To Deal Or Not To Deal That Is The Question..

Comments(5)

• 
  millionby308th March, 2004

  Geno,
  Can you take title to these properties subject-to the existing mortgage, charge a higher downpayment to buyer, say 10% of value of home, then do land sales contract and sell for todays value plus 2 years of appreciation built in.
  
  Buy 97K house subject to existing mortgate= 900/month
  
  Sell to buyer on Land contract with 10K down, and payments of ?/month, and then sell for 107K in 2 years. Do you know the Value of the house as-is today?

• 
  samedwin8th March, 2004

  Not to say that L/O is inferior to sub-2, but milloinby30 is correct. You can take the deed and take over their payments, give them a little uhaul $ and find a buyer with 10K to put down. Make some $ now, and also pack the payments to your new buyer (say $1000/mo). Your terms are great because you're selling with financing. They buy the house ( contract for deed, anyway ) and no banks involved (except to cash that 10K check... . Just some insight into the situation
  Sam

• 
  active_re_investor9th March, 2004

  Quote:
  On 2004-03-08 21:37, Geno wrote:
  Are these simply undoable deals?
  
  Here’s an example. Seller needs to sell for 97,900 this is what they owe on the house. Their PITI is 900 a month. I can Lease Option the property on Rent-to-own terms with 3K down and 950 a month and sell for 100,000 18 months from now. These are the figures I know I can get. I can't improve this property any more than it already is. If I ask for any more than these figures in this area it may not sell. Are these margins to close? Can I wholesale such a deal? Where would my wholesale fee come from since this is so tight? Any suggestions from the pros?
  
  Thanks,
  Geno
  
  
  
  You have to decide if a small margin but a fast deal is worth the time you would need to invest. If you can not find other deals and you can get these completed then do you feel that the margins are good enough?
  
  Others have suggested buying 'subject-to'. Run the numbers that way and consider the difference when compared to a L/O.
  
  John

• 
  Geno9th March, 2004

  Thanks folks,
  
  I will look at these properties more creatively and offer a win-win to the seller. If their motivation and comfort levels aren't in line with my goals I'll wish them luck and pass them my card in case they change their minds.
  
  Thanks.....

• 
  DaveT9th March, 2004

  Geno,
  
  The message is Don't try to force a deal into a particular transaction structure. This does not mean that you can't make something out of what may appear to be an undoable deal. It simply means that you walk away if none of the tools in your real estate toolkit will build an acceptable deal.
  
  In other words, if the only tool in your toolkit is a hammer, then don't try to make every deal into a nail. Instead, acquire more tools, so you can use another tool -- the right tool -- for the job.
  
  In your post you say "the last few sellers actually needed the entire amount owed on loan to cover PITI". You are saying that the sellers will give you the deed if you take the mortgage payment off their backs.
  
  Now armed with this information, what tools will you use to construct a workable deal? Let's use the example you gave: "Seller needs to sell for 97,900 this is what they owe on the house. Their PITI is 900 a month."
  
  The key pieces of information you do not give us are the FMV of the property, and the seller's current interest rate on their mortgage loan.
  
  If we assume that the FMV of the property is only $100K now, then a wholesale deal is out of the question. Because there is no rehab required you can not create enough margin for a profit both for yourself and for your investor-buyer. A contract assignment will not be profitable either, because there is not enough equity in the property to attract a retail investor-buyer and still pay you a meaningful assignment fee.
  
  A sandwich lease option as you describe could work for you. Take over the property as the master tenant with the option to purchase for the remaining mortgage balance. Offer $1000 option consideration and a $900 monthly "rent" payment to cover the seller's PITI. You turn around and lease option the property to your tenant buyer for $950 monthly rent. You collect a $3K option consideration up front and set the sale price at $110K on a 24 month lease term. Now, you collected $3K option consideration from your tenant-buyer, another $50 monthly cash flow for 24 months will generate $1200, and at least $9100 more when your buyer exercises their option ($110K minus the $97900 mortgage balance minus the option consideration). I see about $13300 in your pocket in two years. After you recover the $1000 you paid up front, this "undoable" deal gives you a $12300 profit.
  
  Consider a Subject To approach. You take the deed subject to the existing mortgage. Let's say the current FMV value of the property is $100K and the interest rate on the underlying mortgage is 7.5%. You offer to sell the property on a Contract For Deed for $110K with $7500 down with the balance financed at 9.5% on a two year balloon. You immedately collect a $7500 downpayment from your buyer, and another $200 (roughly) each month on the interest rate spread. At the end of 24 months, the buyers refinance to pay off your note so you collect at least another $4600 after the first seller's mortgage is paid off (more because you have been paying down the balance a little each month). Here is a potential $14500 profit from this "undoable" deal.
  
  Let's change the parameters some and say that the property has a FMV of $122K. The $97900 mortgage balance is really about 80% of the current FMV of the property. You learn that the seller's mortgage note carries an 8% interest rate. Take the property Subject To the existing mortgage. Now do a rate and term refinance to lower the interest rate. Let's say you decide to take a 5/1 ARM that carries a 5.5% interest rate. You have just lowered your monthly mortgage payment by about $250. Instead of a $900 PITI, you now have $650 monthly PITI. If the property will rent for $950, would you want to keep this one for long term rental income. If so, then you just acquired a rental property with $24100 equity that generates $3600 a year in cash flow, for the cost of refinancing the mortgage.
  
  In addition, you still have the lease option and contract for deed exit strategies available if you decide not to hold.
  
  I think you are focused on the current market value of the property and this tunnel vision is overlooking the potential in selling the future market value of the property. In both the lease option and the contract for deed approaches, you want to be selling at the future market value of the property.[ Edited by DaveT on Date 03/10/2004 ]