Is this strategy valid?

Question

I have seen a scenario where a buyer put a property under contract for 70K but decided during Due Diligence wasn't going to buy it so ends up assigning the property, here's how it looks -

Property under contract for 70,000 and the buyer listed it for 100,000 with 30% owner financing. Found a buyer and payed the seller the full amount and holding a private mortgage for the rest.

Does anyone see any problems doing this?

Account Closed · Answer

Hey thanks for your comment.

in that scenario the end buyer comes in with 70% either with cash or mortgage and I would hold the 30% as wholesaler

Rick Pozos · Answer

How about this:

You buy from the seller at 70k. Get a friend, family member or someone you know to lend you the 70k. You buy it. Immediately turn around and find a buyer for the property that needs owner financing at 100k. Your friend is charging you 6% interest, you are charging 10% interest. You bought for 70k and selling for 100k. You make the spread for 10 years or 20 years or whatever your terms are on the loan. Plus you have the buyer put down 10k which is yours minus your closing costs. $350 per month or thereabouts for the next 20 years. Now do it 10 more times and you have a decent little income for the next 20 years. Do it for longer and you are set for life.

Deandre P. · Answer

In the scenario you presented its not really an assignment as buyer one is closing on the property.  Basically you are doing a double close, where buyer 2 funds the purchase and Buyer 1 spread is paid out over a term with a note.  If the original buyer has 1st lien position and can foreclose on the property in case of default, then I don't see to much of an issue.  With that being said I don't how either of the two buyers benefit from this structure.  Buyer 1 has to possibly wait for the full term of the note to receive full payment.  Buyer 2 is putting down 70k (70%), rather just putting down 20%-25% with a lender.

Matt Devincenzo · Answer

If they come with cash then sure that could work.

Mortgage is a no go. There isn't a single lender I'm aware of that allows a SF 2nd for 100% CLTV (Combined Loan to Value). There's a really bad idea being floated right now in creative finance circles that you can do that legally using a two step transaction. I personally do not see how it could be done and not commit mortgage fraud...it could theoretically be done, but the actual lender req's will prevent it. So I won't go as far as saying it will NEVER happen since I'm sure someone can find a transaction that was done this way, but as a general rule it can't be done with any sort of regularity.

Matt Devincenzo · Answer

Sure you can do it, but it's not likely to actually work. In your scenario your buyer is bringing 30% DP, and you owe the seller $70K, so you need to pay $40K to the seller in addition to the DP you collected. Now you have a $70K note for the sale, but you had to physically spend $40K cash to get into that deal...

Nathan Harden · Answer

Yes, this is a thing. Assigning a contract is called a wholesale.