new here.. need l/o advice..here's the 411
Like many here, I have read, read, and read some more for a few weeks now! I have decided to finally run something by you guys. 
(I know ya won't steer me wrong!!!)
Here is my situation, I closed on a house that I bought from my parents on June 12.
I currently have somebody in there on an L/O for 2 years. Here's the run down of the numbers:
Purchase Price: $136,350
Appraisal Value: $152,000 (comps are about this too!)
Monthly mortgage: $1042
Monthly lease pymt: $1400
This is a friend of mine so I only collected $1000 for deposit and no downpayment as of yet. I know that my friend will not be able to get financing in two years due to several different circumstances. So I told her there was a possibility that I might finance her depending on the sitiuation in 2 years. She was fine with that!
What I need to know is would it be smarter to present to her that I will finance her under these certain conditions:
Downpayment due in 2 years : $10,000 (I know how bad she wants a house and I know she would and could come up with this)
Purchase Price: $161,120 (3% appreciation x 2 years)
Rent Credit: $10,080 (30% rent credit)
Loan Amount: $141,040
Her mortgage pymt: $1440 (give or take, 30 years at 9.5% includes all)
So that gives me $10,000 cash and a positive cash flow of roughly $400/month until I get PMI off and then about $477/month!
So what do ya'll think??
Any advice, suggestions, downfalls you see would be greatly appreciated!!
The only real problem that I see with it, is that you've broken one of the main rules in landlording/investing which is never sell to friends.
It's too easy when it's a friend to consider it ''helping a friend out'' instead of the business that it is. This is a problem because you like them get by with more than you would someone else.
Usually it's worse when you either do treat them just like another renter, or start to because of them taking advantage of your ''helping a friend'' attitude. Because they are your friends, they will expect you to 'cut them some slack'.
In almost all cases, it never works out. I hope that you can beat the odds, and yours turns out to be an excellent decision.
good luck
Roger
I really appreciate your response and also your comments! I can definitely see your point. So are you suggesting that I should probably just carry the l/o out for the two years and then since I know that she will not be able to secure financing, just find someone else to l/o or buy the house out right.
Also, one point to be made is that she has been in there for three months already and they are really good tenants, they fix most everything theirselves and pay on time and all three times more than was expected.
But I know that things can get sticky real fast, so like I said I see your point.
I'm new to the game but learnin fast!
Thanks for your help!!!
Jessica
Jessica,
Are you sure that the tenant won't be able to finance this in 2 years? 2 years of timely lease payments carry alot of weight with lenders (especially thru brokers, who they should be dealing with anyway). Most people who've had foreclosures only need 12 months of payments to qualify for a loan.
Unless her/his credit is really, really bad, it shouldn't be that hard to get financing, especially with a $10K credit from the lease (can this be verified by cancelled checks, drafts, etc.)
If there is still some problems (lack of funds, more down needed, etc.), I would offer a 2nd mortgage as an alternative to financing the whole deal.
Example: to get to 10% down. Purchase price $160K. Rent/option credit of $10K. Needed $6K + closing costs. Set up a 2nd deed of trust/mortgage for $10K (5 yrs @ 9.5% = appr $200/month).
Her first loan if it had a 7% rate (very high for todays market) would be about $1000/month. Add $200/month for escrow (taxes/insurance/pmi) and she's at the $1400/month she's paying now.
Roger
Roger,
To answer your question it is possible that she could get financing in two years, however her issues involve two things. First, is her status in the country, now she is legal but she is in the midst of fighting immigration for her citizenship because all of her paperwork was lost (or so immigration says??) She has been her for over 15 years (it's like 13 to get citizenship - when she applied after 13 years this is what they told her and her family). She told me that a lawyer told her that he would just need to put through all of the paperwork again and wait 2 years and she will get citizenship (and pay $6K.. ouch!).
Second, would be her credit!!! But I definitely think that is the smaller of the two problems.
Now, I am not quite sure that I understand what you are suggesting about a second mortgage and how this would accomplish what I am trying to do? So I would take out a 2nd deed of trust on the house and this $10K would go in my pocket and I would have her pay the $200/month on the loan?? Wouldn't this just make my monthly payments higher?? $1042/month and $200/month more and she is still only paying $1400?? And why would I do that if she can come up with the $10K cash?? How does that work, I must be majorly missing something. Please try to clarify.
Your knowledge is much appreciated!!
Thanks so much!!!
Jessica
To try and clarify:
By your figures: L/O for 2 years with a purchase price of about $160K and $10K in option/rent credits (money that has already been paid to you either thru the option to buy or credits applied from the monthly rent). The credit has to be verifiable (documented).
To be able to buy the property, this leaves the tenant with a balance of $150K to be paid to you.
To obtain a 90% LTV loan, the buyer/tenant would need about $20K ($16K downpayment and $4K closing costs)
She already has $10K (rent credits). You lend her the other $10K as a 2nd lien.
Now from this she will have: 1st mortgage payment of apprx $1000/month with $200 (estimate) added for taxes, insurance, pmi which = $1200/month. 2nd mortgage payment of apprx. $200/month for 5 year term added to the first = $1400/month.
To you: $140K cash - your mortgage payoff, $10K loan @ 9.5% for 5 years = $12,000 total payout to term.
Roger
I was with ya til the very end! How did you get to the $12,000? Is that after the five years or at closing??
So I would receive app. $140K minus what is owed which would be about $135,000. So I would receive $5,000 at closing?
Sorry for sounding dumb here, but I still do not understand the $10K @ 9.5%. What do I gain from doing this?? Rather than her just coming up with the $10 grand?? I understand the interest on it, but wouldn't the bank get that? Still a little confused, sorry
Jessica
No problem Jessica,
If she can come up with the $10K great. Collect it at closing and go home a little richer.
However, if she doesn't have the money to close it, I thought this way would be a better option for you than financing the whole deal.
Yes the $12K is the total payout, with interest, over the 5 year term (10K @ 9.5%). This loan would be owner financed, you (the owner) would be the bank, so you'd get the interest. By doing this, you would be getting $200/month cashflow on a property that you no longer own. Sound good?
Again, if she can get her own money, go for it. This is simply another method to get your properties sold more quickly.
If you know a local banker or mortgage broker, they'll be able to show you the details of the deal.
Just a note here. This is not without risk. She might not pay you. You might have to foreclose. If she doesn't pay the 1st, and they foreclose you could be wiped out.
I'd only do it on properties where you have enough equity to come away from the closing table with cash and the note. That way, you've already made something and the note is icing on the cake. You could always sell this note/lien at a discount (steep on 2nd's, probably 50%) and get out of it completely.
Roger
Roger,
Thanks for your reply once again!! O.K. I understand exactly what you are saying now. Thanks for all the options!!
I have another question you might know the answer to. Since I just bought a property on June 12 and do not start paying until August, how soon could I try to get another property?? I guess the better question is how soon will someone else finance me??
Thanks for all of your help!! I really appreciate it!
Jessica
Conventional financing is only limited by your credit and your income. As long as the lender thinks you will make the payment, they'll let you borrow the money. (actually most limit you to owning 5 properties, but some don't care).
Remember, in most cases 75% of any incoming rent is counted as income and usually all of any incoming debts (ie - 2nd lien) is counted as income.
Roger
Perfect!!! That's what I needed to know!!! Thanks for taking the time... I am sure I will need you again soon, so look for my posts!!
Thanks again,
Jessica