Anyone Have Experience With Seller Carry Back?
Hi there...
I am trying to put together the numbers on a deal that I think will be a good one, but I am having trouble working out the financing.
I have heard a lot about "seller carry back" financing, and was wondering if anyone had ever purchased a property using this technique.
How would it work for this scenario: Home price is $135K, need $40K in rehab and holding costs at time of closing, have no cash to put down, but could possibly get 10%. The home, when fixed up could sell for around $210-220K.
Any comments are greatly appreciated. Thanks.
Matt
Seller's Carried 2nds are just like a second from a lender.
Seller's 2nds are usually done when you have a buyer that has less the good credit, low 500, they qualify for an 80% loan, but most lenders will not touch the other 20% so if the seller has enough equity they are allowed by most lenders to carry a 2nd for the buyer and even help with closing cost.
The lender will want to see the sales contract that shows the 2nd. It needs to show the length of the loan, the interest rate, and th payment amount.
Say the house appraises at 103k, the seller sales their house for 103k, they only owe 25k, when they sale the house they have 78k to put in their pocket, but to get the house sold and maybe to make so extra money they loan you 25k at 12% interest for 30 yrs and pay 3% of your closing cost.
Now the sellers hve 50k in their pocket, and is charging the buyers 257.15 a month (250 plus is all interest).
Now three years go buy and the buyers sell, the org. sellers get the 25k back minus the little bit of princple paid back by the monthly payment and since the buyers have been paying on time each month of the 3 years the org. seller pocketed another 9k or so.
The seller
Quote:
On 2004-06-27 03:43, mmredick wrote:
Hi there...
I am trying to put together the numbers on a deal that I think will be a good one, but I am having trouble working out the financing.
I have heard a lot about "seller carry back" financing, and was wondering if anyone had ever purchased a property using this technique.
How would it work for this scenario: Home price is $135K, need $40K in rehab and holding costs at time of closing, have no cash to put down, but could possibly get 10%. The home, when fixed up could sell for around $210-220K.
Any comments are greatly appreciated. Thanks.
Matt
Most lay people think that a seller carry back is for buyers that have poor credit. Nothing could be further from the truth. Sellers must always ask for a credit report on their buyers before carrying any contract whatsoever. Additionally with a hot market they are not too common unless the property cannot be financed any other way, i.e., no foundation, lots of repairs, singlewide mobile homes, etc. The interest rate is usually a few points higher than prime. The best benefit to a buyer would be the lack of lender closing costs. Seller should also ask for a large down otherwise they a compromising their security. If the buyer defaults, the seller gets the property back, however if the buyer has a large down, it will hurt less. I hope all you investors are not trying to take advantage of sellers, that would be really sad :-(
I have a question on this subject. Lets say i did a 10 or 20% carryback for a buyer but then at a later point decided to write it off ro in essence forgive the debt. Can I do this? Are there any concequences for the buyer?
Thanks
[addsig]
MATT --
There are loans that will adjust your $40,000 rehab cost into the new loan rather than just get a loan for $135,000.
Check with lenders about a rehab iimprovement loan.
Cheryl Lopez, Broker
Cheryl:
I have searched everywhere for these types of loans. The only thing that I have managed to find are hard money loans that charge a huge percentage and points, and only offer around 70% LTV based off the ARV. I haven't had any luck locating a lender that will do a rehab loan for the full amount at reasonable rates.
Matt
Debt forgiveness is reportable to the Internal Revenue Service and is taxable in most cases. There may be offsets, so consult with your tax advisor, but it typically will have tax consequences.
[addsig]
Lenders do not care if the seller decides to forgive the 2nd or not. I know people that will carry a 2nd for the buyer and forgive the not the next day. There is a form they fill out, even on the day of closing they date it for the next day, showing the debt is forgiven, the title company just records it the next day.
time to go shopping. first on the list is a competent, honest willing to disclose everything mtg broker (i know there are still some out there). you must state what you intend on doing regarding your investment properties. with the above scenario, there are many new loan products out there to take care of your rehab costs and then some. construction loans with interest only payments are becoming very popular, as well as your standard rehab loans. most of these products are an average of 80% ARV with the costs going to escrow and to be paid out on a phase-by-phase schedule. you could also double close with a partner, pull out all rehab costs including all closing costs as well. on this site alone up in the lenders section there are many advertised products that will fit your needs..good luck
regards-pat
Matt, I think we would be interested in seeing the numbers that you have come up with showing what type of profit that you intend to make. You are already showing 175k, then you have to figure in closing costs, holding costs, Realtor fees if you are not selling yourself, etc. and for a house that "could" sell for 210k. Just concerned that your margin is a little narrow for that much of an investment and would not want you to make little or no money on this deal when other profitable deals are out there!! If you post the numbers you are using to calculate expenses and profit, there are many others on this site smarter than me that can help you make sure it is a good deal. Best to you!![ Edited by MikeWood on Date 07/06/2004 ]
Hey guys:
First let me say thank you again for all of the input. PEr your request, here are the numbers that I amusing in my calculations:
Purchase: $135K (worst case)
Rehab Costs: $40K (worst case)
RE Commissions: $13K
Holding Costs: $12K (6 months - worst case)
Sales Price: $215K (Lowest)
Potential Profit: $15K (Minimum)
What do you think? Being new at this, $15K sounds like a lot of money. Am I selling myself short? Honesty rules. Thanks again.
Matt
Does this fit your business plan? Looks that you have your investing forsight in place, however, it looks as though you are in to this for around 93% all inclusive. Seems real thinn to me on the surface. The key to your profit is making sure that your comps are strong. I dont mean comps from your agent regarding sales , listing price and pendings but a full research regarding the area surrounding this house. Know the economics of your market area, get a feel of what people want, is this house overbuilt for the area?, underbuilt?, what are sales like overall?, whats the appreciation/depreciation factor, these are but a few questions i need answered on a deal I get into. 40 g's is a fair amount of rehab. i dont mean to detract you from this deal, but with a deal this thin you need to look at the whole economic picture. One more note, I had a house deal I got into awhile back at around 26% net profit with 6 months holding. I was selling retail without an agent. had quite a few bites but no offers. Come to find out the neighbors on either side of my property were waging war on each other. This in turn affected my exposure and ultimately my sale. They were turning away potential buyers and took it upon themselves to "hand pick" what type of neighbors each wanted. I finally told them I was renting it out by cutting the rent by 75% and tucking away 4 crack addicts next to them. I ended up with a net profit of 8 or so percent. My point is that knowing only the comps of your area sometimes isnt enough.
Only you and your business plan can answer the question above as to if this is a good deal or not. for me in my area of stagnation, it would fall short on my business plan.
Regards-Pat
Matt, appreciate you sharing the numbers. I will share a couple of thoughts. Personally, if 15k was all that I thought I would get out that deal, I am not sure that I would do it. However, with the numbers that you have submitted, it seems very probable that you could so better than that and possibly much better. If you could knock another 5k off of purchase and rehab and sell that place yourself then that 15k profit just turned into almost 40k. If I felt that I could possibly make 40k or more and worst case scenario 15k then I would have to go for it. Just my personal opinion about the situation based upon what you have shared. PLEASE keep us posted!!
40K is one heck of a rehab. What all are you estimating that it needs? Are you sure of your numbers?
$40K is a worst case scenario for the rehab. I am in the Denver market, and prices are high here right now due to all the work going on. I have worked as a general contractor here in Denver for the last 7 years, so I am very confident in the numbers. I have relationships with several tradespeople here in Denver as well, so I know that I can get the work done cheaper once I start actually lining people up. I just figured that I would use the worst case numbers for getting my financing lined up.
As I mentioned, I do feel that $15K is the lowest that I will net on this deal, and it could go up from there. I also feel that the home can be bought for around $125K (an offer of $135 was accepted by the seller a month and a half ago, but the buyer's financing fell through), and there have not been any further offers that I know of on the home since then.
Again, I appreciate all the advice. I really want to get going on this. I'm just lacking the right financing/partner. Gotta keep looking. Any further advice, as always is greatly appreciated. Thanks.
Matt