FSBO wants to get out of realestate market, what do I do?????

Question

Hello Everyone, I have been grinding my wheels for about two months and finally my ship has come in. I met a gentleman who owns property here in St.Louis, he cannot do the management or upkeep his buildings anymore. Two of the buildings that he wants to get rid of are in pretty good shape and has offered to sell them to me. My initial offers to him was $0 down, zero interest, and I give a balloon payment for both buildings in 2 years from the date that I take over the building. Here is my problem even though I just purchased my FHA property in October of 2013 my credit is not up to 680 as needed in order to go through a bank, also working with a bank I would not be able to generate 20%-30% down payment. The seller wants some money as a down-payment he says he normally takes 20% down-payment, but he knows that I am starting out and he would do a lease option with negotiable terms if I gave a payment of $7k-$10k. I can get both buildings for around $120k, I believe I can get him lower he does seem to be motivated. He just wants to get out and not deal with realtors, banks, or tenants. What do I do? How do I get $7k-$10k. I want to buy and hold I do not want to flip, wholesale, or anything. This is the perfect opportunity for me. The rents are around $2600 per month. I can raise the rents because he has not done any updates in a while. How do I get the money??? I hear about all of the private money lenders where are they?? I need some good sound advise ASAP. I need to call this gentleman back next week.  HELP!!!!

Steve Babiak · Answer

One note of caution to consider.  People with difficulty in raising funds to do buy and hold sometimes run into difficulty during the hold period due to lack of reserve funds; a heating system or roof fails, and with not enough money to get it fixed ...

Brian Gibbons · Answer

If you can get some maintenance money which you would need, why dont you get a MLO deal here, and save up for traditional financing down the road?

MLO = Master Lease Option

Say to him,

"I can give you your $120K for both, and take away your maintenance issues, I will pay your existing financing payments and taxes and insurance (I dont see that info) for 24 months then pay you the $120K.  I would collect the rents."

You MUST get borrowable to do this, either conventional or private lending or partnering.

Get a builder - building inspector that knows code to inspect it.  Inspect his records of what has been done over the last 5 yrs.

Existing Financing Info always has a role in how to buy: Balance, Type, Interest, Payment.

Phil G. · Answer

I hate to discourage anyone or be a buzzkill, but you mentioned that he wasn't able to maintain his properties any longer.  Is there significant deferred maintenance that you're going to need to deal with?  And if so, where is that cash going to come from?  The current owner sounds a little desperate to be rid of the property.

Be sure you'll have the resources to be successful before you leap.  This won't be your last chance to acquire a property.

Bill Gulley · Answer

Oh, and by the way:

When a buyer/borrower walks into a lender you may find that they won't be accepting screwy financing deals, it really doesn't matter what you agree to as to what is credited or when, the lender can adjust anything to a conventional term with a market rate to compute the loan-to-value as to what is credited to the equity amount.

An example is with rent credits in a lease-option, which is a form of seller financing. Market rate rents are used and only amounts paid in excess of market rents is allowed toward equity to base the loan amount on. The same thing can apply to interest or any unconventional method of payment. These are seller concessions in financing.

After adjustments are made, if the borrower meets the lending requirements (often they won't) the transaction can be closed at the agreed amounts.

What can happen easily is that some "investor" dreams up some method or deal he can sell to a distressed owner and they end up out smarting themselves when the deal unwinds because of some unknown or unforeseen event.

From the stand point of building equity, relying on appreciation,  and usually cash flow from a rental, you're better off paying a lower but market rate interest and discounting the price. :)

Bill Gulley · Answer

Yes, but if undisclosed it's always less than the seller thought he was getting and usually, he'll be paying some tax guy to figure out for him how much less he gets, LOL

Bill Gulley · Answer

Avoid no and very low interest! Discount the sale price instead and pay interest.

Investors that get Harry Homeowner caught up in some deal, selling sizzle and promises and unconventional deals can find themselves with real issues if this go south, like the seller finding out he has to pay taxes on the principal amount on a deal you pulled him into. Just because you can get someone to agree to something doesn't mean you should, like jumping off a bridge or losing thousands of dollars from what you said they'd get.

As to the deal, use an earnest money note, consider a L/O as it will probably be the cheapest way to get in with no money. Contract For Deeds are not an option in Missouri or anywhere really unless you restructure the quit claim escrow as your default agreement, not saying they may not be done some places, but everywhere they can have issues in circumventing foreclosure laws if there has been equity established.

Search L/O as there are draw backs, in St. Louis you won't be getting a building permit or contracting repairs as a tenant with an option. :)

Steven Hamilton II · Answer

Imputed interest is not always a bad thing........

Think of it as taking a loss/lower gain on the principal and including some interest income. ;)  It could be worse.  It is not added to income it is often as an adjustment.

Steve Babiak · Answer

Nothing wrong with solving problems others are having by taking on those problems.  You just have to make sure that you can then solve those problems once they are yours. The suggestions about reserves and maintenance funds should be viewed in this context.

Shera Gregory · Answer

First point is to be sure that you do NOT give any money outside of escrow.  I am not trying to analyze the full deal and maybe someone else will chime in.  But I want to make sure that is clear.  Do not provide any funds up front unless it is a small earnest money deposit.  Be be sure that his emotional state is not taking over your analysis of the deal.

Brian Gibbons · Answer

@Brian P. love the idea of no interest but isnt "imputed interest" form the IRS come into play?  See http://www.biggerpockets.com/forums/61/topics/113307-imputed-interest-from-the-irs---what-is-that

Bill Gulley  has written alot about that.

FSBO wants to get out of realestate market, what do I do?????

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