owner financing using lease option

[Ayana Mingo]

do you get a property under contract using a lease option agreement and then sell the option using seller financing? also if i need to rehab a property do you get a hml? how do you factor the cost in for a hml into your bottom line?

[Ellis San Jose]

@Ayana Mingo 

I admire your persistence.  There is no hard money involved in this type of transaction BTW.

This link you posted is a video from 2008. He is talking about using a technique to what was known in the note world as "Simultaneous Closing" or "Table Funding".  You are adding a twist by seasoning the note for 3 months.  There were big note funders like this in the heyday, Metropolitan was one of the big guys that bought a lot of this paper, and they eventually went BK.  

This video was also done pre-Dodd Frank regulations, so please, please research this Federal Regulation & understand how this will affect your business plan.  The game has changed & the risks are much higher & more serious. (btw, the note funding link he refers to in the video is dead) Also, you may want to read this link about the guru he mentions. http://www.ftc.gov/news-events/press-releases/2012...

New laws not withstanding, If I may restate what I think you want to do.  

1) Seller agrees to let "guru student" buy an option to purchase his property for $160,000. 

2) Additionally the seller will also provide owner financing for the "student" for the purchase, with the understanding that you are hoping to pay him $160,000 in a few months.

3) Clever student markets the property for $200,000 with a 10% down EZ qualify loan at 7%, 20 yrs amortization 5 yr. balloon. 

4) Motivated homebuyer with bad credit buys the house with a low downpayment & EZ financing you have arranged & will pay 10% down or $20,000 and $1,395.54 each month for the privilege of becoming homeowner. 

5) 3 months later the original seller is paid off from the proceeds of the note sale. A Note Buyer is willing to buy the paper for $170,000 for a yield of 7.75%, a borrower with bad credit & and is confident that an optimistic LTV% of 85% ($170,000/$200,000) is adequate protection in case of default.

6) Student collect's the $10,000 spread between the discounted note purchase & agreed upon sales price of the seller, plus student collects the $20,000 downpayment. 

$30,000 gross profit minus any closing costs or expenses.

Did I get that right?

Now Ayana I have some homework for you. I want you to call at least 5 professional note buyers and ask them what price range they would realistic pay for a note seasoned for 3 years, with those terms, credit score of borrower, & LTV on the property.

What would the note buyer pay if...

They required a 10% yield, 9% yield, etc?

What is their max LTV%?

What if their appraisal says the property is worth 170k, 185K, 190k 

That will give you valuable information on your questions about your strategy.

Please let us know what you find out.

Good luck with your research!