sold 75,000 - 81,000

I’m a realtor and I would not give up all my commission. In fact most of my clients find the house they want first. anyway I’m seeing the price with closing costs around 72k-73k… Just guessing from the posts so far… I would say it depends on the market and remember to add in all the costs that come with a rental house and a mortgage…good luck!

9

I would say not to pay more than $70k at no more than 7% (PITI of $752 with $2250 in taxes and $1200 in insurance as estimates) and even that would be shaky.

I don’t really think there is that much room because the insurance and taxes in Galveston are quite high even for a home valued at $75k. Depends really the actual figures, but with closing costs, maintenance, vacancy factor it’s hard to estimate your break even point being any time soon. Now, if the local appreciation is great, then it’d shorten your break even point significantly and thus could make a considerable impact on your decision.

10

There are no maintenance costs or vacancy factor if you use the trust and the profit margin is greatest as is your protection against defaults, bankruptcies, divorces, judgments, etc.

Again, you don’t have to worry about getting a loan, just have the seller remain on the loan for 3 years.

11

The house is NOT listed with a realitor. I know the lady through a mutual friend. I knew that she has had several close calls, but she always pays a large amount of money
(bonus) to avoid foreclosure. I was just talking about getting a realitor to represent both of us. I don’t know if I will…

The subject house is in Humble, Texas (near Houston)and the taxes/insurance are pretty high here too. I was worried about the margin too. I am sure that I would have to pay atleast $170 per month for taxes/insurance alone. Therefore if I could get my principal for around $550, I could walk away with atleast 150 per month. Therefore, I would need to offer less that 70K. I just have to figure out how much and how to sell it to her so she is winning too… Please advise!

12

Like I said, 75K at 7.5% gives you payments of less than $525 ($524.41 to be exact…).

Keith

13

I guess I’m missing something. In your original post you said to offer $70,000 and then become responsible for maintenence taxes etc. No closing costs, ok, I can see that, but still there are maintenence costs and vacancy factors regardless of whether you sublet it out or not. Ultimately you owe her $650 a month and any maintence on the property plus you pay taxes whether it’s occupied or not.

Using your numbers of paying taxes + insurance (I’d estimate that to be at least $225 for both) I actually come up with NEGATIVE cash flow based on leasing it from her for $650. Please explain this to me because I’m clearly missing it.

14

I live in Texas and typically you can expect to pay $70+ a month for insurance on a house of 75k (especially down south if you include wind/hail damage policies and/or flood insurance) and taxes are approximately 2.75% in most major municipalities (at a minimum) so that alone is $240 just as an estimate. Again, these are very general numbers but it’s a starting point.

15

Ok, let me try to clear it up…

At the beginning, I was asking whether I should sub2 it from her or straight out buy it. If I sub2 from her then I would have to pay $650 plus tax/insurance ($2400 a year). This would put me at paying $850 per month. I was advise in an earlier post to stay away from a sub2 in this transaction because her interest rate is too high…10%.

So now, we are talking about if I buy it and just get a loan from the bank. The taxes/insurance would be atlease $200-225(I believe) a month.So the questions is…how much should I offer to make atleast $100-150 per month???

kdhastedt said that I could offer $75,000 at 7.5% and pay 524 a month. Which would put me with a note of less than $750. This will give me atleast $100 per month.

16

In the original post he noted that “Her Taxes/Insurance = approx 2000 year / 170 month (seems high!!!)”…taxes and insurance are very regional…in Wisconsin for example, taxes seem out of control…a lot of the “blue states” have horrendous taxes but if the house is $70K I don’t expect that it’s in a “blue state”…here, I used to pay about $500-600 a year for taxes and about $275 for insurance but the hurrricanes changed all that. The last house I insured jumped to over $800! With New Orleans a trainwreck and a governor that can’t find her posterior with her hands, I expect taxes will rise locally as previous-state funding is reduced.

I think that $2K for taxes and insurance is quite possible.

Keith

17

To: DFWHoldings

I understand your questions and perhaps I didn’t explain it well enough. He offers the seller $70K asking her to stay on the loan for 3 years. She has no equity and just needs to dump the property. He tells her he will take responsibility for maintenance and repairs, property taxes, etc. He signs a 3-year triple net lease and is granted a 90% beneficiary interest in the trust. She’s holds 10%. The property is in her name in trust and in three years the loans will be paid off.

He now turns around and finds a tenant (if the one in the property is a problem or not interested) to sublet from him on the same 3-year triple net lease basis. Triple net lease means the tenant is responsible for all maintenance and repairs, not him. Mtg. payment is $600, est. taxes $225. Total payment due each month is $825.

So, here’s what happens. He sublets the property to his new tenant and grants that tenant a beneficiary interest in the Trust. The new tenant as an owner of the trust is legally able to writeoff the interest and taxes according to the IRS. The new tenant now has the benefits of home ownership and still is leasing.

Current tenant is paying $850 RENT! How much more do you think you could get if the tenant is able to writeoff the monthly mortgage interest (say $600 per month) as well as the property taxes? In addition, he can share future appreciation with the tenant. Should rent under those conditions for around $1100. There’s his $250 per month positive cash flow for 3 years or $9,000 profit.

Let’s say the property sells in 3 years for $90,000. Certainly not unreasonable. He splits the $20,000 with the tenant 50/50. He has made $19,000 profit without going on any loans, without being on title, and without having to be responsible for any maintenance and repairs or even having any collection duties. Rent and mortgage payments are collected and disbursed by the Trustee, which in all my cases is a non-profit corporation that does nothing but act as a trustee.

Your question about vacancy factors is moot. A tenant with all the benefits of home ownership treats the house like an owner when he/she is sharing in future appreciation. In addition, I require that the tenant pay three months rent in advance. The other two months are held in a reserve accout. If he/she ever misses a payment, it is made out of the account and they are evicted. Trust me, they rarely leave, and if they do, are easily replaced. I have never had to evict a tenant since using the NARS Land Trust system and have helped many people achieve home ownership who would otherwise have not been able to do so.

Hope this addresses your concerns. Have a great New Year.

18

Please explain what the ‘NARS’ trust is and how it works.

Thank you.

Cate

19

Hi Cate,

I directed you to a private website by email so that you can take your time and study the trust. Here are the benefits:

OUR NARS PACTrust™ PROVIDES:

  1. Transfer full ownership, including tax benefits…without title transfer to the buyer

  2. Acquire (or sell) property of all types safely without cash or credit qualifying…or title transfer

  3. Shield one’s property from creditor claims or judgments, including IRS liens

  4. Sell (or trade) income tax benefits to tenants in order to leverage higher rents while greatly reducing the tenant’s after-tax rental costs

  5. Take or allow loan-payment take over without a Due-on-Sale Clause compromise

  6. Transfer real estate with one brief document, without escrow, title or lender involvement

  7. Structure equity-shares and subject-to’s safely and effectively without title transfer

  8. Structure lease options without potential for an “Equity Claim” to forestall or thwart eviction

  9. Structure “creative financing” safely without threat of untoward or illegal actions by either party

  10. Put sellers at ease who would never trust creative financing or investors otherwise

  11. Structure partnerships without cost or standard paper work or income tax reporting obligations

  12. Hide real property ownership from ALL prying eyes.

  13. Avoid reassessment and property tax increases when transferring RE ownership

  14. Avoid reconveyance (transfer) fees when transferring RE ownership

  15. Convert realty to personalty, while still qualifying for 1031 Real Estate Tax LIKE-KIND Tax Deferred Exchange exemption

  16. Avoid “real property dealer status” when acquiring numerous properties

  17. Delay Capital Gains tax on a sale for years while leaving IRC Sec. 1031 exchange benefits fully in place

  18. Structure residential leases with full income tax benefits to the tenant

  19. Structure safe Lease Options with full income tax benefits to the tenant

  20. Maintain complete privacy and anonymity of ownership with all RE holdings

  21. Avoid a property’s involvement in Probate upon the death of the property owner

  22. Maintain maximum simplicity of multiple property ownership (only one party signs all documents irrespective of the number of beneficiaries)

  23. Eliminate dissention and disagreements among participants

  24. Avoid public disclosure of acquisition costs and sales prices

  25. Avoid the threat of partition by a dissident member during a dissolution of a partnership or a marriage

  26. Avoid the necessity of obtaining new title insurance when ownership is transferred

  27. Avoid or circumvent many restrictive Real Estate Brokerage Laws

  28. Eliminate RE related threats of spousal claims and sabotage in marital disputes

  29. Acquire foreclosed-upon properties with simplicity, without bank involvement

  30. Avoid seasoning issues and double-escrows with Flips and Assignments

  31. “Condominiumize” small apartment buildings (1-10 units) without refurbishment, extra expense or special permits

  32. Structure time-shares, simply and safely—among the trust’s beneficiaries

  33. Handle foreclosure-bailouts and acquisitions without violation of Civil Code Regs. (i.e. §§1695 and 2045)

  34. Make BIG money fast and safely with tenant/buyers who may have minimal cash and poor credit

  35. Effectively and comfortably manage out-of-area or out-of state income property without management, maintenance, negative cash flow or personal involvement

  36. Acquire or sell over-encumbered and over-leveraged property for big profits

  37. Hold ownership in, and live in, your home for years and still qualify for 1st-time homebuyer loan

  38. Sail through lightening-fast closings with or without Escrow

  39. Enhance your credit strength and financial leverage by not showing an income property inventory on the mortgage application (trusts show under “stocks and bonds”)

  40. Acquire and hold your beneficiary interest in a Self Directed Roth IRA and avoid income tax on massive gains forever.

20

Amount Owed = 69,000
County Value = 81,000 (questionable)
Comps from realitor (2005) = sold 75,000 - 81,000

Where is the equity?

She’s had a bad experience with renters-- there’s $3K right there and that’s a bare min. estimate. Add in your closing costs $1K to $2K, a couple of months of vacancy, any arrears to the bank (hey, she’s been hovering at or near foreclosure, right?) or other liens she hasn’t been forthright about, plus another $3K for Mr. Murphy and you’re in the hole a min. of $2,000

Hey, but at least you’ll have negative cashflow, too right?

I’d creative think myself on to the next seller. See if you can’t scare up an actual deal. I don’t say that to be a pompus jerk. I say it because this sounds like my first two “deals”. Run away (for now). Come back when she’s in full-blown foreclosure and short it. :wink: