What They Won't Tell You About Property Investment

Question

Hey BP,

Hope all is wwlk & you're doing really great.

I'm looking to close my first deal here in FL. I've found a SFH here that I'd like to quick flip.

I'd planned on using a double close to flip to a first time homeowner.

I'm in a bit of a conundrum & could use your assistance. It's to my understanding that you have to have an end buyer that brings cash to closing.

Ideally, this strategy is efficient for selling to investors. If you are selling to a homeowner they would need to get a mortgage so I thought of an FHA but don't know if that would be the best option. I also thought perhaps they could utilize hard money & they could refi into a conventional loan.

What would you recommend?

Bryan O. · Answer

@Jeremy Cohen if you plan to wholesale it tends to be to investors because of the timelines. The reasons wholesalers make money are essentially 1) speed to close, and 2) large deferred maintenance that precludes typical sales. A traditional loan won't work for #1, and banks run away from #2 (mostly). The typical homeowner isn't going to have a clue what hard money is, and putting them into something like that would seem predatory to me. If you think that method works, then it should be you pulling the HML and then selling to that end buyer.

Perhaps you could buy the property, then offer up lease options to home buyers.

Jeremy Cohen · Answer

Assigning a Contract to a new buyer can be one of the easiest ways to make a quick profit on a house that you can get below value and flip to an end buyer.

But.... the biggest problem with this is that everyone could end up seeing your profit at the closing table.

The assignment ‘fee’ may be shown on the HUD1 (where both buyer and seller sign). Also, the end buyer has the right to see the contract that you have ‘assigned’ to him thereby seeing the price you are paying the seller.

Many sellers have backed out at closing (legally bound or not) once they see the money they could have made on their own.

End buyers have also walked away once they have seen the lower price that the seller is willing to sell for.

Never mind all of your hard work and diligence finding the property, finding the buyer, and negotiating the paper work!

One alternative that MAY work is to flip the property –i.e., taking title. The problem normally that comes to mind with this strategy is two fold: 1) You have to take title to the property (even if only for a second) so there are double transfer taxes, double closing costs, etc., to pay...., and 2) the new buyer may have trouble getting a loan because now you have a title seasoning problem (most banks only wish to give loans secured by properties that have been held by the seller for 12 months or longer). IF you have enough profit in your deal, you can offer owner financing to your new end buyer and then sell that seller financed mortgage at closing for the cash you need to 1) pay off your original buyer, and 2) to put a profit in your pocket.

Remember all seller financed notes are purchased at a discount (depending upon the terms, buyer’s credit, etc.) .... so there must be enough profit to cover the spread. It will not work for every deal of course, but it is certainly a great tool to know about. Basically, it works like this. These numbers are used for example purposes only. Let's say you put the property under Contract with the original seller for $70k.

Now you put the property under Contract to sell it to the new buyer for $100k, assuming it really will appraise for this (very important). Now you have $30k as your ‘spread’. Suppose your new buyer can put down $5,000 in cash at closing and has "okay" credit of 600ish (stated income would be fine, of course).

The deal can be structured so that you "the seller" carry back a $90,000 first lien, usually with an 8% interest rate (which you will sell to a note buyer at closing) and a $5,000 second lien, which you will keep and receive monthly payments for.

Let's say the buyer purchases the first lien of $90k from you at closing for $78,000. Now you have the $78,000 from the note buyer, the $5,000 from the down payment, for a total cash amount of $83,000 PLUS you have a $5,000 2nd lien to keep as an investment.

The title company will take the $70k to close the transaction with your original seller and he will receive that amount, less any underlying payoffs and title fees.You receive the difference: $13,000 in cash and a $5,000 2nd lien as an investment.

Not bad for a deal that you didn’t spend any money on!

The title company will take out the transfer taxes depending upon what is stipulated in your respective Contracts.

If you state the seller is to pay all of it on the first contract, and the new buyer is to pay all of it on the second contract, you can save yourself that fee (and any other split costs). Be careful to account for this.Rehabbed properties (with proof of repairs) and regular properties without title seasoning problems can also be set up this way – with much better scenarios than the ‘flipping’ example above.

Currently these properties can be set up at 95%LTV (Loan to Value) – EVEN INVESTMENT RESIDENTIAL PROPERIES!

The discount on the note is usually about $6,000 -$7,000 if set up properly from the beginning.

If the seller is willing, this is an awesome deal for the Buyer.

This is a great opportunity to purchase investment properties (1-4 units) for only 5% cash down!is a wonderful opportunity to purchase investment properties (1-4 units) for only 5% cash down!

Jeremy Cohen · Answer

Bryan, it was recommended by another investor on BP. I'm looking for other options which is why I need advice.  I'm aware that conventional will not work. Why would HML be predatory can you advise?

David, I had planned on using a double closing (buying the property first & then reselling it) IIRC a double closing is not illegal as long as your end buyer is using cash & it's not a short sale.

Here's a solution that someone recommends:

FHA isn't going to happen, but if they can swing Fannie Mae 3% or 5% down you can "wholetail" it to them.

Basically you find a transactional lender (@Shari Peterson ) that will lend to you based on the end-buyers' conditional loan approval and appraisal.

Once the end-buyer is approved(1), you borrow money for a few weeks and now that you own it you can sell it to an end-buyer using Fannie financing.

(1) Technically it will never be approved at this stage because you don't own it, meaning you don't have the right to sell it.

If the only issue on their loan approval is that you don't yet own it (meaning the appraisal, prelim, and contract, will all be rejected), that means you can safely take ownership.

Update the appraisal, update the prelim, and finally go out of and back into contract 5 minutes later at the same table.

Hey look, you just overcame the big 3 reasons that wholesalers "can't" sell to folks using Fannie financing.

I'd love to hear your thoughts.

David Dachtera · Answer

@Jeremy Cohen,

Double close ( A -> B -> C ) is illegal in most areas these days, thanks to it being so badly abused by short-sale flippers (I won't name names).

You will probably need to to do two closings back-to-back: A -> B, B-> C. Each transaction will need to stand alone and be "at arm's length".

You may need transactional funding on the A -> B transaction and you'll need to watch out for title seasoning requirements on the B -> C transaction.

Whatever you put together, do your homework and vet it with your attorney and the title company agents.

What They Won't Tell You About Property Investment

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