How's this deal sound?

Question

Am I missing anything?  I am providing financing for the deal.

Wholesaler formed a land trust and said land trust has property under contract for 15K.

Buyer (LLC, but no personal garuntee) to pay 25K for property.

I bring in $23500 additional funding ($1500 earnest money is mine), The plan is to avoid double closing by having realtor (3rd party outside of closing) assign beneficial interest of trust to Buyer, for $11500.  Of which buyer will return $5000 to me.  Title compay then to close contract tranfering propety from current owner to land trust  (now owned by buyer).  End product is $25000 note @11%APR, amort 15 yrs, balloning in 3yrs (secured by deed of trust and $6100 DOT/release fee on another of buyers property (in 2nd position but more than adaquate LTV))

Thanks in advance for comments.

Jon Holdman · Answer

I've tried again to puzzle through exactly what you end up with in this deal.  I think I understand.

You're putting in $25,000 in the form of a loan to an LLC.  You get back $5000 outside closing, leaving you with a net of $20,000 invested. I assume you really mean the wholesaler or realtor is passing you that $5000, not the buyer.  In exchange you get a $25,000 DOT on both this property (but with no guarantee from anyone) and a $6,100 second position DOT on another property (guaranteed by the buyer??)

The buyer borrows $25,000 from you and puts in $11,500 of their own money, effectively paying $36,500 for this property the wholesaler has under contract for $15K.

Do you have appraisals on both of the properties performed by an appraiser of your choice who's totally independent of anyone else involved?  What values have they established?  With $20K invested, I'd want to be sure the new property is worth an absolute minimum of $30K.  I'm nearly certain you're going to end up owning the property, so you want to be sure you can get your money back when that happens.

Seems like the wholesaler is pocketing a tidy profit of $16,500.  That's the net price of $36,500 less the $5,000 that goes to you and the $15,000 that goes to the seller.

To be honest, though, this has the hallmarks of a scam. An overly complex deal with too many moving parts to follow.  Banks won't sell REOs or short sales to land trusts, and those are the situations where you might do more than a simple assignment to complete a wholesale deal.  I suspect this is really a subject to deal where there's an existing loan on this property.  A loan to an LLC with no personal guarantee is useless unless the LLC has other assets.  Even then, since you have no control, the assets can simply be removed from the LLC.  A second mortgage is nearly worthless unless you have LOTs of headroom.  70% LTV is the max any hard money lender is going these days. So, you better be sure your last dollar is below 70% based on YOUR appraisal.  I think there's more to this deal than you know and you're going to be out $20K, maybe $25K when things happen quickly and the deal needs to be closed before you get the $5000 you're supposed to get.  You're going to end up with two worthless DOTs.  At best, you're going to foreclose on a property that's worth $15K (that's what the wholesaler's paying).

If you do this, be DANG sure you have the borrower buy you lenders title policies on both properties.  READ the title commitments and be sure you know what other obligations exist on both properties.  I have a feeling as soon as you demand this, this deal will disappear.

Good luck collecting the $1500 you already have out.

If this is a real deal, loan the wholesaler $15,000 to purchase the property.  Leave the land trust in place if you wish.  Its not very relevant.  After the wholesaler's bought it do a second, completely separate closing.  Loan the buyer $10000 in a second loan and let them assume the existing $15000 loan. Or, combine the $10K new money and $15K existing loan into a single new $25K loan.  Let them kick in the additional $11,500 on this transaction, with $5,000 coming back to you.  This leaves the wholesaler same $16,500 (less the somewhat higher costs, which can be reduced by doing hold opens on the title insurance) as on the original convoluted deal.  You end up with the same $5000 back and a net of $20K into the deal.  Not sure where the $6100 second on the existing property comes into play but I'm sure the title company can help sort it out.

Account Closed · Answer

Agree with Jon.

Here's my advice: Just double close the deal - the closing costs should not be that much on a small deal like this. Or...

If you absolutely have to take title in a land trust, here's what you should do: just have the trustee of the Land Trust assign to you the Beneficial Interest of the trust. That means you will own the trust which in turn owns the LLC that owns the property.

Having said this: I am not a lawyer so talk to your lawyer for legal advice.

Account Closed · Answer

Work with your attorney to make sure you have clear title and have a formal closing that you have 1st lien position by providing the financing.

Jody Hawkins · Answer

Loan closed last week, note paid in full.

Thanks all

Jody Hawkins · Answer

I did close this deal, figured Iâ€™d post a follow up.  
                    
                    Sales price was in fact $25k, as buyer received cash back at closing.  
                    
                    Contrary to advice given did not double close the deal.  All cash transferred outside of closing was deposited into realtors trust account approved by all parties.  
                    
                    Did get suggested lenders title policies.   As attorney suggested we also did away with â€œreleaseâ€ clause on second deed of trust.   Second property has a value of about $150K with approx $90k remaining on first mortgage.   No appraisal, but I have a pretty good feel of the local market.
                    
                    All proceeded well, all documents recorded, I officially have about $21.7K into the $25K note@ 11% with balloon in 3 yrs.  
                    
                    Why did I do this against folkâ€™s advice here? 
                    1)	Itâ€™s a small town and with a little more homework I had numerous business associates (including my accountant) vouch for the integrity of the other two parties.   I know personal recommends are basically useless, but it helps to know folks have had a good past.  
                    2)	This deal fit the buyers MO.  He owes approximately 70 other rental properties in the area.  Almost all are lower income rentals; a quick trip to the court house didnâ€™t throw up any red flags on properties owned by him or his entities.
                    3)	The second property used as collateral in this deal is in his personal name.   Even if I was unable to produce cash from foreclosing on that property, A foreclosure to a property in his personal name would create harm to his business model.  
                    4)             If I end up owning this house myself at under 25K I'll be very happy.    I drove by this weekend and the repair crew is hard at work.   The buyer already has the house advertised as a $550 a month rental.
                    
                   At this point it is what it is, and I am fairly confident my bases are covered.  I did have my attorney look over everything.  He (and his colleague) did give all documents a thumbs up.  
                    
                    If for some reason things go sour, I'll post so everyone can say I told you so.
                    
                    Thanks again for all the advice, it was extremely helpful.

Des Shei · Answer

Thanks for posting the follow up. it helps others see the progression of the deal. With bases covered let's hope everything goes as planned. Happy investing

Jody Hawkins · Answer

Thanks folks,

Advice noted.  Property is an REO.

Jody Hawkins · Answer

Still waiting for all docs to be put together for attorney review.

Jody

Jon Holdman · Answer

What does your lawyer say about this?

How's this deal sound?

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