I turned it down

[David Neely]

So I was presented an opportunity from a realtor I work with, that I eventually turned down, and wanted to get feedback from those on this forum that are smarter than I am on this stuff (i.e. everyone) as to if I evaluated correctly. (Background: I'm a buy and hold guy, not a lender..so this was my first "exposure")

The deal: Person "A" is moving here to work in Factory "B". "A" is not a U.S. citizen and is having a hard time financing a house through conventional means, despite owning 3 businesses (location/type unknown). They want to build a 265k house, with 120k down at closing. "A" wanted my to pay the balance on the house (providing the mortgage) with the following terms:

1 year ballon

7.43-ish % ($1500 per month as offered by "A")

Analysis:

So here's where I started to see red flags: 

1) He wants to put 120k down on a 265k house at closing, and pay off the note in a year, but can't liquidate enough funds in the 4 months construction time to pay cash? I have serious doubts on raising that kind of capital to pay off the ballon, and then I'm stuck with a 265k house I don't want or need.

2) While an "expensive" ballon loan, 18k really isn't a great ROI when we're talking investment properties vs. where my money is tied up (as compared to purchasing cash-flowing rentals utilizing leverage)

3) I know Factory "B" pays well, but not so well that he could cover that balance in a year AND still eat anything other than ramen noodles 2 x a week as a strict diet.

Unfortunately, these are the few details I was provided, and the concerns I addressed with the realtor that brought this offer to me..

So, what do you think? Would you have loaned the money? 18k over 1 year at ~7.5%?

(Obviously, this post discounts the fact that I didn't proceed to performing the due diligence of contacting references, rental histories, proof of employment/salaries, etc.)

Thanks,

Dave

[Ryan Gillette]

I think you're overlooking an opportunity. I'm not a huge fan of seller financing but these terms are pretty good with 50% down and a 1 year balloon.. I would start by identifying the reason he can't obtain a mortgage. Make it a prerequisite he sits with a mortgage loan officer you or your agent use - just to ensure it's reasonable within 12 months he'll qualify. Non-US citizens are eligible for mortgages (you need a SSN or ITIN), you just have to be legally in the US. Chances are his credit profile isn't built up or doesn't have the job history. Usually both of those take 2 years, although there are exceptions. "A" may simply be buying himself that time with the balloon note.

The other flip side of the coin - in the rare event he's not able to qualify in 1 year time- there's family. (This is an overgeneralization based on my personal experience) Foreign borrowers tend not only to have a higher savings rate, but their familial network also has a higher savings rate and are more willing to lend to them quickly. As an example, in five years of working with a lot of Vietnamese clients, if any of them need to raise $100K - each one of their aunts, uncles, cousins, from all over will send $10-20K over. And sometimes those $100K+ amounts are coming from parents giving their children the down payment (sometimes their life savings) to buy the house.

In terms of the interest rate, I wouldn't buck 7%. It's pretty risk free interest in the sense you have such a huge equity stake in the property. For no work, getting 7% isn't bad - especially if they're willing to buy at your list price. Is it as good as cash in hand? No. But if you sell it faster at a higher price, get a solid amount of cash upfront, a decent return on the rest of the cash..