Land Contracts.

[Josh Jacobsen]

Hi Friends, 

I'm a huge fan of the collective wisdom of BiggerPockets, and wanted to seek out a few ideas. There is an apartment building listed on the MLS that I've been fantasizing over for several weeks, and after much considersation gave the listing agent a phone call. The seller is open to creative financing, but wants to find out if I can qualify to assume his loan. I can almost guarantee I will not be able to (in the neighborhood of $1.5m), so I'm looking for legal ideas to structure plan B and keep plan B a win-win scenario to make this deal happen with a Land Contract. Partnering with mom and dad, mom and dad in law, and outside investors are plans C, D, and E - which I really don't want to do.

I read a post a while back from Brandon Hicks that mentioned using pro-rated rent, property taxes, and security deposits as down payment credits. What else have you written into your contracts to produce low or no money down deals?

My goal is to reach a hand shake agreement before settling in with my attorney to draw up a PSA. 

Any input is good input, but I'd especially like to hear from Brandon Turner (sorry Brandon, I haven't read your book), J Scott, Brian Gibbons, Brian Burke, K. Marie Poe, Jon Klaus, Ned Carey,  Aaron Mazzrillo, Dawn Anastasi, Jay Hinrichs, Bill G., Curt Bidwell, and Michael Siekerka. 

Thanks!

[Brian Burke]

@Josh Jacobsen I know this isn't what you want to hear, but if you've only got $10K you are under capitalized to complete this deal on your own. For a deal worth $2 million (+/-) $10K will get swallowed up for breakfast. Just the loan assumption fee would likely be around $15K. Sure, you can acquire it with creative financing like land contracts, seller carry backs, sandwich lease options, credit cards, signature lines, HELOC on primary residence, etc but you'll be so overleveraged with so little reserves that the slightest hiccup could put you in a very bad and painful place. On a $2 million deal I'd keep around $30 to $40K (at a minimum) in the operating account at all times. You'll most likely have nothing left with which to fund this operating account if you play that close to the fence.

Forget about using proration credits and security deposits to offset the down payment. Those credits have a purpose. You'll use the prorated rents to pay the first mortgage payment.  The security deposits are for you to hold in trust, to return to your tenants when they leave (less damages and outstanding balances).  In practice this stuff is credited in escrow but you still need to put the funds that you would have deposited to escrow into your bank accounts so that you have the security deposits and reserves on deposit. 

Plans C, D and E are viable. Raising money from friends and family gives you the down payment, reserves, closing costs, etc.  The lender is much more likely to approve the loan assumption if you are bringing real money to the table and have skin in the game (even if it's someone else's skin).  Splitting the deal with others is painful, but nowhere near as painful as the feeling of despair when the market moves against you and you realize that you are undercapitalized can't service your debt or expenses.

On the bright side, leveraging other people's money allows you to scale much faster and higher than you could do on your own.  Done correctly, under capitalization will be a thing of the past.  It will also transform you from a dreamer desperate to find a way to do a deal into a real buyer that'll be taken seriously by the seller and lender.  You'll get a better deal when you have the upper hand!