Motivated seller, how to structure this subject to deal?

Question

I have a motivated seller which I need help to structure the deal. Her husband who is the main bread provider passed away in May and she has been struggling to keep up with the house payment.

The house was built in 2000 and they are the first owner.

House 2013 tax access value $103K, she owns 75K, 13 more years left. Monthly payment is $1134 including mortgage, tax and insurances.

House is in good condition, needs new carpet, and some paint. Power wash outside.

The neighborhood is a blue collar neighborhood, her house is worth between $80-$90K according to the recent comps.

The house can be rented for around $1250.

She had an investor offered to take over $75K mortgage and pay her $10K cash. She rejected because she wants at least $15K cash. That was a month ago. She may reconsider that offer, but she wants to see what I have to offer.

How can I structure this deal so it can be beneficial to both of us?

I am thinking market to the end buyer to take over the payment of $75K with $20K down and I get $5K out of it. Is this workable? I am not sure how exactly this owner financing work. Should the buyer continue to pay or the buyer needs to get their own finance 3-5 years later?

My thoughts maybe too naive, not realistic, please bear with me.

Grant Kemp · Answer

@Jerry Puckett @Adam Roberts Sorry it took me a bit to reply, I spoke with Eve on the phone but forgot to update the thread. Please bear with the long reply, I want to make sure everyone understands:

Okay so here's what it looks like so far. Looks like the seller got this loan 2-3 years ago and still has a principal balance of 75k. Seller's underlying lien (UL) is at 6.5% (approx). Seller wants 15k. House is worth 80-90k

What we would do is agree to buy the property sub2 with a down payment of 15k paid out when the property is sold to our back end buyer (the wrap). Our contract works in a 60 day option period with a 30 day optional extension. Once under option contract we are given the right to go out and market for a buyer. We'd then go out and look for a buyer who has at least 15k as a down payment, and market the property at at least 90k.

Owner financed properties are able to be sold at 110-120% of the retail price because you're adding value to the house by offering the financing built in to the property. So here we are with a $90,000 home that can realistically sell for 100k OF. However, let's use bottom end numbers so we have a base line

say the house sells for 90k OF with a 15k down payment. Once you find the buyer, you'll go to closing with the seller and the buyer and close the same day. At closing with your sub2 seller you'll need to provide full consideration so that you aren't breaking any double closing laws. This consideration can be provided through a promissory note to pay the 15k off w/ no interest within a week or something like that.

Once you close with your seller, close with your buyer, collect the 15k DP, turn around and give that to your seller and now your cash needs are taken care of.

But where's the profit? well the UL is at 6.5% and we know it was taken out 2-3 years ago. The seller has said there's 13 years left on the note, so I'm assuming it was a 15 year UL, and since we have an outstanding balance of 75k I'm going to assume the original principal balance was about 78k. I can estimate that the principal and interest payment to the UL is $679.46 by knowing this (however we are still awaiting solid numbers from the seller which will be shown on a mortgage statement)

Our loan the the end buyer is now for 75k as well, which matches the UL, however we're going to charge 8-10% to the buyer. I'd charge 9.5% and we will need to go for at most a 21 year note in order to make sure our UL is covered. That being said, I'd go with a 20 year note at most. This would make your end buyer's payment $699.10 PI.

So for the next 13 years you will only profit about 20 dollars a month, BUT after that 13 years is up your profit turns into 699.10 per month for 7 years! That's $58,724 total! And then you add up the $20/mo you were getting for 13 years and that adds another $3120 to it for a grand total of $61,844.40 of profit. Remember:

A) Literally no money has come out of your pocket for this transaction, so you're making 60k off of NO money put in

B) IF the buyer defaults, then you get to foreclose on the property and re-sell it with the same terms, but this time you have no seller to pay off so you'll be collecting the full 15k up front as profit, starting a NEW 20 year note and getting all your profits AGAIN.

Now remember, this is off of a deal that otherwise was trash, so for a property that was not going to make any money you've made a base line of 60k with potential profits skyrocketing from there.

Also, if you're able to sell the property for 100k instead of 90k you're getting a 10k principal spread as profit, and that 10k is going to be interest bearing! If you sell for 100k the buyer's monthly payment PI is $792.31 which means you've got a $110/mo profit for 13 years and your end total profit is 83,714

Pretty good for something that wasn't a deal ;-p amazing is the power of interest!

Ellis San Jose · Answer

Just for an academic discussion.  Say that I spent the time & energy to put together this deal against Bill G.'s advice even though he warned me that it is fraught with risk & liability.  Even though technically it is an infinite return because you would have theoretically no money in.  I still have time & liability exposure.

The present value of $20 month for the next 13 years at 12% return is $1,576.46

So if the deal doesn't make it past year 13 was it worth the time & risk for $1,576.46? What would it cost for legal if this thing blew up?  How much time would you need to spend to get this deal done & to manage any hiccups?  MOre importantly, how many other deals would you miss because you were messing around with this one?

I would rather prepay other bills that I can negotiate a discount or pay off high interest debt an extra $20 a month without the liability risk or time required of this deal.

Deal structuring is a great skill when used properly, I just see this application as trying too hard to force a deal when there isn't anything there.

My vote would be to move on to something with more meat on the bone.

Ellis San Jose · Answer

@Grant Kemp

What is the present value of the next 20 years of cash flow?

$20/ month for the first 13 yrs. and then $699.10 from years 13-20?

It seems to that if you don't apply the Time value of money the cumulative amount could be a bit misleading.

Oh yes! and congratulations, you've just been Gullied.

@Eve W.   I don't see a deal here. The seller wants full value and there is no spread to work with on payments.  Smoke and mirrors won't make this look any better.  I bet there are better deals out there to pursue.

Faith Brashear · Answer

There is not enough there to really work with, especially with repairs of new carpet and paint.

$1350 seem really high for a 75k loan.  Payments really should be around $400 plus taxes and insurance on a 30 $575 plus taxes and insurance on a 15 year.   Her TI should not be more than $250 per month.   She really should be paying $625-$825 not $1350.   The only way I can see you making $5 and help her is to arrange financing for her.  A new 15 year would benefit her greatly without losing that much extra time in the payoff period.

I would find out if her loan company would do a streamline fresh start refinance.  If not send her to NACA and have them help her force a loan modification, she should qualify,

Grant Kemp · Answer

holy cow! sorry to have gotten you so worked up here.

Ok, let me try to address these things one by one. I hate how heated people get on things without realizing that even though it's not the way you've done things in the past, that it can still work. I realize I may have put one too many exclamation marks in my last comment? perhaps that's where I became a "guru"...anyway:

"Buyers need to be able to refi the deal as soon as possible, doing a really stupid thing of jacking up a sale price means it won't appraise out." you're right in that it wouldn't appraise out if sold for zero down, but typically an owner financed transaction is going to have a very large down payment, in this case 15,000 which would get the house back to an obviously "financable" amount since we're matching the principal value up. I don't recommend going 120% of retail market value pretty much ever, but what I said was that the houses can sell for that much when owner financed. I've seen it happen plenty and MOST of the time (ie close to 90%) the buyer prefers to continue paying their wrap mortgage rather than refi. We even offer refinancing to our buyers and most opt just to continue as is. In fact, I've not sold a house for over market by that much. The most I've gone is 110% and this was due to underlying lien amounts needing to match. Again, it's all about disclosure and making sure everyone entering into the agreement understands what's happening to the T. And to say that having built in financing doesn't add value is a matter of semantics at best. It is valuable to a buyer to have financing available to them when it may not otherwise be available. When buyers are a higher credit risk, they pay more. This is traditionally reflected by interest rates, and in this case it can be reflected by a higher purchase price.

Always keep in mind that the ability to repay MUST be considered. and this is where using an RMLO comes in to play. You've got to stay compliant with Dodd-Frank, SAFE, RESPA, TIL, and all the other acts that deal with financing to a consumer.

as far as the sub2 and end buyer problems you mention, there's not as much validity there as would seem by your comment. I'll mention the question of the seller filing bankruptcy to Scott just because I've never had to deal with that scenario. However, buyers or sellers dying would not be an issue any more than in a traditional sale with a traditional mortgage, either way it gets passed to the estate. And the "lots of things can happen" side of things is also not as "lots" as you may imagine. We've closed approximately 10,000 owner financed transactions over the last 25 years and only seen the due on sale called 5 times, 3 of which were due to non payment by the investor. This is one reason we always use a third party loan servicer for these notes.

I'm not sure what got you so upset about my mentioning the note so you're not hit by the double closing laws? That wasn't the topic of our discussion so I didn't go into it, but if you need money from the "C" closing to fund the "A" closing (in this case a 15k down payment) you can create a promissory note to "A" backed by a DT for that 15k and make it payable within a week (or any other short term) with no prepayment penalty, then when "C" funds, use thatmoney to fund "A" and it pays off your note. This satisfies the full consideration requirements of the A to B transaction and allows you to use the B to C money to do it.

Also I'm not sure where this big hangup on people dying comes from. For one, at least from the investor side, we always purchase and sell through the LLC, and secondly death of an entity doesn't just wipe out a mortgage. In the case the investor died, that mortgage owed would be passed on to heirs if it was done under their personal name, and if not the company would still be getting paid their mortgage.

Default on the wrap note does NOT mean you have to pay off the underlying lien entirely. Perhaps you thought I meant default to the UL? The reason we structure our deals with the investor in the middle is so that we can be there to continue paying the UL even if our buyer stops paying. However, even with that being said we have disclosures upon disclosures making sure that the seller understands that it is their name on the note at the end of the day, and worst case scenario occurs that means the debt is their responsibility. Almost all of the sellers we have are one step away from giving their house back to the bank anyway, so their worst case scenario means they just end up right where they started. Best case scenario, they don't have the hit to their credit that a foreclosure or short sale would and someone else gets to have a home. Anyway, if the buyer stops paying, you can continue to pay the UL while foreclosing on the buyer. The note and DT is signed to you as the investor, this is why you're able to foreclose on the buyer.

"Now, I do most investors like to stick it to buyers while smiling perhaps saying a prayer with them as you have them sign and do their best to tell themselves they are honest dealers," I find this to be the most ironic line of the whole thing. I can confidently say that I NEVER try to pull one on anyone, seller, buyer or otherwise. The world goes round through disclosure, and doing anything other than telling the whole truth to everyone right up front is just dishonest and wrong. This comment made me cringe a little to see you endorsing this kind of behavior while talking about what a bad person I am here haha

either way, like I said, I'm pulling from 25+ years of experience and 10,000+ closings here. Scott's a title and real estate attorney and we've seen this stuff work. We close anywhere from 5-15 properties a month, and while I won't say you never can run into a problem I will say show me what real estate strategy NEVER has an issue arise. Everything done here is entirely legal and proven.

I apologize to all on the forum having to read such dramatic posts, really seems to be counter productive but I guess at the end of the day it's good for questions and issues to be addressed.

Bill Gulley · Answer

What I see is a beginning guru it seems, with really bad information, lack of understanding and not a clue what is involved in a very long term wrap.

Seller financing does NOT add value to a property, that is total guru crap. It is an economic benefit to the extent alternative financing would otherwise cost, that's all a seller concession of sorts, nothing more.

Buyers need to be able to refi the deal as soon as possible, doing a really stupid thing of jacking up a sale price means it won't appraise out. SO, now we have a due on sale issue, the freaking seller dies, they take bankruptcy, your buyer dies, lots of things can and do happen (the idea of taking those risks for 13+ years is plain nuts ). Now, 90 days later you may need to pay off your seller off, that means paying off the underlying mortgage so that you can continue selling to your buyer, if you can't that buyer is looking at you. In a Sub-2, it's YOUR obligation to sell under this shell game.

If your buyer can't refi because the sale price was in the clouds, that comes back on you!

Selling over the real market value has to be earned in appreciation over the term to break even if additional cash is not paid. Ever hear the term predatory transactions or lending?

So, no one sees a problem of chucking and jiving over 13+ years avoiding the due on sale issues and possibly the SAFE Act or with servicing issues?

I probably would not be so ticked if I didn't see Kemp attempting to use seller financing with a note at settlement to avoid the issues with double closing, while he was so fuzzy on it, having closing issues, paying it off later......I have done this for years in closings  AND I mentioned it last year or so on BP.

I'll get that part straight, you do a note for full value of the amount due the seller and close that transaction. THEN, immediately upon receipt of funds from the next transaction you payoff that note. NOT is a few days, not the next day, pay it immediately! The note should state it's due upon sale.

Are you all aware that people drop dead? Investors don't live forever nor do they know when they are leaving this world. Same with everyone else involved too. You make some deal where you can just pay a note off on some sloppy old future date will be harder to sell as to the idea for the seller, it's sloppy work and unprofessional.

YOU CAN NOT FORECLOSE on an equity amount carried back on a Sub-2, default terminates the installment contract, if you foreclose that means the underlying lender has to be paid off and if it did sell at the payoff and actual costs, your future interest and profits go poof! Gone! Your underlying lender must be notified too, now that's just a really bad idea.

Again, that 110% to 120% of value is a load of patties commonly found in Texas ranges behind cattle. A pure line of it justifying the theory to make a deal sound great and rip off a buyer. Now, I do most investors like to stick it to buyers while  smiling perhaps saying a prayer with them as you have them sign and do their best to tell themselves they are honest dealers, but don't snow newbies.  ASK any real estate appraiser, one with a license, that walks on land, if the value of a property increases by offering seller financing........total horsefeathers!

@Jerry Puckett was that an endorsement?  I don't know Adam, I've seen his posts before and didn't blow up, but the other clearly has no clue and fluffs the potential deal much like a guru might do.

@Adam Roberts perhaps you have a better grasp of creative transactions (I'll ignore the phrase mentioned for that stuff), so please, jump in. :)

@Kathy Armstrong   More due diligence in selecting speakers (?) as there is a bit of an endorsement by "management" of any group in selecting a speaker. Oh, I'm sure the group and speakers have disclosures out the tail, not the point, what is perceived?  They need more than the art and style of public speaking, the ability to motivate, as what they put out needs to be within the reality of real estate. I think if I were in your area (BTW, I might be, have family in the area) I'd try really hard to get some attorney involved, it would/could be good for their business. Good luck with your group!

@Grant Kemp I would not have landed as hard if what I had not posted several times on BP for over a year or more about note/closings, and  taken and twisted into some scheme......and no, you will never convince me that you thought of it or that you've ever done it. Not good, not pleased, don't adopt anything I say into any scheme you might dream up. I pass on information for individuals to consider, not for others to attempt to make some scheme out of who go around speaking. Thanks.

Nothing personal-personal, just cleaning up and doing my self appointed job here. :))

Now,  poor @Eve W.  I see you are a Realtor, are you representing this client/seller? Are you aware of what a net listing is, adding a profit to a sale and giving the seller a net amount?

No, there is no cash in it beyond your commission if you have a listing agreement, you could increase the listing. Should we do a greed check:) You will also most likely need to run your deals past your broker too, lucky for you he or she is probably sharp enough not to allow what has been suggested, you put your client seller in that mess only a relative would forgive you.

Now, if you are acting on your own, not as a Realtor you might pull something out, there was a good suggestion, possibly, about refinancing but I'd not do it as an owner occupied, that could be seen as fraud turning around and selling after a refi. She can certainly sell it with cash down and do a Sub-2 and carry it, have the deal serviced so she doesn't have the problems, but it needs to be short term, 3 years, try not to go beyond 5 years, certainly 7 years. Qualify your buyer.

Another option is to get with John Jackson on a lease-option that can close in a shorter period.

I usually don't get soooo ticked, but this was really something, sorry Eve!

Good luck Eve! :)

Adam Roberts · Answer

@Grant Kemp  excellent analysis.  Appreciate you taking the time there.  Good stuff.

Adam

Jerry Puckett · Answer

Excellent!! No one knows wraps, sub 2 and owner financing like these two. This will be a must see meet up. Put it on your calendar folks!!

@Grant Kemp can't wait to hear you break this one down.

Rich Perrin · Answer

@Grant Kemp you mentioned to use a third party to collection company to perform any debt collections to not arouse any suspicion. What kind of third party are you referring to and why would that cause it to not arouse any suspicion? I've seen this mentioned a few times.

Grant Kemp · Answer

I can respect that. It really does just boil down to personal preference of if you view it as worth the work or not.

I should note, this is a very bare bones deal. Most sub2 wraps have much more meat on the bone, but the whole point here is to turn a nothing into a something and this is the only way I know of to turn trash leads into money.

Motivated seller, how to structure this subject to deal?

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