Keep this strategy in mind too. It’s a good tool to have in your creative financing toolbox! From an article just posted:
Trying to flip a property can turn ugly when your end buyer cannot get financing because their lending institution requires title seasoning. Your options are to 1) find another lender; 2) find another buyer, 3) try to ‘assign’ your Contract for your profit; or 4) find a creative strategy to get your deal closed. This article is about the last option – using creative financing to overcome traditional lending institutional guideline problems including, but not limited to the title seasoning issues.
Everyone has probably heard about the strategy of creating a seller financed note to structure a deal and then selling the note at the closing table to a note investor (such as ourselves) to fund the deal. If you have not heard of this strategy, read up on it! It is a great tool to have in your back pocket when traditional financing is not possible – or not desired – for one reason or another. Assuming you are already aware of this strategy… you should also know that this is a great tool to use when FLIPPING a property – If – and only if - you have enough profit in the deal to cover the note discount. More about that later.
When I use the term ‘flipping’, I am referring to simultaneously buying a property at a discount (i.e., pre-foreclosure, distressed seller, etc.) and then selling it at it’s true fair market value to an ‘end buyer’. In this article I am not talking about rehabbing properties. The same seller financing strategy can work (more easily, actually) with rehabbed properties, but for this discussion I am referring to strait FLIPS.
The deal is set up as follows: Assume you can purchase a property for $65,000 because the seller is 2 months behind and knows he will go into foreclosure if he doesn’t act quickly. You then set up a Buyer to purchase the property from you for its true market value of $100,000. This end buyer can put down 5% in cash at closing and has reasonable credit (600+). You can either purchase the property outright and do a 2nd closing later – or set it up as a simultaneous closing and transfer the title twice at closing. Either way, your end buyer’s bank may not fund your deal because of this ‘flip’. If that happens, you can structure your deal as Seller Financed- even if there are underlying mortgages! Your title company / closing agent or note buyer will prepare the note and mortgage for you for the closing. This particular deal for our company would be set up with an additional 5% 2nd position note to be ‘held’ by the seller. That would leave a 90% first lien. We would structure the interest rate to be between 8 and 9% depending upon the Buyer’s credit. We would buy the note for between 85% and 90% of the MORTGAGE balance ($90,000 x .87 = 78,300, for example) depending upon the property and the situation. So the flipper (that’s YOU) would have $78,300 from us PLUS $5,000 cash down payment from the Buyer – for a total cash amount of $83,300 PLUS the $5,000 2nd position lien. The underlying payoff of $65,000 would be made to the original seller at closing and the balance of $18,300 plus the $5,000 note is all yours. Not bad for a deal that you didn’t spend a dime on! While the discount on this ‘flip’ might seem a bit steep at first, keep in mind that the only alternative is to hold the note. The time value of money tells us that cash now is worth more than cash payments streaming in over time.
Rehabbed properties and properties without title seasoning problems can also be set up this way. These properties can be set up at 95%LTV (Loan to Value) – EVEN INVESTMENT RESIDENTIAL PROPERIES! The discount on the note is usually about $6,000 -$7,000 if set up properly from the beginning.
I hope you find this article informative and helpful. I hope it gets the creative juices flowing!
Michele Robbins, CPA