Owner financed BRRR??? Such a thing?

Question

I need help analyzing a deal. Here's the situation:

A home is being purchased by an investor for about $70,000. He's committed to closing, but has since found some other deals he wants and is looking to free up cash. The house needs $12,000 worth of work before anything can be done with it, rented, sold, etc. So that puts them out of the roughly $11,000 for the down payment and then another $12,000 in repairs. The house will easily be worth $105,000-$110,000 when finished and probably rent for around $850. I just purchased a house so i'm cash poor. I'm not familiar with the BRRR strategy. How could we make a deal that would be beneficial to the both of us? Maybe some kind of owner finance??? Me take possession of the house so he's not out anymore cash and he can start generating some income? I could use a HELOC to fund the repairs and get it rented. I'm guessing his monthly payment is around $456. How would everything work if we maybe agreed at a sell price of $75,000 and payments were based on no down payment and say a .5% higher interest rate? How exactly would a deal work if we were to agree that in a year the house would then be sold to me and everything transferred to my name? Would i be out the $12,000 in repairs as well as 20% for a Fannie loan? Or could something work out where there could maybe be some kind of cash out or something? Any ideas or other creative ways of making something like this work?   Thanks!!

Art G. · Answer

Ok, so by the fact that you say he put 11k down then he financed it with a bank?

If so you cant owner finance with him.  The bank would freak out if title changed names, plus he doesnt own it free and clear.

Your best bet based on these facts is a wrap or sandwich.  You can get his property with a lease option to buy as is, agree on the price, you cover his loan payment plus something bonus, then you turn around and advertise that you are lease optioning a home as a handyman special.  The actual occupant pays you a couple hundred above your lease amount, you agree to a higher price than your initial price with seller.  Google how to structure "wraps" and "sandwich" deals.  This gets you income from the property, someone to fix it up, gets seller loan covered and he gets down back in a year with no expenses plus some bonus income per month.

As to your refi, you only need to put 20% down if you are paying retail price. Lets say retail is 110k, and you buy it for 75k, you are at 68% LTV. So a down would not be required assuming that the home is repaired and worth 110k.  You can get it to 110k value by having your tenant fix up the place. He pays for repairs, and gets to pay full price... assuming he can qualify. If he cant you get to keep the rents from him, and you can refi house as stated above.

The key is to have rock solid lease option contracts. Hint, the lease agreement never mentions the option. The option only states that buyer will receive a CREDIT for $XXX/mo (negotiated amount) and credit for repair expenses IF he elects the purchase option and qualifies. Be specific when that option date is to be made on.  If he doesn't elect or qualify then he fails the terms of agreement. And you are not bound by it.

Michael Jones · Answer

Hi @Art G. Thanks for taking the time to reply. Maybe I wasn't clear in my ramblings. I'm not looking to wholesale the house. I want it for a buy and hold rental property. An investor, like myself purchase this home with the same intentions. He knew the house needed $12,000 in repairs, but he got such a screaming hot deal on it he bought. So, now he's has $11,000 tied up in the house for the down payment and to do anything with the house he's going to need to tie up another $12,000 to either sell it or rent it. Since the start of the deal he's now came across some other deals he's interested in. He can make the payment on the house, he's just not in a position to do much more than let it sit at this point. My thoughts are maybe I can get him to owner finance it to me for say $75,000, that way i don't have to put $11,000 down for financing. Maybe work out a deal where I pay him $200/month for cash flow on his investment, until a year or so is up and I can then get a new loan/refinance in my name. I can swing the $12,000 in repairs and have it on the market in a month or two. I just can't swing the $23,000 cash to do the deal completely on my own.

If all of this sounds legit, i guess my questions are:

A) Is this even legal?

B) When it comes time to put my own financing in place, will it be a type of refinance requiring me to only pay closing costs? or will it be an entirely new loan where i will need to put 20% because it's an investment property.

I can secure financing. I have good debt to income, good active income, great credit. I'm just cash poor right now due to dropping almost $18,000 on another investment property.

I know the guy, so I think I could get the deal done. It will give him his money back in a year, plus $5,000 in profit, plus the $2,400 month over his current mortgage. And if i don't have to pay the 20% down on top of the $10,000 in repairs, it should be a good deal for me. So very mutually beneficial.

Art G. · Answer

That is a very convoluted question. With lots of risk and unknowns through out your scenarios.  I honestly dont even know where to begin to answer the multiple parts. So I just went to the beginning of the problem and thought how I would solve it. Its actually pretty simple. Its no home run for anyone but it gets both of you cash asap and gets their money freed up.

Retail is $110,000 times 80% = $88,000 subtract out repairs and you are left with a deal for an investor at $76,000.  Tell the owner you will locate a rehabber for them and split the assigment fee of $6,000. 3k for each of you. They made money on the investment, you made money for your time.  if they agree. Take a picture, place it on top of a page, type in details like re-sale value after rehab and cost to rehab, then show the profit margin for them of $22k and the cost for them to buy the deal.  Go to your local auctions and present that page to the auction buyers. Make sure you offer it to a few at once so they panic that they will lose the deal. You will have it sold by the time you get into your car.

You can try to figure out a complex way to make more out of it, but this is the fast and secure way to do it with out any risk to you. Avoid using your personal home as a finance tool for any deal. Always keep in mind that a deal could go south and your home is on the line.

Good luck