All Forum Posts by: Glenn Mayo

Yes...good points. I was going to ask the seller to take second place, since that's the only way I can get the repairs financed in this setup. As far as being cash flow negative, I did account for that, which is why I said ur would hurt for a year. That being said, it would be REALLY nice to avoid that pain.

So, in addition to finding the weak spots in this proposal, can anyone suggest ways that it might be modified to be workable? Bear in mind, the goal is to acquire the property with as close to zero out of pocket as possible.

First, thank you all for helping. Helping with what? Well, helping me to decide whether or not to put in this offer. I'm looking at it, and I THINK it'd work, but I can't help but feel that I'm missing something, or that there's something fundamentally flawed in my thought process that makes this unworkable. So, I'd really appreciate this august community looking at this idea and picking it apart to help me see the flaws.

Ok, I have located a 2 BR, 1.5 BR duplex near my home. It was built in 1970, and it doesn't look like it's been updated much since. It DEFINITELY needs a new roof, and although it doesn't quite need a gut rehab, it definitely needs completely new kitchens, bathrooms, floors, windows, doors, and various other updates and repairs. I know a new roof can cost anywhere from $4000 to $15,000 (I'm not going for the super fancy, high end roof that can cost MANY times more), so I just figured the high end to be conservative, and budgeted $15000 for the roof. I figured another $25,000 for the rest of the work, using decent, but not fancy, apartment grade stuff. So, $40,000

The seller owns the property free and clear, and is willing to do seller financing. He has it listed for $125,000, but my agent says that's overpriced, and that, in our area, the ARV is actually $110,000 - $115,000. Again, being conservative, I figured $110,000. If it appraises for more, great, but I'd rather count on it not.

Alright, here's the proposal I want to submit:

$87,000 purchase price: I know this is closer to 75% ARV, but I figure that the seller is going to want some consideration for carrying the note. More on that in a second. I think the seller may try to wring more than that out of me, but my reply to that is that I have to put a whole new roof on the place and then do a complete rehab on top of it, so...

$20,000 cash down: I figure cash talks, and $20,000 isn't anything to sneeze at.

Seller would carry a $67,000 note for 20 years, making my payments to him 279.17/month for 20 years.

To make this work, I'd have to:

- Secure a hard money loan for 70% ARV, or $77,000.

- From that, pay the seller $20,000

- Use the remaining $57,000 to rehab the property

"Now wait!", I hear you saying, "You said your rehab budget was $40,000!" Yes. Yes, I did. However, things tend to go wrong, and sometimes unexpected things come up. Here in Texas, those unexpected things sometimes take the form of foundation issues. I don't think there's anything wrong with the foundation, but you never know, and in any case, there are certainly some 1970's oddities about this place that it may take more than I suspect to fix. So, being conservative again, I left a $17,000 cushion, just in case. Whatever doesn't get spent on the rehab, I'll pay to the seller to pay down the note. But I'm not counting that pay-down in the rest of my figures.

I'm figuring that the HML will charge me 14% interest and 4 points on the loan. That makes my payments to the HML $1155/month. Add in the payment to the seller, and that makes my monthly payment to debt service $1434.17. To that, I have to add another couple hundred for insurance, taxes, electricity, water, etc., etc. I figure I'll be putting out $2000/month all told, which means I'll be hemorrhaging money for a month or two, until I can get a the rehab finished and get tenants into the place and shift the burden of the payments to their rents. It'll hurt, but I can do it. Each side of the place will easily rent for $725 in this area (and maybe more, but again, playing it safe), and the tenants will pay all of their own utilities. Their rents will cover my debt service plus trash removal and a little bit of my insurance. I'll have to spend the year paying a little bit for insurance, but it's not a tremendous amount.

In a year, I refinance at 80% of ARV. I use the $88,000 to pay off the HML (Which, with points and interest, is actually $90,860, minus a year of payments - $13,860 - leaving $77,000), leaving me $11,000. I pay that $11,000 to the original seller, reducing my balance with him to $52,649.96 ($67,000 - 3350.04 (sum of 12 monthly payments of $279.19) - $11,000).

I am now left with a new 30 year mortgage of $92,840 ($88,000 + 5.5% interest). My monthly debt service will be $537.06 ($257.89 on the new mortgage + $279.17 on the seller's mortgage). Even figuring in my other costs, one unit will cover almost all, if not all, of my monthly expenses on the house. At this point, I stop bleeding and start cash flowing.

In 5 years, I sell the property for $130,000. ($110,000 ARV + ~3.4% appreciation/year: I like to peg appreciation roughly to inflation, that way, if it appreciates more, it's a nice surprise). I pay off the remaining mortgage of $77,366.60, and the remaining seller's mortgage of $35,899.76, leaving me a profit of $16,733.64. Looked at another way, my profit would actually be $52,733.64 ($16,733.64 profit from sale + $36,000 profit from rent of one side of the building over 4 years). Or, I could hold onto it, and keep collecting rent on it forever. The big trick seems to be getting through the first year, which is just going to be painful, no matter how I slice it.

So, that's what I'm thinking. Where are the holes? Will this work?

No, you don't need an attorney to create an LLC. You can file all the paperwork yourself. But I would HIGHLY recommend that, before you do ANY business, you secure yourself a reputable attorney. There are lots of potholes that a new businessman can easily fall into, and unless you are seriously savvy, you'd do well to have an attorney help you navigate those. I haven't used an attorney for real estate yet, but I realized when I filed the papers for a C corporation a few years back that it's just too easy to miss some small but significant detail. Do yourself a favor and get someone on your side who not only makes their living knowing the law, but THRIVES on that stuff.

Excellent idea, Charles. Thank you. 

Keep them coming!

Thank you, Mike. Those are the kinds of suggestions I was looking for. 

Anyone else?

Thanks. I knew THAT. But this is the CREATIVE forum, and people are buying homes all the time without going the conventional route - which is what you describe. I can't afford to wait 10 years while I scrimp and save to come up with a down payment, only to find that I've missed the bus and/or now the banks are requiring 30, 40, or 50% down. No thanks.

Anyone else?

With no money, weak credit, and no one to help, how does one come up with a down payment to do a seller financed deal?

Ok. Here's what's going on:

My wife's grandmother had a house that was owned free and clear and, when she died in 2008, there was no will deeding the house to anyone else, so it kind of became a "family estate". Currently, my wife's aunt and cousin live in the house, but they have absolutely destroyed what was once a beautiful home, and they have allowed the taxes to run in arrears. Two years ago this month, my mother-in-law went in and paid the taxes to avoid tax foreclosure on the house. But since then, the family has not paid taxes, and they are now two years in arrears again. They are not yet in foreclosure as far as I know, and I don't know at what point they'd go into foreclosure, but surely they cannot continue to live in the house without paying taxes and have there be no consequences.

My wife and I have advised her mother not to pay the back taxes on the house again, because that would only enable the "ingrates" (as my wife calls them) to continue on as they are, and my mother-in-law is retired and on a fixed income, and she simply can't keep forking over a couple of thousand dollars every couple years to prevent the loss of her family home.

So. What I want to know is, is there ANY way in which we could catch the house before it went into tax foreclosure, pay off the back taxes, gain control of the deed and the house, and evict the current occupants so we can do a full gut rehab on the home and return it to its former glory? I know we could technically buy it out of tax foreclosure, but the problem is that, if it goes into foreclosure, it's fair game, and ANYONE can buy it, putting us in a bidding war with strangers over our family home. So, we're not really sure what to do.

Ok, Bigger Pockets; you guys collectively know everything there is to know about real estate. Help us figure a way to get this house, restore it, and put people in there who will appreciate it.

Ok, I REALLY like the BRRRR strategy. In fact, once I get going, I think it's going to be my primary strategy. But I have a question about the refinance part of it. What are the conditions to refinance? In other words, let's say I get into a great place, go through all the rehab and rent business, but when I go to refinance, I get denied? WHY would a bank deny my refi, and what will cause a bank to approve a cash-out refi? That's the stickler for me, because I don't want to lose a great, cash flowing property because I can't get a refi. And I'll likely need one, because, at some point, I'm going to have to use hard money.

Speaking of which, another question: are hard money loans generally interest only for the duration of the loan?

Can anyone give me a crash course (or point me to one) on using notes in creative financing? For example, I've heard that you can use notes as down payments, etc. Can anyone help me understand this?