All Forum Posts by: Bill Gulley

Hi, a CFD, Laese/Option and Seller Financing with a DOT are three distinctly different animals. The Seller Financed deal is an installment contract that conveys title and may also be done by a special warranty deed where the seller does not fully warrant title, or even by a quit claim deed, conveying only that interest the seller may hold in and to a property. Closing requirements for compliance with federal, state and tax laws must be complied with regardless of how title is transferred. Title is transferred.

A Lease/Option does not convey title, but an equitable interest in and to the property as a lease hold interest under the terms of the lease. The option agreement conveys an equitable and contingent interest to the extent of the option price paid. Most options do not finance a portion of the sale price and therefore do not establish equity as an installment agreement. Option prices can be financed over ther term but if the option is not taken to purchase, the option price is generally forfieted.

A Contract-For-Deed or Land Contract is an installment contract that provides for the transfer of title after contract performance. While the CFD does not convey title it does convey an equitable ownership interest and allows for the sale price to be fully paid, usually at anytime over it's term. It conveys an ownership interest as much as conveyance of title by contract terms for the use of the property, encumbrances, modifications of improvements, taxes and insurance as made by contractual agreement. State law and local custom may dictate buyers property rights and usually closely in line with those accepted under a promissory note and deed of trust, with the main difference being actions under default. For the note a non-judical or judicial foreclosure is required, for the CFD, a quit-claim deed is customarily held (in escrow supposedly) to be filed under an event of defualt.

The CFD and Lease/Option are the favorite stratigies used by scoundrels to sell properties. The terms are designed so that sufficient equity is not established or sufficient time is not allowed to cure credit issues of the borrower ensuring that contractual terms is an impossibility or highly improbable to perform. A down payment is taken and the agreement runs for some time until the seller declares default, takes the property and repeats the process.

During the Whitewater issue (I was a bank examiner in Arkansas for examinations) the issue was the equitable interest transferred in property held as collateral by banks and investors. A main concern for investors in a CFD is the due on sale clause which was established to restrict a new buyer from assuming underlying financing at below market interest rates, not becuase of collateral interests transferred. This misconception of the due on sale clause continues by investors and bankers alike today.

As Frank pointed out, Texas has strict guidelines concerning installment contracts. Preditory lending practices may be used against any investor in any state if the seller meets the definition as a dealer under UCC and various federal statutes.
In many states, charging a fee to provide an installment contract in addition to the sale price financed may well be construed as practicing law and as a mortgage origination, especially in a business name acting as a dealer. The fact that the seller is a party to the contract is sufficient for drafting any agreement, but charging for services to another party may bring about new issues for the seller, especially in the event of default. Installment contracts were and are popular amoung farmers and those selling small business operations as well. Investors picked up on these strategies and are common, however if an investor does this in the normal course of business they may well be viewed as a dealer under federal statute and may trigger issues under the Uniform Commercial Code.

There are many servicing issues with these contracts. A check can simply be held by the seller to establish a late payment history since payments are deemed to have been made upon the cancellation of the check and not the date the check was written.

The CFD and Lease/Option are excellent tools to make deals happen, especially for those marginal buyers who can not meet conventional financing requirements. They must be entered into with caution and with expertise for underwriting the deal so that the buyer has a reasonable chance to perform.

Time must be given to allow a buyer to cure any credit problems that exist and future financing will be viewed depending on the equity established in relation to an appraised value not necessarily the agreed sale price after one year. Loan servicing is necessary to provide the buyer with a credit payment history as it is actuall paid. If a third party servicer is not available, payments should be deposited into the seller's bank account for immediate clearance as proof as payment.

Another important issue is that hazard insurance may be obtained by a buyer under an installment agreement as a homeowner and a loss payee provision can be made to the seller and for any underlying financing. A Lease/Option will require a Tenants Policy for the "Optionee" and would require assignments of any loss payable to the "Optionor" since an ownership equity is not deemed to have been established under such contracts.

Additionally, the Note and Deed of Trust guards against contingent liabilities of both parties. An IRS lien may be filed against a property held in title by the seller making conveyance of title an impossibility. Bankruptcy by either party, unless such provisions are adequately addressed in the agreement are also an issue. And, there is the possibility of defualt under any existing loan by the seller that can easily jeopardize these transactions.

The degree of ownership transferred, the equitable interest in and to the property and contingent liabilities are all issues when deciding which kind of instalment transaction should be utilized.

Hope this helps to address some of the questions concerning seller financed transactions. Bill .

Hi, motiva8td is right, your deal should work with a Realtor. One point though, a real estate commission is not "earned" in many states until title is transfered or a willing and able buyer has been produced, that means one who can close a conventional purchase transaction. Many Realtors (Brokers) don't want to get involved waiting for commissions or being paid and then having a deal fall apart down the road with the seller asking for money back, it's not so much a legal issue as it is bad PR. You need to address real estate commissions in your contract. That the buyer and seller agree that real estate commissions are earned and due upon executing the installment contract, that no refund shall be due the seller in the event of default. How they are to be paid might be agreed as well. Some Realtors will carry back commissions, especially if they are about to lose the listing. If they will carry back a dollar, it's a dollar less you have to show up with. The seller pays the commission, the buyer just brings the money to make that happen. Good Luck! Bill

Yep, as I said, never rent to students without the parent co-signing and underwrite the parent, look to the parent to make the deal right. Use lack of credit as your requirement.

I think you are wise to buy quality properties and not get caught up in the slumlord cycle. I could write a book on slumming and the long term effects not only to the property owner but also to the community. Municipal governments in Missouri are learning to deal effectively with slumlords and life will get harder for them in time.

Leverage your deals, acquire quality units, have good management in place and wait to retire, early I might add! Bill

Hi, again, lol, just a note I promise!
I don't know what the fuss is about with loss of rents in the summer, well I do, but it should not be an issue since you should be on an annual lease. If other landlords are letting contracts on a month to month, you have a problem! I required my "college units" to be leased annually and I had no problem with vacancy since they word got out that they were really cool split level units, winding stairs and fireplace. Interior was made a bullet proof as possible, commercial burber carpet, door stops and an understanding of what was acceptable conduct! Just a note, Bill

Hi, I think you pretty well got the answers, you are responsible to turn over the property in as good a condition as you leased it, less amounts of normal wear, tear and depletion (or aging) of the improvements. As good a condition really boils down to a marketable condition for it's purpose, in other words, so that the property will re-rent for the same or even slightly more rents as comprable in that market. If you did anything that reduces it's marketability, you need to indeminfy the landlord. Normal wear and tear is the cost of doing business for a property owner, but not negligent acts. Small pin holes from hanging pictures is pretty much normal, a hole from a door knob is negligence. You ruin the carpet in a room, you replace it for that room, not the whole house. You might push it in court to the point that her carpet was 7 years old when you leased it and you indemnify her for the depreciated value, since new carpet say the for the nice stuff, might be more than just making the property owner "whole". Be reasonable. Bill

Hi, I don't want to be misconstrued here, I agree with both of you. Hopefully, I'm pointing out that there are other investment considerations and that sometimes we over analize a deal from just a numbers approach. The listing price is pretty much derived from the GRM at 10% @700. or $140,000.00 and realtors commissions and closing costs up to 156K as is, so is the property really for sale? Are they motivated to sell at a fair price? I didn't get my calulator out on this. I don't know anything about the place other than rents and the numbers you guys have tossed out. What's the building like, improvements, location, sq. ft. condition other than noted repairs??? If the original question was "what is it worth"..Is a property only worth what it cash flows at at it's present value, today? Is any consideration given to the length of time the unit produces income while equity is established? What's that worth, anything? Bill

Hi, Johanathan, your financial figures are correct. As I said above about the cap rate, and assessing value, your opportunity costs are only know to you and what I meant was what the value of the property to you might be. Jon has a simplified approach that is consistent given the variables as he has pointed out. There is a difference in holding 50, 200 or 2,000 units and 6 or 12. The degree of analysis should be appropriate for the portfolio. With you being a student of finance/accounting you may tend to over analize a property simply because you can. I take a technical approach as well and then an economic benefit analysis. Instead of blindly going where no investor has gone before (if that's possible) I may go with market rates for an investment, if it fits at that price. Your model should reflect economic conditions, housing supply, etc. in Columbia. What rents can you command with a desirable unit three or five years from now? If your goal is holding the property, say for 12 to 15 years (depreciation) you need a "sinking fund" contribution for capital expenses as Jon pointed out. If your goal is to repair the property and build up the rents and sell it 3 to 5 years from now, forget the roof if it does not leak! Let me state something again for clarity: Most investors that have risen from the dust in the past ten or twenty years from Guru seminars and books take an entirely different approach to investing, it's more like seeking out ways to dig into the sellers' equity as deeply as you can to make it a good deal. While these stratigies do make money, in my mind, it does not qualify as real estate investing, more like real estate stealing, but it is legal. Many of these stratigies depend on very motivated sellers, and that's a good thing too, but what happens if the economy gets to a point where it becomes a sellers market, as it will, then what do they do? You need to be able to put a deal together that is a win-win, which means at some point you'll need to know how to invest without discounting a sales price if you're going to continue in the business, say for 30 or 40 years. The properties you mentioned are obviously over priced in this marekt for the area, the proof is that they are still sitting there! Low balling an offer to meet any numbers game based on rules of thumb probably won't get the property you want. Investors rely on making multiple offers in hopes of snagging a deal. A good real estate investor will identify a property that has a greater potential than it's current use or function, can acquire it at a fair price and make necessary changes and increase it's economic benefit. WIth your background, even starting out, you have the tools that are not, nor really could they be, illustrated in a guru seminar or book. Too hard, too difficult and over the head of many small investors (sorry) but it is what it is. There is no right or wrong way (at least in your strategy) so long as it works for you. If Columbia is your target market, if you are shooting for seniors and grad students with means, if you are going to provide a quality product at even a slightly higher rent, then other factors can make a higher price work for you, like financing. As Jon so correctly pointed out, financing is the key to real estate and applying the proper amount of leverage in a deal (that is blended with the overall portfolio) can make or break a deal. Well Florida just won and Bobby said "there is nothing like a win" that's true in real estate as well, there is nothing like a "win-win"! If that's the property you really desire for your portfolio, then slim it down in a good, conservative model and see what it works out to be. Then make your offer and give room for one more counter offer to your highest price. Doing so will probably yield an offer that is a "real" offer and the agent will probably advise the seller appropriately, since they would like to be paid! Good Luck, Happy New Year too by the way! Bill

Hi, your GRM is part of the equation, in the valuation of property, it must be compared to the CAP rate. Don't forget that the cap rate is the alternative rate for another investment and should be assed for each deal. Appraisers must generalize this aspect of the income approach. To value a property you need to look at the market analysis and construction approach (building it today less physical depreciation/depletion). If you are reading a guru book, skip any chapter on valuation of deals! Gurus usually illustrate only the income appraoch, usually incorrectly, because of two reasons in my opinion, one, it justifies their strategy and two, they can't really value a property, Valuation is beyond the scope of there "Secret Strategy". I would think very few Gurus are appraisers. I'd suggest you tie up with a local appraiser, offer to work form them, even at no pay, As a student of finance and RE, you can open the door with that from an educational aspect.

Without knowing what your cap rate is, valuation is not really possible. Generally, lenders will look at a deal with 20% for taxes, maintenance and insurance, which is a good guesstimate. You're right, maintenance is not a constant variable, but over time a property that is in good condition at the start should be about 8 to 10%. Take care to consider the difference between capital improvements and maintenance. In your area, a college town, maintenance may be a little higher, especially if three students rent a unit. Student housing runs alittle more than a family and you need to have strict rules in place. I always required students to have parents co-sign and sited their lack of credit as being the reason, but really, it was to cover damages. Underwrite the parent! To do this, you need control or final approval with your management company. In your situation, I'd guess that the property needs to be purchased at about 70% of it's income approach, then factor in the other two methods, with the greatest weight (but not entirely) being given to the income appoach. Bill .

Hi, first, you need to find the Resolution Trust Corp. on line and register. After that you will be sent listings of FDIC owned properties. Do you have a RE License? You can contact me for more in this area if you like (check out my profile page). It's easier to pick up loans that are troubled than going through the competitive bidding/purchase transactions with the banks or FDIC. If you have "cash" buyers you'll be in a good position to acquire properties before they hit the auction block. Bill

Hi, from Springfield! Wecome to BP! Hope you do well in school and ask anything you like. If you have a question I'll be happy to assist you, but I don't do homework! LOL. HAppy New Year! Bill