Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes
Hi there,
I was listening to one of Sean Terry's podcasts about creating deals from sellers with little to no equity. He gives an example about buying a home worth 100k and the seller owes 98k. He says he will offer the seller 1k cash and leave his existing loan in place for 3-5 years. Then he goes on to say he would try and find a buyer who will put 12k down and take over the original sellers loan. He says that you will make the difference of 12k less the 1k you give to the original seller less closing fees. So around a 10k profit.
I have two questions here.
First, are the end buyers paying 12k plus the 98k existing loan for a total of 110k? I am confused why Sean is saying its a 12k down payment when that money isn't going towards the loan of the property.
Second, how exactly would the end buyer refinance the deal after the 3-5 years?
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
14y
It seems to me that if the end buyer is buying for $110k a house worth only $100k now, regardless of credit they're going to have a difficult time refinancing it in only 3-5 years. Unless they bring more money to the table at the time of the refi of course.
I would think any end buyer would question why are they paying $12k and it's not going toward the downpayment.
Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes
14y
Thanks andrew. What happens if they don't repair their credit and can't refinance. Would the property foreclose on the original seller or would they just most likely try and sell knowing they cant refinance?
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
14y
It seems to me that if the end buyer is buying for $110k a house worth only $100k now, regardless of credit they're going to have a difficult time refinancing it in only 3-5 years. Unless they bring more money to the table at the time of the refi of course.
I would think any end buyer would question why are they paying $12k and it's not going toward the downpayment.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
14y
Originally posted by Matt Nusbaum:
...
First, are the end buyers paying 12k plus the 98k existing loan for a total of 110k? I am confused why Sean is saying its a 12k down payment when that money isn't going towards the loan of the property.
...
You would be "in control" of the property, so the 12K down payment goes to the person in control of the property. How that person disburses that money is another matter, but from what is implied above, it seems that the person "in control" would take some of that to cover some expenses (money paid to original seller plus any closing and holding costs) and keep the balance. My guess is, paying down the loan balance is not supposed to be your concern ...
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
The "down payment" usually gets soaked into an "owner finance fee" (points) for a loan. You need to check on the laws regarding this and whether or not you can charge that much.
BTW...if someone pays that much in fees they will likely wreck the house and you won't be far ahead. Phill Grove's AMPS program attempts to allow one to broker these sorts of deals without being a broker. There are very real risks involved in this sort of investing that are well-documented on BP. Try looking for those old threads.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
This could be worked as a "subject-to" deal. This is, basically, where the mortgage stays in the original owners name but the deed transfers. There is more that goes into it. You can research subject-to here on BP. I'm a little scared of that kind of deal, but there are some big proponents of it here that appear to have done very well for themselves.
@Bryan Hancock: So are you saying that if someone puts 12K down, or rather, into fees, they will wreck the house? Sorry for being dense, just not sure where the motive would be. I must be missing something here. Do you mean the seller would wreck the house on the way out or the buyer would wreck the house upon moving in, or something completely different?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Such investment promotions like this involve great risk. First off, you must find a buyer willing to pay more than the porperty is worth which would likely only take place on a party with bad credit.
Second, you initially signed on the dotted line that you would pay the seller financed note off in 3 years. You have now passed that off to another person with little to no chance of doing so (unless the market drastically appreciated in 3 years - very unlikely at this point in time). This could get you into court.
You also have to concern yourself with the new laws regarding owner financed notes these days. The stupid politicians have hindered our abilities to do this.
Last note/food for thought: Be careful with such a strategy!
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
Originally posted by Brian Hoyt:
@Bryan Hancock: So are you saying that if someone puts 12K down, or rather, into fees, they will wreck the house? Sorry for being dense, just not sure where the motive would be. I must be missing something here. Do you mean the seller would wreck the house on the way out or the buyer would wreck the house upon moving in, or something completely different?
There isn't a motive. The simple fact is that this coked-up financing attracts bad credit risk tenants. These same folks have a high correlation with people that wreck houses when they leave because they can no longer make the payments. There is always some reason why it is the investor's fault for them not being able to pay.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Well, in the case mentioned in this thread, it would be in part the investors fault as they sold a property well above the current market value and passed off terms where the mortgage had a 3 year balloon. Knowing full well the buyer would have linmited abilities to refi, in my humble opinion, they would be part at fault in such a case.
This is one of many reasons why I stated that such a strategy is not a good one and you should be very careful moving forward with it.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
I think you'd better consider who you are listening to and what do they hope to gain. It's not likely in the current market that such a deal would be a reality, but it makes for a great story.
Will and Brian have words of wisdom there. Now, you may be looking to dance away from both buyer and seller when your deal blows up. Find another strategy IMO>
Wholesaler · Salt Lake City, UT · Member since 2009 · 1k+ posts · 401 votes
14y
The buyer is paying $110k for the home, there is a $98k loan, and a $12K down, that is why he is calling it a down payment, because that what it is on the end deal.