doubling offer price without effecting CF?

Question

Anybody ever try this?
          
          Suppose you got a guy selling a house asking 50k.  If you put down 10k and get a 40k loan, your payment will be 250 a month.  
          
          If you were to offer 100k, double his asking (bet that would peak his interest) still put 10k down, but ask for principle only payments for 30 years, your payment would STILL be 250.
          
          No banks, No sniveling lenders tell you "NO!".  Buy as many deals as you want.
          
          Now, suppose you offer 75k (still 50% more than asking) with the same 10k down and principle only payments for 30 years, your payment would be 70 bucks a month less at $180!  You'd be improving your CF by offering 50% over asking!
          
          Read this in a book I just bought.

TC

Bill Gulley · Answer

Hi, imputed rates are harder to investigate by IRS auditors than you might think, the probably have a current rate sheet for the month or quarter, but can you imagine going back five years from treasury rates and adding a margin for each adjustment and comparing the to the yield of a zero coupon bond of it's term with additional amounts of pricipal accruing to a balloon payment that is factored in at the time of sale and discounted from the sale price? I didn't think so, that auditor just went to lunch! That deal would have to be a big deal, worth investigating and spending to on for the extimated tax due, it's just not there, because, well, it would be a fair rate under the type of transaction contemplated! You can make notes appear to be very complex yet simple for the parties to understand. Not enough room here. But if we said we would do a deal at a sale price at a lower rate of interest like 3% for example, we could raise the rate and lower the principal amount and in the end it would be the same thing, we could also trade another financial instrument in the mix, if the balloon payment was $20,000 due in 15 years, you could find a municipal zero coupon bond purchased today for say 35 cents on the dollar that would mature at $20,000 in 15 years. Now the balloon payment is taken care of. And, the 35 cents could also be financed with the payment and shown as interest, since you modified the price to manipulate the rate. Is that kind of clear? You can take any part of a note and modifiy any variable to compensate for the change in another. Whats, the difference? TAXES! Capital gains vs interest income. The overall deal has to be reasonable to avoid the sham transaction rules and be at arm's length. We don't want to cheat'em, just choose the best way to pay what you must. Bill

Mike C · Answer

Tom,

A couple of things. I agree and also believe cash flow and terms is much more important to me than price but you can take it too far (which you may have considered and just not explained here). First, you must determine the value of the home. In your example, assuming the home was worth 50k and paying 100k wouldnâ€™t work for me. Yes, the cash flow may be good (maybe, depending on other factors) but what is your exit strategy? Do you really want to be tied to that house for a very, very long time? Only you can answer that question and maybe you can live with that if it is a rental and you have ample cash reserves for what ifs. Now if this property were worth 100k and not 50k, I would pay 100k (or maybe a bit more) IF the terms and other variables were very favorable. Be warned though that you better have some experience if paying over value as the value of that property could keep going down. My point is being creative is good, being foolish can cost you a lot of money and headaches.

While I havenâ€™t tried your idea above, I have used a variation of it. Say I am trying to buy a pretty house (my preferred market) and the home is worth 200k. I have tried all my usual techniques and he just wonâ€™t budge and he/she will take 200k or no sale. If I canâ€™t buy the home any other way and it looks like all is lost I try this: I say something like, â€œI will tell you what, I will pay you your 200k, but will pay you 1000 per month for 200 months.â€ Or you could also say you will pay whatever their mortgage payment amount is as they would have to be pretty motivated to take less than their mortgage payment (I always start with 1000 though, you never know). Not many will take this type of offer (you can also explain how an installment sale saves on the taxes) but if you ask every seller where you canâ€™t come to terms, you will get a few you wouldnâ€™t have otherwise. But I would take this every time. Why? First, I will probably L/O it with rent in the 15-2000 a month range (preferable 2000 or close to it), depending on where you are. No, this doesnâ€™t meet the 50% rule at the low end that is widely expounded here (which is very good advice), but it works for me. I have plenty of cash reserves to cover any problems. Second, the time value of money. Discount the future value of 200k paid over 30 years or whatever terms you agree to. You will like the result.

A word of caution. If the homeowner owes close to the value of the home, their loan will pay down slower than your financing and they will have to bring cash to closing because you will owe them less than owe their lender. You need to run an Am schedule to see how the numbers work on out in case they go for this. You can get around this too or make them pay if they will agree to it.

Just another arrow in your quiver you may or may not find useful. I have used it a couple of times when all other offers are rebuked.

Good investing

Mike C

Dustin Lyle · Answer

Hey Tom,

Another thing you should look into, Which is a great tool when computing TVM, (TIME VALUE of MONEY), is the rule of 72. There are other number rules such as the rule of 70, and the rule of 69 and 69.3.... But the Rule of 72 is best used for yearly compunding of interest.

The Rule of 72 simply states that 72 divided by an interest rate equals the number of coumpounds needed to double the principle.  I'll give you an example...

50K mortgage @ 7.2% will cost *about 100K over 10 years. (simple interest)

72/7.2=10 compounds (years in this case)

But if you got a lower interest, say, 3.6%, it would take 20 years for the same 50k to cost 100K. 
72/3.6=20

Now the numbers are not "hard" or "exact" but they are fast...
And when your using money manipulation when negotiating, odds are that the other guy doesnt understand the value of compounding, atleast the way you do now. You are able to "throw" numbers around and make the guy think he's taking advantage of you... When in reality, you know the underlying concept that he doesnt.

:superman:
Dustin

p.s. when they said that knowledge is power, they weren't lying! Though this is a great resource to have, success comes from resourcefulness and your choice to create opportunity.

Bill Gulley · Answer

Hi, you can have some fun in your spare time playing with your financial calculator instead of the Xbox (LOL)
          
          Look at different present values adjusting the two other variables, term and rate, then look at the future values and change up rates and length of time. Now start solving for balloon payments or remaining pricipal at different times over the amortized periods. Change up payment amount, add $50.00 then $100.. You'll soon began to visualize the difference and the effects of changing one variable in the equation.
          Add a little imagination and  soon you will be able to make a mortgage dance to a different tune! Have fun! Dazzel 'em, 
Which reminds me of one of favorite sayings..."figures lie and liars figure" !
Bill

Bill Gulley · Answer

I really enjoy finance, after all, that's where the money is! LOL OK, yes it was Jesse James saying the reason he robbed banks was because that's where the money was....Gotta Go! Bill

Dustin Lyle · Answer

May I suggest a reading?

Foundations and Applications of the Time Value of Money

By Frank J. Fabozzi

It will get a little boring if your not actually interested in the knowledge it offers... Lucky for me, I WAS! My brother, not so much :)

Anthony Larson · Answer

this is a hell of a thread, we got bill telling jokes, tom giving chinese lessons and as always real estate suggested strategies. sorry i really did laugh after reading through this thread, anywho...

BILL my man, are you able to tell me more about avoiding imputed interest rates,  I loved the concept and I did find it in investing in gold mine houses, jay decima is a great author.

Just Don · Answer

"problem" i see with this senario is IRS inputed interest rule.

Bill Gulley · Answer

Hi, sorry I don't have a book review. Educating sellers is part of the game. I use to look for older landlords, cath them at a rental cleaning it up after a move out, better yet, follow the evictions! Explain the tax advatages and all the work involved in driving to the bank intead of to fix a toilet. I've picked up rental portfolios! SPeaking of discounts, what ever happened to the zero coupon bond. Bonds purchased at a discount and traded at it's future value for balloon requirements or discounted purchase price? I use to sell properties to a car dealer, yep, that's how I'd drive my Pathfinders, a win win for both of us. Good Luck, Bill

doubling offer price without effecting CF?

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