Happy to assist.
BTW - have you done a pro-forma analysis on what your private financing idea looks like financially? As I'm sure you know, there are other ways to invest the $185k - $200k of implied equity you have in that property.
Let's say you do get $20K - $30K down and 8% over the course of, say, 5 years when the contract, or deal unwinds due to a balloon payment. How does this compare to selling the property, then doing a BRRRR on a 4 to 6-plex for example, or doing a 1031-X on a similar property (an MDU fixer), then just keeping it as part of your retirement plan? It would be interesting to compare Cash on Cash returns and IRR compared to the one SFU you are considering carrying the paper on.
Keep in mind that once you sell (whether title passes or not), some of the more attractive benefits of ownership abruptly end; tax benefits (depending on whether title passes or sits in escrow), equity appreciation, depreciation (though if sold and no more is taken, then you don't have to recapture as much when you finally do sell), rent increases (or, mortgage amount increases in your case), to name the important ones.
It sounds like you are already signed up for a mostly-passive real estate investment, so why not mitigate more risk, improve your returns, and spread your equity over more units?
Just thinking out loud. Best of luck to you.
Julia,
I will answer each point in your last reply text, so I cut/pasted it below:
"By another agent who had some experience i was told in Texas title company takes care for the lawyer part in the transaction for around 500$ to set up the mortgage part."
As mentioned previously, this depends on the deal. If Texas Title Co will handle a contract-for-deed transaction, they will most certainly handle a private financing transaction. The fact there is no mortgage removes the mortgagor/deed of trust related risk for sure. The fee of $500 mentioned clearly does not include Title Insurance, which your buyer, if represented by a buyer's agent, or their own attorney, will require in the case of title passing. As well, I question any title company who closes one of these and who also does not impose title insurance for both parties. Again, think in terms of "arms-length" and protecting the buyer from themselves, because if anything goes south, the buyer's attorney will focus on all the things you, as a licensed professional, should have done, but didn't.
A possible foreclosure would be around 2000 to 3000 $. I was surprised how affordable this is.
Yes, perhaps for the legal portion of the transaction and assuming the defaulting borrower doesn't declare a BK. If the borrower is allowed by law to remain in the property for a certain time period during the foreclosure, or if this time period is placed in limbo because of a BK, then you should add the lost payment revenue to that estimate. In Colorado, for example, the duration for a public trustee foreclosure, is a minimum of 115 days. Then, add another 5 days for each junior lien holder. Is it possible that your [then] defaulting borrower could have liens the amount to more than just your private mortgage? Sure, which BTW, extends a whole bunch less confidence in the private mortgage methodology!
He recommended a 20.000 to 30.000$ downpayment and a 8% interest rate.
Sure, if you can get it. As mentioned before, more is better. Same with the note rate of interest. While 8% is nearly twice the current, 30 yr fixed rate (assuming the borrower has the scores and the ratios), the typical rate for one of these is probably closer to going rate + 1.5%-2%. I believe these deals need to appear to be reasonable to a judge if you ever find yourself in court defending your position, but that's just me. This also means that your buyer/borrower needs to sit down with a license mortgage broker to learn what it will take to qualify for a new mortgage at the end of whatever contract period you mutually agree to. Depending on the borrower, it also means they need to sign up for and attend whatever credit counseling is stipulated in the State of Texas for such borrowers. This is discussed and required by the Dodd-Frank Act, or as currently stipulated. Confer and confirm this with a mortgage broker who is knowledgeable about private financing.
He said if buyers default foreclosure would be done after 60 days usually (delinquincy notice).
If that is what the Texas foreclosure statute states, then great! As mentioned above, it takes a whole lot longer in Colorado and, this is further modified by the borrower filing a BK.
He said to raise the sales price from 185.000$ to 200.000$.
As with down payment, or rate of interest, etc., sure, if you can get it. If you impose on your buyer/borrower to obtain their own fair market appraisal (and, you absolutely should) and they still choose to go forward knowing what the property is worth (according to that appraiser), you are covered, when/if they have issues attempting to refinance out of the way of your balloon payment.
He said in Texas title gets transferred, what probably means i have to pay sales taxes right away, right? I would prefer title to not get transferred, should i do a option to buy in this case?
In Colorado, I can do private financing, which might be via private mortgage, wrap-around mortgage, land contract (contract-for-deed), lease with option and probably a few others. If any of these methods are just flat outlawed in the State of Texas, then let that be part of your decision-making strategy. If you are a buyer, the best of all worlds is to have title pass, which allows the buyer to fully avail themselves of all the typical homeownership advantages, including the ability to further lien the property. If you are a seller, the best of all worlds is to keep pretty much everything as-is without the usual headaches of being a landlord. If title sits in escrow, as the case is with a Land Contract, you may retain the tax advantages, but shed yourself of the maintenance responsibilities.
Most lawyers push to have title pass, because it can represent less risk to the seller. However, a Land Contract done properly, with ALL the necessary steps and disclosures, can be very safe and very defensible. You just have to engage the services of someone who really knows how to do them.
On the subject of taxes, it depends. I have done both types in Colorado and I can say for sure that both are considered "installment sales" which means I declare any income realized as it occurs, not in one lump sum at time of close like with a conventional sales transaction for one of your listings where you represented a seller/client. Check with your CPA, who should also be knowledgeable about these specific transactions, to be sure, but I believe you will be OK in this regard.
I'm assuming you own the property in question, right? You never really said for sure and it makes a huge difference in my answers to your questions. For now, I will assume you are the owner, who just happens to be a licensed agent as well.
If you have never done one of these, I would strongly encourage you to stop and seek out a real estate attorney who understands these really well. Even before than however, I would inform my employing or managing broker, because he/she may require you to run the transaction through their books.
There are more pitfalls to these than I will have space to reply via this post. Just know that you need to handle it like any other "arms-length" transaction. Anticipate everything, treat your buyer like they know nothing and conduct the transaction as if you might be sued.
To start with, you need to identify how title will be held for the duration of whatever contract period exists after close. Either you pass title publicly (seller carry wrap-around if there is an existing mortgage/loan), or you have it held in escrow (land contract/contract-for-deed). If the former, you have potential issues with violating your deed of trust covenants. If the latter, you have potentially the same issue, but you may get to keep the tax advantage. As well, land contracts do not change your hazard insurance policy. Also know that most mainstream title companies will not close a land contract transaction, but most all will close a seller-carry wrap-around deal.
Once you get past the above, you must handle this transaction like any other for one of your brokerage clients. This means they need to inspect the property (they order and pay for), obtain a fair market appraisal (they order and pay for) and have the transaction closed by a competent title/escrow company, real estate attorney, or other qualified intermediary. This closing may need to include title insurance and all the other trimmings depending on your answer to the above question about passing title (or not).
You have potential issues with the Dodd-Frank Act, with imposing a balloon payment, with properly notifying at least two offices of the county of record (treasurer and assessor). You will also have issues related to receiving loan payments and disbursing funds to the underlying mortgagor, as well as issues related to year-end reporting.
You asked about down payment and mentioned appreciation after year 1, year 2, year 3. When you say, "Down Payment," I presume you are not talking about a Lease/Option sort of transaction, which is somewhat implied by the year 1 - 3 mention. I suppose you can try to take the buyer's appreciation in years subsequent to closing, but I am not sure whether such a tactic is even legal whether the property is sold and title passes, or is held in escrow. As to the remaining question about down-payment, you can ask whatever you want, but personally, I would not accept less than 5%, but I would expect to get full market value for the property, or even the high end of the range on a new appraisal. Depends on how much skin in the game you wish your buyer to have. More is better.
@David Denzy. To solve the issue of building a list of cash buyers (they are easy to find BTW), you have options, whether a licensed real estate agent or not:
1. Licensed: Just run a comprehensive search on sold properties over the prior 12 months. Buried in the detail provided by MLS via downloaded Excel file, look for the column that shows buyer financing. You are looking for CASH buyers (sometimes just shown as $0 mortgage). Then, go look these up on county records to see who bought. The leads you want to add to your list are shown as companies to a high degree, with another high percentage shown as individuals. You will get lucky and also see buyers of multiple properties purchased during the last 12 months when they are really active. Whether entity or individual, any buyer who shows up more than a few times in your 12 month search window are very active. There will be a few on this list who can and would buy everything you can find and be able to close in 7 days or less.
2. Unlicensed: a) Know someone licensed? Just offer to pay them for their time to do the above, or, b) contact a mainstream title company in your town, who will put you on their recurring email for foreclosures, as well as the list of resulting Certificates of Purchase. As mentioned above, any company (not a lending type institution for obvious reasons) that purchases a foreclosure is very likely an active cash buyer. Using this list will also get you the leads that use short-term financing, so in effect, can turn out to be an even better, more complete list, because not all active investors pay cash 100% of the time. c) A twist on b is to just look up the info in your county's foreclosure search tool. You will discover the same info, but depending on how it is presented, this route may be a bit more time-consuming.
Either way you go on the above, including any necessary research, you will have a sizable list of investors who are both cash buyers and active purchasers of fixers. Don't try to please everyone. You can make a decent living on a small list (less than 10). I did this in Greater Denver a number of years ago and wound up with 400 good leads, all of which were buying (and selling) at least 3 properties over the prior 12 months. My short list was only 5, but any of these five would buy everything I ever had available. One in particular, was using their own staff to make offers, as well as wholesalers and closing between 12 and 20 per month!
Anyway, once built, take your newly minted buyer's list and start talking to them. Resist the urge to open discussions with investors with the usual ploy of asking what they are interested in. Just know that if the numbers make sense, they will be interested. This takes me to the other "have-to." Don't make your list of investors guess about anything. Do the research, take the pictures and do a walk-through video, disclose the material defects, get the bids, run the numbers and present your case. When you do, talk in the terms they understand; ARV, FMR, Cash on Cash Return, NOI, DSCR and so on. Also, make sure they have time to look at the property. Give yourself up to 2 weeks to be fair with everyone, but be mindful of your seller's privacy needs in terms of showings.
Until you are able to close, disclose what you are doing and what your value is to the transaction. If they won't take a contract with contingencies, write an offer that uses a purchase option, but make the option period short enough to entice them into the deal. Just be prepared to pay up a non-refundable option payment of $500-$1000 to lock up the property for the next 3 weeks or so till you get one of your new cash buyers in the saddle.
When you finally get a property under contract, be careful about providing address info to your cash buyer unless they are willing to sign a Non-Circumvention/Non-Disclosure Agreement.
Bottom line is say what you are going to do, then do it with honesty and integrity, because in these circles, it's a very small world.
Good luck!
@Jake Davis. Before you sign up and pay for your licensing course, identify and interview 2-3 brokers, where you might wish to hang your license once you get it, so that your eyes are wide open to the costs and the issues - high/low, good or bad. Find out what they require of their new agents and how much it costs to obtain and maintain this license and assess whether or not these costs justify whatever you have intended in your full or part-time real estate career.
The process isn't cheap by any means, but you can minimize costs depending on where you decide to hang the license. Some brokers are much "cheaper" than others, but it all depends on the services they offer their agents. Realtor, or non-Realtor is another question, because Realtor status costs more - quite a bit more (BTW - if your broker is a Realtor, you cannot be a non-Realtor. It works the other way as well: Non-Relator Broker = Non-Realtor agents).
You also have to pay for E & O insurance and take a certain number of continuing education credits every license period, some of which can be FREE as a Realtor, but most of which costs money.
Beyond the above, I suspect you can cover your expenses on just one, full commission transaction each year, depending on the above. One of the advantages is that you will have access to MLS (also a monthly recurring expense). This and other factors will begin to open doors.
At minimum, if you can "pay yourself" or save one side of the transaction commission, that is not bad at all. If your average transaction was, say, $400K, this means about $12K you save (or, get paid at closing) for each deal you do - less the split you pay your broker.
Seriously consider doing Real Estate part-time and stay with your J-O-B. You will know when it is time to drop the J-O-B.
Best of luck to you.
@Nyaisha Cummings. If your sister is licensed and is actively looking for off-market deals and finding them, as @Cameron Tope just pointed out, GREAT!
Regarding the question of, "... so she would still get a commission even if shes not the buyers agent. Shes just bringing buyer to the table but shes not actually representing him. Hes a investor that she knows." No, not unless she and the buyer are contractually bound, which then means the business relationship has been papered properly and she is allowed to negotiate on behalf of and represent the buyer. Even then, ANY monies paid to your sister MUST come from her broker, unless it is a personal transaction. The problem is, as a licensed agent, for most employing brokers, there is no such thing, because anything she does could reflect on their license, so they want to be in the middle or at least be apprised of what she is doing, even for a personal transaction. I'm nearly 100% sure that her employing broker will require it.
Also, be advised that "referral fees" are not advised, especially if a licensed agent is the one paying it to someone else. Have your sister check with her broker, as well as the rules with your state's real estate commission before paying anyone anything outside of a structured title company closing.
As a wholesaler, who is a licensed agent, she has disclosure requirements that take priority compared to where you, as a team, were before your sister obtained her license. As such, assuming her broker is plugged into the situation and approves, you need to disclose to the seller what you are doing up-front, or most certainly at same time you submit your offer, so that the seller is fully apprised of your plan and can consider your solution before they accept.
Then, assuming you have a contractual arrangement with your buyer, just represent him/her as fiduciary and the seller as Customer, in a normal brokerage transaction.
The other option is to just put the property under contract, then assign the contract, but again, this needs to be fully discussed in advance with her broker, then fully disclosed to the seller, so they can't come back later and sue you for making "too much" on your transaction fee.
I strongly suspect that your sister will be required by her broker to use standard contracts and forms made available by your state's real estate commission. Why, because licensed real estate agents do not practice law and therefore are not allowed to write contracts. Absent this, and with her broker's approval, she could use a real estate attorney to write contracts and associated amendments or addenda.
Sorry to be a wet blanket with the broker and commission talk, but just trying to keep your sis and you out of trouble. Best of luck with it!
@Juan Alvarez. Happy to help!
@Juan Alvarez. On the question/concern of finding competent, available, contractors: If DFW is as busy as Greater Denver, your concern is very real! If I didn't already have contractors that I have worked with for years, the ONLY way I would consider hiring new ones would be via referrals that I trust and can verify.
If you regularly attend REIA club meetings, just ask members who they have had success with on a repeat basis. Do not depend on reviews from the typical homeowners who might have had a handyman/contractor hang pictures, or assemble furniture, or paint a room.
A larger rehab project requires skills and subs that don't come with handymen. And, you may have to wait for the right contractor to make room in their schedule, but it will be worth it! Don't go cheap! You can ALWAYS find cheap on Craig's List. Cheap will cost you lots of money! For your first project, use a General Contractor, who has their own subs and who will deal with all that minutia for you, then follow them around, ask lots of questions and learn.
Whatever you do, have a rock-solid contract that specifies money for performance and have them deal with materials and the haul-away and bid the job including both labor and materials broken out. BTW, good contractors already know what their costs are, so will not usually have a problem disclosing this info. This also helps train you for what to expect on the next project.
Finally, DO NOT pay for any materials that haven't shown up at your job site. For labor, DO NOT pay for labor unless or until labor is expended and shows up on your job site in the form of completed work, but expect to pay for this on a weekly basis as work is "delivered". If you have to "float a loan" to your contractor to begin a job, you have the wrong contractor. All of this should be discussed, negotiated and agreed to up-front and in writing.
Best of luck in DFW!
@Juan Alvarez. The ADU (Accessory Dwelling Unit) described by Chace Fraser, could also be a Tandem House. Legal Description/Tax ID Number remain same with ADU, but Tandem House zoning actually turns it into 2 legal parcels. This type of zoning is REALLY tough to find. In any event, "2 parcel" needs to be researched/verified at the county of record, but a good start is to call the listing agent and just ask.
As has already been pointed out, most Zillow/Trulia listings are quite accurate as a result of where they get their data, however, Zillow "Zestimates" can vary wildly depending on the density of listings in the immediate area that have been used to establish this value. More data = more accuracy. So, properties in active market locations/subdivisions, will be very accurate, while outlying, more rural properties may be off by a mile.
I echo previous comments regarding your use of a buyer's agent, but with a slightly different perspective: It is true that listing agents negotiate and define their success commissions in advance with their seller clients. Most of the time, this is the usual 6%-ish sort of earned commission ("success" or "earned" means they actually performed on the terms of their listing contract and actually brought a buyer for full commission, either through their own efforts, or through the efforts of a co-op/buyer's agent who earns up to 1/2 the full commission). The twist here is that, even though this commission is negotiated up-front and usually (though not always) includes the buyer-agent side, this is still negotiable based on actual offers after the fact.
Let me explain: Let's say you deal directly with the listing agent (not the best idea if you don't have significant experience doing so BTW) and then build and submit your offer directly to them. As part of your offer, you can make your terms say whatever you wish. This could include the requirement of a 3% commission rebate (knowing full well that the listing agent stands to earn a full 6% if you do not ask for some of it), applied directly to your closing costs. Let your imagination run as to what this could pay for; repairs, capital improvements, pre-paids, etc., but also know that any sort of rebate requested must fully disclosed, appear on closing disclosures, be approved by the listing agent, their employing broker, and most of all, by your lender. Also know that, in the absence of a buyer's agent, you inadvertently impose more work on the listing agent, who now needs to handle items usually taken care of by your buyer's agent. If the property has been on the market longer than usual, they will be more receptive to doing this work on your behalf. If your market area is HOT, you will need to ease up on a portion of your requested rebate.
So, to the question of, "use of a buyer's agent costs you nothing?" Well, that doesn't really have to be true, does it? A rebate of, say, 2% on a $400K property is $8,000 and enough to pay most/all of your settlement costs not part of your down payment.
If you are in the mode of buying your first investment/house hack property, my advice to you is to hire a buyer's agent who is ready, willing and able to give you a buyer's rebate. There are plenty of agents out there, who are very good at what they do, who are willing to give you back 1/2 their earned commission. In this fashion, you get the best of both worlds. This means, at a 3% commission side, you stand to get back 1.5% applied to your closing (not in cash - unless different in your state, it is a violation of IRS tax code if you receive cash for this type of transaction, unless your agent also sends you a 1099 to cover this extra income).
Best of luck in your journey on the first one!
Personally, I like Lease Options, but if you've not done one of these yet, let me leave you with a few items to consider for your first:
1. Assuming no agents are involved on either side, require that your tenant buyer obtain a new market appraisal to help them establish value so they go into the transaction with eyes wide open. It's important that they hire and pay the appraiser for this - not you.
2. Keep the lease separate from the option agreement. This is pretty standard.
3. Require the tenant buyer to sit down with a mortgage broker to advise them what will be required to qualify for the mortgage/loan they need to perfect their rights detailed in the option agreement. This way, a qualified 3rd party helps them (and you) meet the requirements of the Dodd-Frank Act.
4. Source and use an intermediary to close your Lease Option deal, place original docs into "escrow", enforce the terms of the deal, collect and disburse funds. This is the sort of "arms-length" needed to insulate you in case of issues down the road. This can be an attorney, or any company in business for the purpose of servicing private money transactions.
5. Require your TB to have a professional perform a thorough home inspection, including roof, HVAC, plumbing and electrical. As with the appraiser, they need to source the inspectors and pay for these inspections. As with the appraisal, this step is for their own protection (and yours) so they can't complain later that you sold them a "pig in a poke."
The above will make such a transaction safe for both yourself and your TB.
Good luck with it.