subject 2 deal brainstorm

[theoptimate]

Hello all,

Here is the rundown:

1200 Sq ft home purchased in 1992 for 65000
8.1% interest rate
mkt value of 75000 fixed
Needs repairs of 15000

Seller and partner were sold property with intention of flipping in 3 months. 22 years later they’re still paying for this vacant home. I would like to take over payments and live in the property and willing to pay seller 5 or 10k as compensation for loss of equity. I will soon be graduating from college and the seller is a longtime friend of the family.What is the best way of doing this deal?

[javipa]

Is it obvious that these investors don’t know what they’re doing …then , or now?

If the house was actually worth $65K in 1992, then it should be worth, conservatively speaking, around $120-130K

If not, somebody bought WAY over market, or the area has tanked.

I could be wrong, but my experience with people who hold on to bad deals for some 20-plus years, are likely to continue holding on, because they think they have options.

If the house has an ARV of $75K, and it’s gonna take $15K to get there, that means the net value is $60K.

However, to sell the house conventionally it will cost (at least) an additional $7,500. That means the total overhead to sell this house is not just $15,000, but $22,500.

The sellers would net $52,500 after all repair and marketing costs.

Meantime, you want to take over the payments, live in the house, and do all the repairs?

That means you’re buying a fixer, and investing $15,000 worth of materials and sweat equity into the deal.

If you bought the house for $52,500 (which is effectively retail), you’ll have invested the equivalent of a 29% down payment of the purchase price (albeit in small chunks over time).

On the other hand, at $52,500, the sellers will have received all the equity they could possibly expect to get today, with this offer/transaction.

The issue is showing the sellers what they would net from a conventional sale today, at full retail. They probably already know they’re upside down (based on his purchase price).

However, showing them the exact numbers, may nudge them to bail on a bad deal, instead of waiting until Hillary Clinton retires from her second term as president.

I would pitch this by showing the sellers what he would net, if they invested another $15K into rehabbing, and sold conventionally for $75,000. Again this would net the sellers $52,500, according to our calculations.

Then I might say, "Instead of taking a loss of $12,500 on your original deal, I can offer you what you paid of $65,000, if you’ll finance me 100%.

Not only that, but I’ll be investing at least $15,000 in additional cash and sweat equity into the house, which will increase your security."

That’s where I’d start, assuming the seller’s motivation was not to sell at a loss.

Meantime find out what the sellers want, and try to give it to them, but make them work for the solutions. Forget trying to negotiate a clean deal. Clean deals won’t provide satisfaction in the sellers (or you), unless the sellers are between a rock and a hard place for whatever reasons. I doubt they are. So make them work for a deal.

The easiest ways is to ask for more than you want, and as you give up what you don’t care about, you insist the seller give up something. Otherwise, if you give up stuff without getting concessions from the seller, you’ll look like you aren’t serious, or worse, dishonest.

Hope that helps…

One more thing; have all your paperwork ready to sign. Don’t agree to something and then have to come back to get signatures. Otherwise, you’ll be renegotiating the whole deal twice. Also, if you make an offer, make sure all the sellers are there.

OK, that’s it for me.

[theoptimate]

Javipa,

Thank you for your feedback.

Here are the points I took from your recommendations:

1. Find out what seller wants. Negotiations should be rough around the edges to make both parties feel more satisfied once a deal is reached.
2. Ask seller for 100% financing.
3. The seller is saving potentially $22,500 or $7,500 + $15,000 by doing the deal.
4. Have all the paperwork ready once deal is reached.

Some additional clarifications I failed to mention:

1. You’re right 75,000 is a conservative estimate of the ARV. The zillow estimate provides a range from 82K-98K. However, the property is a 2BR 1Bath.
2. The seller have been paying the mortgage for 22 years at an interest rate of 8.1%. Does this provide the opportunity to refinance following repair and cashout some equity if I assume the mortgage?
3. Not sure the best way to get the repairs completed. I can provide pictures that I took of the property.
4. My ideal transaction would entail them repairing the property and me taking over the mortgage and taxes. I think I can pull of assuming the mortgage but point #3 creeps back in.

theoptimate

[javipa]

@theoptimate post:3

Javipa,

Thank you for your feedback.

Here are the points I took from your recommendations:

1. Find out what seller wants. Negotiations should be rough around the edges to make both parties feel more satisfied once a deal is reached.

I guess rough around the edges would mean to me, not offering the seller a clean deal, but adding things the seller can reject, and you can trade off, so that he (you) owns the final negotiations.

2. Ask seller for 100% financing.

Actually frame the request as an ‘offset’ to all the other benefits you’re offering. Full price, accepting ‘as-is,’ etc. in return for ‘full financing’…

3. The seller is saving potentially $22,500 or $7,500 + $15,000 by doing the deal.

More, or less. If the seller fixed the house up, and sold conventionally, he would only net 52,500. You’re offering the sellers $65,000, without them having to do anything’. So, you’re ostensibly saving/giving him about $12,500 in return for financing you 100%.

4. Have all the paperwork ready once deal is reached.

Some additional clarifications I failed to mention:

1. You’re right 75,000 is a conservative estimate of the ARV. The zillow estimate provides a range from 82K-98K. However, the property is a 2BR 1Bath.

Zillow is a toy. Don’t rely ‘just’ on that. Use Trulia, and find an agent who’ll give you an MLS opinion of value (that won’t try to steal your deal).

2. The sellers have been paying the mortgage for 22 years at an interest rate of 8.1%. Does this provide the opportunity to refinance following repair and cash out some equity if I assume the mortgage?

It depends on the balance of the note. Otherwise, yes, any loan you get is gonna be cheaper than 8.1% (depending on your credit).

However, getting a new loan, or refinancing, pretty much defeats the sub2 financing element you’re wanting, doesn’t it?

You don’t have to pay the seller 8.1% on his equity, if you take over his loan. You can negotiate a MUCH lower rate on the seller’s equity. Focus on the payment you need to have, not the interest rate. The interest rate will fall behind the payment you need to achieve.

Meantime, the sellers are likely paying a loan balance based on $52,000 (assuming 20% down) over 30 years at 8.1%. That makes the existing payment pretty stiff. So, any additional interest you pay, will need to be pretty low, to make the deal make sense, as far as current rates and terms are concerned.

The fact that you would be getting in with extreme leverage is one thing. But paying a high interest rates, too, can turn high-leverage into a nightmare …especially if you considered renting the house.

3. Not sure the best way to get the repairs completed. I can provide pictures that I took of the property.

Pictures aren’t necessary.

Meantime, money for repairs is a whole different matter.

If you don’t have the funds to fix the house, the question becomes, ‘are you willing to live in it, the way it looks now?’ If not, maybe this isn’t the deal for you after all.

Or perhaps you could sell/offer the terms you negotiated to another buyer that has the money to fix the house, but needs financing? Frankly, that’s what I would do with this deal, if anything. ***I’ll mention more later.

I’ve heard of stranger things where the buyer asked the seller to loan him money to fix the house as a condition of purchase. The argument was that the seller was creating more value regardless, and the buyer was paying for it all (over time) anyway.

Otherwise, I have no answers for you.

4. My ideal transaction would entail them repairing the property and me taking over the mortgage and taxes. I think I can pull of assuming the mortgage but point #3 creeps back in.

theoptimate

There’s no reason to assume an 8.1% mortgage.

In fact, this loan pays off in eight years at this rate. The payments are MOSTLY principal.

You WANT to take advantage of this.

So, you take over the first ‘subject to,’ and create a second (with a lower interest rate, for 30 years, all due at the same time the first pays off).

Then in eight years, you’ve extinguished the entire first mortgage (taken advantage of the accelerated loan pay-down), and that alone will likely create enough equity in the eighth year, that you can easily refinance the seller out of the deal and pay off the second mortgage note.

Hope that helps.

***P.S. Another thing, and this might be a little greedy sounding, but since you’re giving the seller over ten grand more than what he’d get in a conventional sale, you might ask for a no-interest, no payment second. Just thinking…

This way, depending on the existing loan’s balance, you could then offer attractive financing terms to a new sweat-equity buyer, and sell the house for say $90K with no-qualifying financing, for eight years, and ask for $10K down. The house will be worth at least $90K in eight years. It just will.

This way, you pocket $10K by offering marketable, long-term, non-qualifying financing, with a back-end profit of another $15K.

You might try to work in a payment spread (kind of hard when the existing rate is over 8%, but…), and by the end of the deal, pocket another few thousand. So that would be a total front to back profit of $25K plus the payment spread.

Not too bad on a property that makes no sense, other than the good terms you negotiated.

[campbellsimon]

In order to assume a mortgage from the bank, you will need to meet the same qualifications as if you were getting your own bank loan. Since rates are around 4.5 - 5%, it does not make any sense to assume this mortgage. I would recommend buying it outright and getting your own financing.