"subject To" FAQ Example
Can someone explain ...
What it means to sell on a deed for contract?
What it means to sell on a lease-puchase option?
What it means to do these on a 2 year deal?
See the "How investor makes money" section of the example below.
Thanks.
Sub2 example:
Property FMV = $100K, seller owes = $90K.
To sell conventionally thru an agent would be: 6% commission = $6K, negotiating loss = $3k, closing costs = $3k, holding costs = $4k (650x6mo) TOTAL = $16K to sell. Seller would owe $6k at closing.
Sub2 sell: Investor buys property subject to the existing financing. Gives owner $10 for 'equity' at the closing where title is transferred to the investor. The investor will then start making the $650 a month payment on the property.
How does investor make money?
Investor sells on a Contract for Deed or Lease-Purchase/Option on a 2yr deal. In 2 years the property should be worth about $106K (3% appreciation per year). So sells for $3K down, $800 month, balance due at term = $103K
Profit = Upfront $3K - $10 = $2,990; Thru term = $800 - 650 = $150 x 24 = $3.6K; backend = $103K - $90K = $13K TOTAL PROFIT = approx $19.5K
There were 10 views and no replies. Is this an enormously stupid question?
Are there any other costs that the seller could incur if he sells through an agent? Or is that covering everything.
[addsig]
I don't what all the costs are involved in selling a property trhough an agent. Based on the wya you asked the question I am going to assume there are more than the example shows.
I think I found my answers, maybe you can confirm.
Contract for Deed = You, the investor/owner, maintain the deed until your buyer satisfies the terms of the agreement.
Lease/Option = I beleive this is the same as contract for deed. I would lease the property to a buyer and offer an option to buy. I maintain the deed until it's purchased. right?
To do these on a 2 year deal = The terms of the deal of required to be satisfied after two years. The most common scenario is that the buyer refinances and actually purchases the property from you.
How close am I?
twessels,
Glad to meet you and welcome to the board. While we try to help people with their questions, it usually takes a little more time than 15 minutes. Patience, my friend
To your quetions,
A Contract for Deed (CFD) is usually set up as a loan, with principle and interest payments. An example would be a 15yr term with a 2 yr balloon payment which means all the outstanding principle and interest payments would be due within 2 yrs of the loans start date.
The main difference between a CFD and a standard type loan is the the terms of a CFD must be fulfilled BEFORE the buyer gets the deed. Also, in most cases, a CFD only requires an eviction (instead of foreclosure) to get the buyer out, if necessary.
A lease/option (LO) or lease/purchase (LP) is 2 agreements. The first is a lease agreement for a set period (2yrs in the example). The 2nd is either the option or the purchase agreement.
An option gives the tenant/buyer the choice, but not the obligation to buy the property.
A purchase agreement locks in a closing date on the property.
As far as the 2 yr thing goes, you've got it close. Technically, at the end of that period, the buyer will be getting a loan to purchase the property. However, most banks will consider (especially in the case of a CFD) the "owner financing" a loan and work the deal as a refi (meaning they will loan off of the appraised price as opposed to the purchase price).
Hope this helps,
Roger
As far as the CFD is concerned it depends on where you are as to whether or not you can Evict or have to Foreclose.
IL for example. If the term of the CFD is more than 5 years then you have to foreclose. If the buyer has paid the balance down to 80% or less then you have to foreclose.
I am in PA now and trying to find the laws regarding it here. But with the little knowledge that I have of the state it looks like an eviction will suffice. However, if they have paid the purchase down to 75% or less then they are entitled to the principle that they paid greater than 25% of the purchase price. Still trying to figure this one out definitively though.
Thanks for the replies.
In the example the investor sells the house with a CFD asking the new buyer to pay 106k for the property ... 3k down, 800/mo. and 103k at the end of 2 years.
Why would the new buyer agree to pay 800/mo. and not have any of that payment go toward the principle? Does the example just brush over this in an effort to keep it simple?
twessels,
Yes, the example is a simpilified version of a subject to deal. Whole books have been written on the subject, so getting everything in one post might be a bit problematic.
CFD's are loans, with principle and interest payments. In the example, an $800/month payment on $103K for a 30yr term would be approx 9-9.25% interest. This would have about $100 a month more or less going to the principle for the term.
For more info on negotiating, refer to Bill Young's articles about financial judo.
Roger
Understood. Thanks for all the input, you guys rock!
- T