All Forum Posts by: Jeffrey Yates

@Jon Holdman

You're great, and your numbers are spot on. Thanks for the breakdown! Done this before?  :) 

They owe $58K at something like 3%.  Which would mean the cash to them would be $38K.  Getting them the full net proceeds amount of 38k would definitely make them happy, but I'd ask if they could make do with slightly less (maybe $25K), depending on what they need to do to ensure their financing goes through on their new home (they were approved for 400 and bought one at about 300, so i think they should be okay). That would free up my cash for rehab.

I see your $96K as being the exactly right number.  It's the straight proceeds of the sale without nickel-and-diming my friends, which is good business and good practice.  

The amount needed to bridge the gap between my minimum purchase price (91K@ 75%) and their minimum net proceeds ($96K or 79% ARV) is no small amount, but my wife is a RE agent and so that's $4K of commission at sale. That preserves our "imagined" 16K profit, but add in minor catastrophes and sacrifices to the RE gods, and we're at 10K or so. We only expect that much, and would just hope to do better.

So next up is really nailing down the cost of the wood floors (no pun intended) and trying to cut our holding period way down.

Thank you so much for helping us think through this one!

@Darrell Shepherd

Awesome, I knew that what I was describing had to fit some sort of mold, just wasn't sure which.  Now I can better research and communicate it!  Knew I wasn't reinventing the wheel (or hoped, rather) so thanks.

70% and 2% would be nice, but I haven't seen them but once in a blue moon in South Florida.  But I won't cheat too much, that's for sure.

@Jon Holdman

I definitely agree with you that these should be my goals: (not sure how to quote, sorry!)

• "If you can reduce your money costs, that improves the results."
• "If you can keep the existing loan and fund the rehab out of pocket your threshold is now more like 75% instead of 70% because your avoiding hard money costs."
  

So maybe I should focus more on how to find an arrangement that give my friend the cash he needs to do repairs/downpayment on this new house, but buy myself 3-4 months (6 to be safe) to sell it after repair.

And I would like to show them the profit we expect to make after all the calculations to be extra sure that they're going into this with eyes wide open -- great advice all around! thank you!

Thanks for the responses Jon and Larry! I appreciate your challenges, too, because it makes me look harder into the deal. But I don't think I was clear enough about where the spread comes from. Once I show the numbers, I think you'll see why my question becomes how to structure the deal to maximize savings due to the fact that I'm buying from a friend, since those savings could help me get to 70-75% ARV less repairs and make this a more sound deal. It's a little tight, but that's why the structure matters to me.

Here's more info:

The repaired condo (i.e. carpets replaced, everything cleaned up) would sell at $105K. The improved condo (install wood floors, upgrade appliances) will sell "fast" at $135K and rehab costs should be about $10K (combination of sweat and hired). Those are vetted comps from a local RE broker. 70% ARV less repairs is about $85K. If I can't get there, I can get close, and here's how.

We've approached our friends with all of this full information, and they are simply not interested in improving the property themselves to get more profit -- as I stated, their time and comfort is more valuable to them, so no "friendship problems" there. They said they'd be perfectly happy to get the $105K selling price that the comps suggest the condo is worth, once repaired (NOT improved). 

But what that really means is they'd be happy with net proceeds from a $105K sale. IF I can match their net proceeds from a $105K sale price - i.e., what they take home after a straight sale to to a third party (which includes all kinds of RE agent, legal, closing and ancillary costs designed to protect each party) - that's all that matters. 

So let's take the $105K selling price to a third party, and say that

after repairs to get in listing condition, ( - $3K) (carpet, misc fixing)

closing costs to seller, (estimated at 3%, or about - $3k)

and realtor commissions, (6%, or about $6K)

they walk away with $93K ($105K - 3K -3K -6K)

But if they sell to me, they immediately save $9K in repairs and RE commissions, making my purchase price $96K (105K -9K). I'm now $11K away from the 70% ARV mark, but only about $5K away from 75%, which is worth it to me. If I look at it another way, using J Scott's formula: Max Purchase Price = Sales Price - Fixed Costs - Profit - Repairs, I'm trying to get the condo for about $92K (= 135K sales price - 13.5K fixed (estimated) - 15K profit - 15K repairs (padded for a 5K disaster)), giving me $15K on the deal. I'm about $4k over my max purchase price...

So now, every dollar I can save my friend by selling to me instead of a third party means I PAY less on top of the net proceeds of sale, effectively reducing the purchase price of the property for myself - -so yes, the seller's costs DO in fact carry over to benefit me in a way. 

**HERE is my question, and why I am asking about it: 

Is there a deal structure whereas I pay them some cash (to give them $$ for  in exchange for title to the house and 120 days to deliver the full balance of the purchase price AFTER I rehab and sell the house? And what's the cheapest way to accomplish that?

Normally, this may not matter and there should be enough cushion in a deal not to have to do acrobatics for closings, but saving a few thousand by being clever here makes this deal all the safer, and my profit better. 

As you can see, the deal is tight, so hard money costs and paying extra closing costs might make the difference between whether it's worth my time and risk.

Thanks for all the thoughtful responses, it's helpful!

Friends of ours are going to close on a new house in approx 60 days, so they need to sell the small condo where they've been living. They've lived in this condo for 2+ years, so in order to sell it, they'd need to replace carpets at a minimum, which is a hassle for them. They're the kind of people that prefer convenience and ease, even if it costs them a few extra dollars. Other value to him includes my being flexible with timing of purchase to avoid any overlap on mortgages, and no need to fix anything or clean anything up (a big plus for them!).

Thus, my proposal: Sell me the condo at market value less cost of repairs, less realtor commissions (saving us 6%), have our RE lawyer friend do a “minimalist closing”/quit claim (saving us some closing costs), and then let me rehab, upgrade the floors and resell the condo at a higher value 60-90 days later. He gets the money he would have walked away with on a straight sale for no work whatsoever, and I get to take home the added value over cost of improvements.

I've done all the numbers (ARV, FARV, COR, etc.) and am comfortable with our margins.

Here’s what I need your help on, BP:

What is the best way to structure this deal?

My friends needs a good chunk of his net proceeds from sale of condo to pay for repairs on the new house.

I need at least some of the purchase price financed, even if only for 90-120 days (conservatively) until the time of the sale.

How can I meet both those needs as cheaply as possible? Maybe by giving my friend a lease option that explodes in 120 days with a downpayment equal to the cash he needs for the new house? What do you call that, a "deferred close with occupancy?"

Also, I’d like to minimize the transaction costs as the property is sold from him to me, because every dollar I save my friend by selling to me (vs selling to a 3rd party) reduces the price I pay for the property.

This is a true friend, so I have zero trust issues and am 100% comfortable with doing the initial sale as cheaply (even if it means unprotected, deed-wise) as possible, AS LONG as it doesn't complicate the eventual after-repair sale to a third party by me.

Hope that’s clear! Thank you BP!

@Cal C. "You can call me Aaron Burr by the way I'm droppin' Hamiltons"

@Richard C. I don't like to hear it, but that's absolutely correct info. thank you! But, good news is, it does turn out that they want to avoid foreclosure, so i'm walking thru the house this afternoon. They sound interested in selling.

If the walk-through goes well, is there anything wrong with getting a signed purchase agreement between myself and the owner for the last known payoff amount, JUST so I have some kind of equitable interest before paying for title search/attorney? I know it's impossible for them to sell while in default, but my goal is to tie up the property for ME, while I work with the bank to cure the default. I don't want to do all this work and have an opportunist sweep in.

I would obviously include clauses for lien search and inspection, and wouldn't pay the owner anything obviously until I worked out. Is this a good strategy to protect my interests while we work out the details?

If not, any suggestions on how to tie this up while I work out the details?

@Wayne Brooks

@Joe P. I've done the cursory search on the clerk's website, but I'm hesitant to pay for a title search for every property i'm considering....this is a good potential deal though, so it may we worth it. After all, I'm just starting out and so starting a working relationship w/ a local title company could help me work something out with them moving forward.

Any suggestions? Another question is, if in fact this goes to auction, and I want to try and bid --- do auction buyers always do full title searches for the house they're gonna bid on? Or doesn't the auction process clear out the junior liens/encumbrances etc?

Good point on the other loans against the property, if I do go Sub2 with the homeowner I'll definitely be researching that with a proper title search...

I found a good potential deal a few towns over from me. The bank issued a default judgement for an amount which still leaves some equity in the house, but it is set to go to auction in two weeks if the balance goes unpaid. I know that once it does, any deal that once existed will get bid up into oblivion. So I have to act now!

Homeowner is unresponsive and unwilling to sell to anyone, likely due to some clouded judgement as a result of drug use (apparently, according to neighbor I spoke to yesterday).

Is there ANYTHING I can do, speak to the bank/attorney/etc. to purchase the property ahead of auction/foreclosure?

I'm fairly certain the only thing I can do involves getting the seller to sign the deed over to me and maybe offer him some walking money to motivate. IF that's the case, I can still keep trying, but what are the documents I need? Is it just a quick "quit claim" and would that be strong enough so when I paid off this guy's foreclosure judgement I actually have rights to the house?

Thanks in advance! Hoping someone has some "ninja" moves for this one!

Thanks @Wayne Brooks

For my deal in Lake Worth, I know the lien will remain. Do you have any advice/experience to share about negotiating the fees down/away? Figure we'll just go sweet talk the code enforcement officer and explain our plans to restore an historic home, but that with the exorbitant fees it's impossible.