Flip the house or the note?

Question

One of my yellow letters went to an owner where it's listed w/ an agent (he called me).  The sellers want what the house comps for, let's say $100K.  There's a buyer already in the house buying on land contract that doesn't expire. They balance on their loan to the seller is over $200K, six years into a 40 year mortgage.  This land contract doesn't expire according to the agent and they buyers in the house can't refi due to the comps.
How do I flip this house or note?  Sellers owe only $12K; they just want out.

Dion DePaoli · Answer

If I were to guess, the agent's comment "does not expire" has to do with the terms of the land contract/contract for deed.  The [lease] doesn't expire.  That is true.  The contract matures, though, and 40 years later.

The issue you have as Mark said a 40 year contract for deed is not an attractive instrument.  This term needs to be shortened.

In this deal, you are talking about and dealing with the real property.  The land contract (or contract for deed) is a contract that goes with the real property which says once the terms of the LC are met the title will convey to the Tenant/Buyer.  You as the Wholesale/Buyer will inherit the property with the established interests of the Tenant/Buyer in place via that contract at point of sale.

The value of the real property has declined like much of the US.  6 years into the contract will not have paid down too much of the principal balance.  Your purchase price will want to be 'capped' by the current value of the real property and not the balance.

This can be a bit of a gem if you work it right.  The game plan would be to take the property at a discount to the current real property value.  The discount you apply is in relation to the conservative 'What If' scenario.  In this case the risk of default by the Tenant/Buyer.  In the LC the remedy would be an eviction.  The capital cost to you would be paying for that legal remedy and some type of repair cost to fix the property back up and either fully sell or sell in another installment contract.

The risk in general is the Tenant/Buyer walks away defaulting thinking they will never pay for the home since they know they owe more than it is worth.  The risk is exemplified when the Tenant/Buyer, as Marc states, has no down payment or skin in the game to incentive them to stick around and make good on their obligation.

I suppose it is worth saying, everybody needs to read the LC to make sure the current owner did not restrict themselves from a sale of the real property while in the LC.

If you took this property and reworked the land contract the Tenant/Buyer at 7.5% interest over 10 years, paying around $1,200 will have paid you $144k which will be worth around $100k discounted.  If you wanted to make around a 20% return you would want to be ALL IN (purchase price, due diligence and closing costs) for $60k or less.

Every dollar above the $60k you would want to start working on shorting the investment term.  (not to be confused with the borrower's amortization or term)  In other words if you have to strike the deal at $70k, you will want to cut your investment term down by working with the borrower to refinance the entire 'new' balance before the 120 period maturity or somehow pay you in full (they could sell the property, too).  That could be a windfall within the first year or two if you play the deal right.  It may even work out that you don't have to actually modify the terms of the existing Land Contract, simply take a short pay for the balance.  (They owe $192k, you take $95k as full payment)  If you managed to pull off that in 13 periods you would have yourself a nice 49% IRR.

I suppose the barrier here is that only a couple of us are actually describing what the deal is worth and you have not done so yet.  The land contract has created a layer of complication in deal analysis and you have to work out what the cash flow and upside from your discount is or will be.  That said, you have a current owner who walks with cash when you get north of $12k on a $100k piece of property that someone owes $192k on.  You have a lot of wiggle room to make a deal out of this one.  Nice job and good luck.

Marc Faulkner · Answer

Matt DevincenzoMatt has a great point.  There is nothing keeping this buyer from RUNNING away from the property, in fact they have 100k in negative equity to motivate them to do exactly that!

Marc Faulkner · Answer

UPB is the unpaid principle balance Bobby R. The only way this would be a deal is if you can buy it at a discount from what the comps are, forget the balance for now.  What they owe and the value have nothing to do with each other....

Since this is a 40 yr note, it is going to take a long time to get your money back.  What is the remaining term?  How much down (skin in the game) did the borrower have when they bought the home?  Why did they set up the note on a 40 year term?  What would the property sell for in a fire sale?  These questions might get the sellers expectations down to where this might be a deal but, I doubt it.  The reality is that there is no real market for 40 year notes.  With that said, it could still be a deal for you at the right price.  Ask yourself this-IF I bought the note and the borrowers quit paying tomorrow, what are my options?  Since you would have costs involved in getting the property back, and holding, you could never justify buying it for what the comps are or you would loose your butt!

Matt Devincenzo · Answer

I have no idea haha, but I'm monitoring this topic just so I can see what responses you get.

It seems that the one great thing in this deal is the sellers only owing 12K so at least that is easier to work with. My guess is you need to purchase for like 20% of the UPB and restructure the note so that the payment amount stays the same but the term and UPB is reduced then it would be marketable to a note buyer.

Again I don't really know but am extremely interested in finding out since I am just starting to look into note buying.

Bill Gulley · Answer

Sounds like a cash for keys, of a discount to buy now to me. Seller wants to sell. There is a buyer with a long term contract in the house who has no incentive to do anything except make the payments. Hopefully, the lender won't bark too loud at 12K with the due on sale issue. It's a lousy note to boot!

Great mess, good example of what not to do, another DIY deal or did the seller get advise on setting this up? Glad I'm not the guy who got this owner in that contract!

One other option, sell the property subject to the CFD, about like selling the note at a discount, could be a good deal for an investor.

I'd first try to motivate the CFD buyer, take them to a Sub-2 with a new note and deed of trust with a Special Warranty Deed or if the buyer can dig up 12k, a straight seller financed deal. Not sure how you want to get involved in your position.....  :)

Bobby R. · Answer

Dion DePaoli, you said a mouthful.  Thanks for the insight.

Bill Gulley, the seller is the the person who owns the house and the note.  Honestly, I don't know what the couple in the house want to do as they are paying the note according to the land contract and I'm only speaking w/ the realtor whose interest is with the aforementioned seller.

Bobby R. · Answer

It's been a busy couple of weeks since I've been up here...
Wayne Brooks, the owner of the home, the one paying the mortgage to the bank, is selling the house that he has sold to a tenant buyer under land contract (sounds confusing when you put it that way).

"Land contract doesn't expire" is the jargon the realtor used.  There no date set for balloon payment so the TB can refi and cash out the seller.

No the land contract is not in default.

Bill Gulley · Answer

Bobby R., can you clear this up? We have alot of speculation going on.

Let's put some names to the parties involved. You say seller, but both the person in the property and the holder of the note can be sellers as we have two different issues here, a house and a note.

What does the guy in the house want to do?

What is the holder (the seller under the CFD) want?

If there is a Realtor, seems the guy in the house has it listed, is that right?

What are you trying to accomplish, besides making money, do you want the note or do you want the property?

Who owes 12K, the seller who sold under the CFD? And is it the seller of the CFD that just wants out or the guy in the house?

Buying a CFD is not just buying a note as you need to deliver a deed to the property at some point, not just release a lien.

:))

Marc Faulkner · Answer

Just off the cuff-most note buyers are going to want to see that the borrower has at least 20% real equity.  Assuming the value holds up at the $100k that would put you at $80,000.  Most seller financed notes are written at 9 to 10%.  To make this attractive to an investor, you are going to want to set the term as short as possible, while making sure the payment is affordable to the payer.  You might go $80k to finance at 10% for 240 months with a payment of $772.02, plus the pluses!  This would lower the buyer/borrowers payment and length of time required to pay back the note/thus making it a no brainer to get on board with!!!  I would see if the borrowers might be able to come up with some cash in order to get to this balance- before just offering this to them:)

Now-in my opinion you would not want to have anything more than $65,000 into such a note.  If the borrower has the ability to come up with some cash in trade for better terms and a better payment, this could certainly be a transaction worth looking at....

Wayne Brooks · Answer

I'm missing, or not understanding, a couple of things.
1)  Who is trying to sell, sounds like the previous owner, but it's under a land contract.  I assume title hasn't passed to the land contract buyer.
2) What does the "land contract doesn't expire" mean?
  What price are they asking?
I assume the land contract is not in default?

Flip the house or the note?

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