Assignment fees? Mentor fees?

Question

Fair warning...I'm a newbie here.

I've been meeting with two individuals in a partnership that have their own real estate investing company.

They're willing to mentor me and help me through deals as I find the time available to shadow them and watch them work.

They've taken time out of their schedule (10-15 hours thus far in the past month) to show me properties in various stages of rehabbing, staging, and have started to show me how to analyze deals.

I've come across a property where I can buy it Sub2 and do an owner financing deal on it. The property requires an initial investment of ~$30,000 with a owner finance price of $175,000. Estimated profits are $60,000 at the end of the 5-year balloon.

They've done all the work including finding the deal and will handle all of the paperwork for the Sub2. They've also found a tenant/buyer and will also handle all the paperwork through to the end.

They've given me the analysis of the deal breakdown and the assignment fee is $25,000 on top of the $30,000 for the deal. Is this fee too steep -- or is it fair?

I'm not trying to be greedy -- just seeing if I'm being taken for a ride.

Thanks.

J Scott · Answer

This is easy.  My biggest concern for you (assuming the estimate are accurate) is that you'll have trouble finding a real buyer who has $20K to put down.  Now, supposedly these "mentors" have a buyer already lined up who is willing to put down $20K, correct?

In that case, I'd suggest you do one of two things to ensure that buyer is real:

1. Have the buyer put the money in escrow as a condition of your purchase.  In other words, sign the lease purchase or option contract with this end-buyer before you purchase; or

2. Have your mentor's assignment fee be the $20,000 that the buyer is putting down.  If for some reason they can't deliver the buyer, they forgo their assignment fee.

If these mentors are for real, they should agree to one of the two suggestions above.  If not, they're probably taking you for a ride...

Jon Holdman · Answer

Its always good to assume you're being taken for a ride and work through the numbers to convince yourself that you're not.  A $25K assignment fee is VERY steep on a $205K purchase.  But you haven't given us enough details to understand the deal.  Plus, you're describing a complex deal.  Buy subject to, put in $30K, owner financing, five year balloon?  I don't get it.

Let me put it this way.  If you cannot explain the deal so we can understand it, you certainly should not make this investment.  Convoluted, "trust me" deals are the hallmark of a scam.  Not saying this is, this may be perfectly legitimate and a good deal for you.  But you need to be able to understand every aspect of it in detail.

Chris Martin · Answer

Regarding "I wonder, if this deal is so sweet, why aren't these "mentors" just doing it themselves and cutting you out of the picture? They are just really nice guys?" They are getting $25,000. Sounds like business to me, not a "gift" or them being nice.

This deal seems complex and has lots of room for problems. For a first deal, I would think a simple deal that has substantially fewer deatils is more appropriate. Mentors paid $25,000 shouldn't put you in a deal that doesn't fit your novice investment experience, IMO. Same logic as other "professionals" who should only pitch investments appropriate for their clients tolerance and experience....

Jon Holdman · Answer

I'll analyze the numbers in more detail when I have more time.  Thanksgiving dinner awaits.

Who is paying taxes and insurance?  I assume this is your end buyer, since they're not in your calculations.

This appears to be not a lease/option but rather a wrap mortgage.  You have a new $155K/8.5%/30 year amortization/5 year balloon mortgage that is wrapping the existing mortgage you're taking subject to.  I would run this by YOUR attorney to be sure you're not running afoul of the SAFE act.

I see how you got to the $60K profit.  It should actually be just a bit more because that $85K mortgage should be paid down somewhat over the next five years.  Be SURE you know the terms on that mortgage.  You wouldn't want to take over a loan if its going to balloon or reset sometime soon.  Be sure that loan is current.

Subject to's require disclosure, disclosure, disclosure.  You want to be sure the seller is truly committed, since this mortgage remains on their credit report and is their responsibility until you pay it off.

If you commit to sell the property at $175K, the appreciation belongs to your buyer's, not you.

Have you personally verified the $175K price?  Not just looked at a handful of comps you've been given, but reviewed all available comps?  Cherry picking the best comps doesn't work any more.  You hope is that an appraiser will not pick the worst possible comps.  So be sure you know all possible comps.  if the buyer's can't refinance down the road and pay you off, its going to be your house. Realistically, you will end up selling it to them for whatever it appraises for when the time comes, or the $175K, whichever is lower.

You will have a LOT of cash tied up in this property, almost $35K.  $1500 is nothing for rehab, not even paint and carpets, so I suspect you will either have less (i.e., they buyers will buy as-is) or more.  Subject to's being called seems pretty rare, but its not impossible.  If interest rates spike, I suspect many more of these loans will get called.  Since you've sold on a wrap, you can't refinance.  Be sure your buyers are aware of this situation.  If the loan does get called, it will be up to the buyers to refi and pay it off or else they will lose the house through no real fault of theirs.  Rest assured you're getting sued by them if that happens.

This is a complex deal with a lot of risk.  Not one I would want to take on, and certainly not for my first deal.  With $35K to invest, I think you could do better.  If you can really buy a house for $85K in your area, put in $10K for rehab and rent it for $1800 a month, just do that.  You would put in about $20K for down payment, pay the rehab and you would have a simple, profitable rental.

What's that $5500 for at closing?

David Belote · Answer

My concern is where the 60K profit is coming from, if you are guessing what the property will be worth in 5 years do not do this deal! If your gross rental income potential is 12K a year then it's a no-brainer assuming you can also get the money back you originally invested. As far as fees 25k is steep to me but if the deal makes sense that's what matters.

Ed O. · Answer

How credible do you consider these "mentors" to be? I would have another set of totally independent eyes look at the deal and see what they think. From what I have seen, a $25,000 assignment fee seems high, based on your numbers. 25k for 15 hours of anyone's time is a good deal. Have some other investors look at the deal and see what they say. Don't give them all of the numbers. ask them what they think of it. You stand to put a lot of money in the pot on the front end. People are ALWAYS at their nicest when you're wallet is out. I'd suggest acquiring a course from ebay from one of the gurus for a few hundred bucks and crashing through it, so you have a better understanding of what you're getting into, without making your partners privy to the idea that you're sort of fact-checking them. 
I'd suggest asking them to see some proof of their success, "because my wife is being standoffish with me about investing this much money" or something like that. If the deal was so hot, why are they "giving it" to you? Lots of lease/options blow up and need to be resold. If they miss the balloon date, then what?

Jamie Gaymon · Answer

Is the 20K that you're paying to the seller being paid upfront or after the sale to the tenant buyer?

The closing of the Sub2 and the sale to the tenant buyer is practically simultaneous since there's a buyer lined up already.

No, I understand how a simultaneous close works, but here's where my question stems from.

Your seller is getting 20K UP FRONT.  Are you paying him 20K to move out, or 20K for the privilege of buying his house sub2?  Because my understanding of the optimal usage of sub2 as a purchase strategy was to avoid having to put up a ton of money upfront, and because you have a seller who you might have a concern about getting into lien trouble if you had been considering them for a lease option.

I guess a better question would be, what's going to happen to this house if you don't purchase it sub2?  Why is he motivated to sell you his house sub2?

Unless there's some extenuating circumstances, in the current market we live in, I just think you could find equally good sub2 deals out there that would require you to put up considerably less upfront.

The way this deal is structured doesn't seem to make a whole lot of sense.  I'm a newbie to, so I might be looking at it wrong, but it seems like everyone is positioned to win on this deal right now but YOU.  Which is fine, but how involved are you in screening your tenant buyer to know that he's going to be able to qualify for a mortgage at any point in the future?

To me, this just seems like a far too complex transaction for a newbie with a goal of being somewhat hands off, with mentors that he's not really sure about to take on.  All of the variables that will cause you to realize your profit seem to be in the hands of the mentors that you're not sure you believe in?

if anyone can explain it differently, I'd love to hear it, but that's what I'm seeing.

Nick Q. · Answer

Good point. I'm probably going to try option #2. Thanks for the idea.

How would I even start looking for commercial properties? I know absolutely nothing about this arena. I'll send you a PM with a few questions if you don't mind.

Not that I know of.

The closing of the Sub2 and the sale to the tenant buyer is practically simultaneous since there's a buyer lined up already.

Jamie Gaymon · Answer

Is the 20K that you're paying to the seller being paid upfront or after the sale to the tenant buyer?

Jon Holdman · Answer

Saw Nick replied while I was typing.

For them, the outlay would be minimal.  They're getting $20K from the buyer and pass that along to the seller.  The $5500 in taxes probably isn't due just yet.  Tax due dates vary widely, but in some areas (like here), they're aren't due until next spring or early summer.  They certainly aren't due at closing.  So, the actual cash to close this deal is only a few grand.

Don't bet on this being as passive as you might hope.  Real Estate just isn't a passive investment.

Assignment fees? Mentor fees?

Most Popular Reply