Ways to structure this deal?

Question

Good afternoon, and thanks in advance!

I have been talking to a woman about selling her rundown house to me.  The ARV (given to me by a Realtor) is $25-28000 max.  From my conversation with the seller, we have calculated the repairs to be around $12-15000.  Rents in the area are $550-650 for a 2-bed.  The home is free and clear and she just wants out.

At this time, I do not have the funds to fix the property myself as I have a flip going on another property (I hope to post to Success Stories in about 60 days!).  So I am looking at either wholesaling this or doing some sort of lease option.

I was going to offer her 2 options - All cash at $7500 and an owner financed option around $11000 ($2500 down with equal payments over the next 10 years...something like that).  If I wholesaled the deal, I figure I could wholesale the deal for $10000 or so.

My other thought was to offer a lease option on the sell side as well.  However, I don't know that much about them.

Any thoughts or opinions on the deal?  Betters ways to structure the buy side or sell side deals?

Thanks again!

Rob Scarborough

Scott Wagoner · Answer

1st thing, you say that you were going to offer her....I always always always ask what they want.

2nd thing, you say the ARV is $25-28K max right? with $12-15K in repairs? wholesaling this for $10K is probably not going to be an option because there would be nothing left in the deal for the rehabber who buys from you.

Find out how much she wants for the place and if shes willing to wait for her money then we can structure some fun things!

Michael Quarles · Answer

@Rob Scarborough

You can absolutely buy from a seller who seller finances at a zero interest rate.  However the seller will have a tax liability to the IRS.

Bill Gulley · Answer

@Roy N.

You are correct, so is Michael as to being able to have zero interest, with caveats.

There are predatory lending and predatory dealing aspects at play suggesting or convincing someone to go without interest  on a mortgage. The lender will have imputed tax rates over the term of the loan meaning they will be taxed twice, once on the gain from the sale and again on the principal received as interest income. Interest must be stated in a note and paid to take any interest deduction or write it off in a business as an interest expense.

Zero interest notes are mentioned in Dodd-Frank as a high cost loan, the presumptions that a loan is "equitable" will not be there as with conforming loans. As you read financing regulations remember that the "Maker" of a loan is the borrower, not the lender who is an originator. Both sides are covered.

If she lives in that house, she is exempt from Dodd-Frank but that doesn't mean the spirit of the deal can be totally avoided under predatory issues.

Just because you can do something doesn't mean you should. Rob has an unsophisticated seller/lender, some little old lady with a junker property who needs to move on. She is being convinced to take less than she wants (needs in her mind) finance the price without interest and then pay part of the principal received in taxes, IMO, not only is that predatory dealing but you're screwing her over as compared to what is usual and customary. Now, if an investor or business type or a sophisticated lender were involved, things could be different.

A comment as to disclosures, hello, I'm screwing you on this deal, will you agree to it? That has no bearing on dealing with unsophisticated buyers or sellers. Would a prudent person do that deal? Is it customary, is it prudent, is it equitable, is it dealing in good faith? A disclosure that tries to avoid some assumed liability in dealing is an alert that tells everyone that one party is "aware" of some aspect and the other may not be. New investors and even old salts that rely on odd, specific disclosures that attempt to avoid rules won't really fly, might give a perception to the underdog they have no recourse, but not to an attorney. What you're telling the judge is that the deal had issues and you were trying to avoid responsibility for what you were doing, it shows you  were aware of the matter. Sometimes it's better to keep your mouth shut, plead ignorance, correct a matter if needed and move on.

Sorry, back on topic, 5% interest currently would be a "fair" rate and your real cost is one minus your tax rate times the interest paid, might be 3.5% after taxes. On 20K you're talking about just under $700. Your offer can be less considering the interest you'll be paying, that is a better investment deal as your payoff will be less with more equity to you. Flipping this, you could have less than 2/300 bucks in interest expenses and you'd avoid the predatory nature of doing something that is not usual and customary. Is that worth it?

As to wholesaling in Missouri, the licensing law says "facilitating any transaction" the way it's seen here is that by selling a contract you are facilitating a sale transaction between your seller and a new buyer and being "in the business of" doing contract sales to facilitate other transaction will get you zapped! If you take too much of the owner's equity in a deal it will be predatory and dealing without a license. Remember, the law generally favors a seller over a buyer,  a landlord over a tenant and a lender over a borrower.

Lastly, making two offers, one in cash and another being financed simply tells me that you have that amount of cash to work with and my counter offer will be more cash down, with a higher price financed. Not always a good tactic.

Use a note and deed of trust buying with seller financing.

Solve the little old lady's problem first, then yours! Good luck :)

Roy N. · Answer

@Michael Quarles

Now, I'm curious and need to understand.

We are long-term buy-and-hold investors and, as mentioned above, we will suggest a vendor carry when the owner/vendor is does not need the money immediately and, particularly when s/he is asking a non-realistic price for their property.   We might pay marginally more (<10%) in such a scenario, but never 30-40% more.   Rather than pay a higher price, I would rather pay a slightly higher interest rate.  We also tend to negotiate vendor carry as an interest only loan with a balloon .. or perhaps annual principal paydown targets.

Essentially a vendor carry is a private mortgage and the interest portion of the payments is a deductible expense.

If we were to negotiate an instalment sale, there entire amount paid would be considered principal and no portion could be deducted as a business expense.

In either instance we would not pay more for the property than our analysis indicated was appropriate.  The vendor, in either case is going to have to pay income tax on a portion of the monies they receive as interest income .... so it's a wash for them.  What at the advantages to foregoing interest payments?

I'm always looking to learn.

Roy N. · Answer

Same thing happens here ... the taxman deems that interest was charged at their prescriptive rate ... and they collect their share.

Given that, would it not be better to set they payments as having both a P&I component?  The vendor will be paying taxes on the interest portion and the buyer can treat it as an expense.

Michael Quarles · Answer

@Roy N.

IMHO no.

Roy N. · Answer

@Rob Scarborough

Here in Canada and, I believe, in the U.S.A., interest legally must be charged ... or the taxman will deemed it to have been charged (at a prescribed rate) and tax the vendor accordingly.

What you are describing is an instalment sale - kind of like "lay away" for real estate.  In that scenario the property would not be yours {title would not transfer} until the sale was complete.   You might be able to execute a master lease in parallel.

Bill Gulley could provide more insight.

Bill Gulley · Answer

Rob, Roy,  the site is acting up, lost my avatar too!!!!!  Be back :)

Scott Wagoner · Answer

Rob, most buy and hold guys that I know wouldnt put that much into a house just to rent out...they usually want paint and carpet type stuff otherwise it's to much out of their pocket and takes to long to recoup their money.

Am I understanding that she started off wanting $18-20K? If I read that right, then the seller is off in lala land!

Rob Scarborough · Answer

I didn't realize that. I have been listening to Michael Quarles podcasts and this is how he describes doing his seller financed deals without issue.  Maybe I am misunderstood.

@Roy N. - it wouldn't let me tag above for some reason.

Ways to structure this deal?

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