How would you structure this deal?

Question

Wanted to say thanks because I've learned a lot from reading this site the past few weeks and look forward to giving back in the future.

I just got a lead off a direct mailing campaign and the owner owns the property free and clear.  ARV is about 225k and the seller thinks the property should sell in the 180k range.  The property needs about 25k- 30k in work. The seller expressed interest in carrying back the financing and knows that I want to flip the property retail.  He also expressed interest in taking some of the post flip profits in exchange for providing the financing.

If I were to buy with hard money or my own cash I would want to buy for around 130-140k but there is a chance that I could have no money in the deal with the seller carrying so I could pay a lot more.

What would you do and what's fair to the seller?

Thanks for your responses.

Justin S. · Answer

Your state contract is probably fine but I've never seen it, assuming its in CA.

Don Hines · Answer

Maybe I got lucky. But, I am dealing with an out of state seller and my spread is a lot better than $15k when I am done. I think I would just ask for the owner financing with no prepayment. Sweeten the deal with a balloon in 2 to 5 years. If this your first one, put at least 20% contengency in your rehab guesstimate.
Don

David Duval · Answer

I'm going to try and convey to the seller that they will net more if they do seller financing.  They don't want to make repairs or have to deal with selling the property because they live out of state.  They would likely struggle to sell the property for greater than 170k and that's before selling costs and whatever repairs they would have to make to sell the property.

So purchase price would be approximately 160k(hopefully less) and the seller would carry back 160k at whatever percentage interest we agree upon with a balloon in one year and no prepayment penalty. Interest only payments and no payments for one year.

Sound good?

Thanks for walking me through this Justin and Bill.  Much appreciated

Bill Gulley · Answer

The seller needs to sell and he can carry back a note with a balloon payment. You could agree to a liitle more for the deal since you're getting this below an appraised value. I would not set a % of a final sales price for his financing it, it would probably be cheaper using a HML. Costs of the rehab would be on you. But, what ever you give him is just money out of your pocket, a 25K rehab could be a pain so don't sell yourself short and you'll have accrued interest as a carrying costs even if payments are not required to the sale date.

If you're new to this, I would not suggest you partner with a seller.

Good luck

David Duval · Answer

If the seller does finance can I use my states' board of realtors purchase agreement to get this in writing or should I use a different contract?

Justin S. · Answer

If the seller is doing seller financing, then you would be on title.  If they are on title, then there is NO seller financing because he did not sell.

If you want him on title, then I would not pay him anything for financing as there is not risk on his part.  Setup a JV agreement, Deed of Trust (DOT), and a promissory note.  The DOT/Note would cover your remodel costs and the JV agreement would explain the profit share and roles/responsibilities.  Make sure your  Note is due in 6-12 months.  If he decides to not sell, at least you can get your costs back.  If he never pays you, you can foreclose on him.

I would probably not do it this way.  I would make sure you are on title.  That way you are the decision maker and not him.

David Duval · Answer

So today you would pay 160k and have seller carry 160k at 10%(hopefully less) and then you would pay for the whole rehab and sell the property?

The seller would be on title, so how would I ensure that I got paid at the close of escrow and should I take a fee of 20k or should it be more performance based?

Thanks for responding

Justin S. · Answer

Assuming the homeowner is carrying the entire purchase amount at 10% Interest:

If it were my first deal though, the most I'd pay is around $150K.  This should get you close to a 30K profit

Today, I would pay closer to $160K.  This will get you close to a 20K profit.

David Duval · Answer

I'd like to make at least 15k on this deal if possible.  What do you guys think about seller carry 160k at 5% for 1 year, no prepayment penalty and then I come in and rehab for 30k?  I would be selling the property myself(i am a licensed agent)so selling costs and property taxes would be ~13k of the 225k sale.   Essentially I would be managing a rehab and then selling the home as an agent.  So that leaves about 15k in profit but how do I write a contract that ensures I get paid(besides the listing agreement)?

I feel like there is a deal here because the seller has so much equity and wants to sell( unfortunately doesn't need to sell).

Any ideas would be much appreciated.  Thanks

How would you structure this deal?

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