Hey all, I just want to pitch an idea and learn what holes you can shoot in it,
I am in the midst of putting the pieces together to become a broker in connecting investors with buyers that have bad credit. The investors will have a wrap-around mortgage and make their profit in the spread of the interest rates. I will keep 5% of the down payment from the buyer. Before you poke holes in that, I assure you I will be compliant with regulations, and I will be ready for the due on sale clause.
But hear this out: I got to thinking, what if I don't need these investors? What if people selling their houses are already investors in the making? I just need to present it to them. Can I find a FSBO and ask them, "would you be interested in cash flow every month with no land lording?" "What if I could find you a person with 10% down, money for closing costs, one year of insurance and taxes, and willing to pay 8.5% interest on a wrap loan?" Then I will set it up as planned but I didn't have to find the investor that needs 20% down with stellar credit and income.
Yes, yes, the due on sale clause. But if the lender calls the note due, we will simply revert the transaction, and I will owe the buyer a big apology. But nothing will be due if we just undo it. What do I need to put into the paperwork to be able to undo an owner finance transaction if we need to undo it?
Also, could I offer this to sellers that are selling on the MLS? Or rather, to their realtor? Will the realtor present the idea to their clients? It could be an excellent option for houses that are hard to sell because they need fixing up. Often times, these buyers with bad credit will do the fixing up. Or maybe in neighborhoods that aren't selling so great. Will the realtors absolutely kill the deal by scaring the seller with fears about regulations, etc.? And if the seller doesn't "sell" the house, then the realtor will wonder about their commission?
Thanks for any and all feedback
Hey, great post. Can you tell us about your first 4 JV rentals? You actually split profits on the cash flow? Did you make a definite plan to sell the rental at some point? What if you disagreed about things? JV sounds a lot easier for flipping where the deal has a definite end.
@Ryan Parnow I think you read Tanya's post like I did--that rent was $513 a month! I was like psshh..dang not much.
@Tanya Smith says it is $513 cash flow. That sounds like the most amazing deal ever and most anyone would assume too good to be true. But ask the company for more info and see if you can find boots on the ground to verify it and do your diligence. But I think you are correct in investing in these other areas. I agree more and more everyday as I live here in Dallas!
Don't bother replying if you're not going to read what I said. That is common sense. You should be penalized on this website for waving your godlike opinion around disparaging people without even reading what they're saying or learning a damn thing about them or the deal before disparaging them. That is irresponsible and lazy and pretentious.
If it's not compliant, then there is no deal, is there?? Do you have a learning disability? If-it-is-not-compliant-then-what-is-the-risk?? If the attorney, who actually knows what he is talking about unlike you, says this can't be done, then there will be no deal. Unless this attorney is just not knowledgeable enough and we can find one that is.
"It can't be done, it can't be done" Do you know how many millionaires have heard that? Probably all of them. You're just another one saying it. Living in your box with little vision. Instead of asking, how can it be done? You shoot it down.
So let me get this straight. What you DO recommend is that every beginner that is broke spend their 10k that they don't have on marketing? Okay. Well, that's just solid advice. Thanks for the gold nugget Bill.
I know what you're going to say. "But Trevor, I would never pay retail for a rental property". Because you are putting your safety net in the equity for relatively little cash flow as a trade-off. That is the accepted formula. Have you had much luck finding 70% ARV houses? I haven't. I've seen how hard it is.
So what I'm doing here is, I'm trying to be creative. What if we didn't have to compete with all of the thousands of people clamoring for 70% ARV houses? What if you could make money from a retail house? How much do you expect to spend on marketing and in your time to find that 70% deal to make a $300 cash flow rental? $5,000? $10,000? I know of investors that spend $10,000 per month on direct mail. No one is even going to respond to their first 3 or 4 mailings. You just spent $10,000 to make a donation to the paper recycling company and killed a bunch of trees.
A lot of people settle for 85% ARV houses. So what if the buyer I have says he will do 15% down instead of 10% down? Now you have an 85% ARV deal. And that comes with NO risk of broken pipes during foundation repair, or just overshooting your rehab budget in general, or paying for builder's risk insurance, or the list goes on and on. Because this house is in VERY good condition already. It is a hell of a house.
And now you're making $1,100 cash flow with NO cap-ex repairs. NO 10% management cost. NO nothing. Are they paying down the equity on your rental thereby giving you equity? No, you're getting higher cash flow instead.
Here's another idea. Let's negotiate with the sellers and tell them that since they are not paying 6% for realtors commissions, we want a 5-6% discount.
Let's add one more important fact. This guy is not a renter that can vanish into the wind. And if you want to collect a few bucks from him, you might end up losing money in court costs and such. No, this is a buyer. Make him sign a legally binding promissory note to repay the debt. Make the note say that he understands that he will owe this debt no matter what happens to the housing market. You can chase him down all over the country and garnish his wages and whatever else. He won't leave his house. He won't risk giving up his down payment and payments PLUS be stalked all over the country and end up having to repay the debt anyway.
Let's be creative instead of shut down. Instead of saying, it can't be done. Ask instead, how can it be done?
I will say this again. I did not attack him for disagreeing with me or saying negative things. I attack him because he did not even ask one question before doing so. Doesn't he want to be sure that he fully understands the deal and all of my intentions before condemning it?
Okay, I don't know the future. I should have said, "in my opinion" supply won't meet demand in a year and since he has a low 600s credit score, he will be able to refi in less than a year. I'm sorry I forgot to say in my opinion. But I did address that it was the worst case scenario and what would happen. I addressed that. So...I don't see how this is any argument against me. I did not deny it. I said you would have to sell the house for less to another buyer with a new down payment which will negate your losses further.
Or, here's an idea from your playbook: you could rent it if you prefer. If you rented it, you could wait until the market comes up again and then sell it or seller-finance it again. You are in the EXACT SAME BOAT as if you had bought this house AS a rental property. If you were renting it, and the market dropped, you would continue renting it. Maybe your rent price would be affected, maybe it wouldn't--that is beside the point. So now you had a seller-financed house and your tenant-buyer decided to cut and run. Well, you have all of his down payment and payments without having paid a dime for repairs or taxes or insurance, and now you have a rental property to rent out. Exactly as if you had been renting it all along in the first place. Are you starting to get it? The worst case-scenario turns out to be a rental property as if you were renting the whole time? Wow...scary stuff.
There are no risks in the regulatory compliances. Either you comply with the regulations or there is no deal. So I don't see how that is any risk at all. You hire an attorney and you do it correctly and then there is a deal. That is the whole point of complying and paying the lawyer $300 an hour...is that you have complied...how can it be risky if you complied with the laws? I don't see why this is even coming up again.
Please tell me you are starting to get it. I just crushed your worst-case scenario. Shall we go over how defaulting is all but completely mitigated and how you could actually profit from it?
Or shall we complain about all the confusing legalities involved and how scary that is? That is what lawyers are for...
C'mon. Let's hear from Bill again. If you honestly think I haven't rebuked all of your doubts, then you are just being stubborn and your pride won't let you admit it. But it's ok that the deal scared you all off since you hadn't heard of it before. I'm sure that is normal and I need to learn to present it better. But when someone like Bill, who people listen to obviously, comes in before ASKING ONE SINGLE QUESTION, condemns the deal as if I am some kind of scammer or trying to trick people or that I am a complete moron ignorant of the concept of risk. Ugh, I find that very offensive. Even more so, as I sit here and think about it.
Thanks for your feedback. I can understand what you're saying.
The market dropping is a possibility and probably the best counter-argument I've heard so far. Like I said, it will take a knowledgeable investor to see the merit of the deal and weigh the risks with his expertise. In my opinion, this person will pay off the loan before the market drops. The investor is welcome to meet him in person and review his current house-deal which was also seller-financed. he has made every payment. You will see his financials as much as you like--you will see that he owns several businesses and makes substantial income with substantial savings.
Do you expect supply to meet demand in DFW within 1 year? How much could it really drop? I would say the market is inflated at most by 15%. Well you're getting 10% down from the start plus his payments made up until the drop. If he leaves, sell the house again, albeit for less, and collect a new down payment. I agree, that is probably the worst case. I think that is much worse risk than default. Honestly, default is completely mitigated as I see it.
The return of $88k and $1,100 x12 months is 15%. Now take the immediate down payment that you get of 49k. That is 34% return after one year. So I'm not sure what calculation you were doing. This is with no land lording! No repairs. No replacing a tenant after one year therefore replacing carpet and paint and spending every dime of the cash flow you made all year--effectively making ZERO cash flow.
Honestly. You guys seem very experienced. But all you see is the down sides. The upsides are too numerous too mention. I realize it is your job to look at the down sides, the risk, the worst cases. But you can't ONLY look at the bad. Your job is more accurately, to WEIGH the bad AND the good. If you only look at the bad of any deal, you would never do any deal ever. You wouldn't even leave your house because you could be struck dead.
Another example of seeing only the bad--my commission. If you only look at what I'm taking then it sounds like a lot. But if you look at the good, you would see an $1,100 cash flow from a SFR. Most rental investors hope for what...$300 per door? This happens in wholesale deals as well--investors are willing to pay 10k in a wholesale fee because 20k can still be made. I just did that exact wholesale, last week. He effectively paid me 1/3 of the profit.
I think I see what is happening. I think the entire problem in your eyes is the expense of the deal. If this exact deal was for a 150k house, you would probably love it. I might even be able to charge 10% on top, like you said Chance. This only difference in my deal is that the down payment is higher, and the 10% on top isn't there. But guess what? If the 10% on top was there, I would take it. That is how those businesses work. The engineer of the deal takes the down payment on top, and then sells the note to an investor who wants cash flow. All I'm doing is taking 1/3 of the cash flow instead which still leaves $1,100 per month--a return of 34%! With no land lording! No property taxes. No insurance.
If this was a 150k house, the payment received would be proportionally smaller, and therefore the cash flow would be smaller. Let's calculate and find out: The buyer pays 10% on top which goes to me. That leaves 150k at 9.9% for 30 years for the buyer. That is a payment of $1,305. And you make a 20% down payment of $30k and finance 120k at 6.5% for 30 years. That is a payment of $1,044. That is a cash flow of $261. That is a return of 10%. Let's say you got a 5% loan. That is a payment of only $644. Much better. So now you're cash-flowing $661. That is a return of 26%.
That is a return that is LESS than proportionally smaller. If it was proportional, then the percentages would still be the same.
Please read my post carefully and check the math if you want. I spent some time on this post so please absorb it. At the very least, I am learning how to present these kinds of deals to investors. Apparently, I am doing it all wrong. Of course, there is only two of you. The rest are running like mice thanks to Bill's advice.
Maybe people just aren't ready for this. They would rather get 26% with 150k houses. Which are just as likely to drop in a market drop. And MORE likely to see a defaulter because the down payment from the buyer is so much less. But what do I know.
Well I will do my best to do real estate without the goal of making money. I thought I was doing my freelance art for that, but hey, I can make no money at everything I do. Sounds awesome. So you got into real estate to help orphans from Africa in a non-profit?
Of course it's for the money. Every deal you've ever done was for the money. It's almost like you're trying to be facetious. I am the least greedy investor you will ever meet. I insist that every deal is giving as much to the seller as I can, and not the least. I refuse to even interact with investors that screw people out of their equity, etc.
Do you know of another way to get passive income of this kind of return without land lording? Yes it is a bit uncharted compared to the tried and true strategies of your career. Yes, there are laws and restrictions. Yes, there is some risk.
The risk you mention of default? You could actually profit from it. You will have 10-15% of the original down payment plus all payments to date, and now you will have a new buyer with a new down payment.
There is risk in anything. The way you talk, I'm surprised you ever did a deal. Weren't you afraid there would be a fire or tornado? Someone could inexplicably run a herd of goats into the house and let them deficate in there for a week. That could happen, so why would anyone ever be crazy enough to buy real estate?
It is about mitigating risk. If you want to ONLY do deals with absolutely zero risk, then fine. That is fine for you. But you have no right to "police" the forums by making your opinion of what is a good deal the self-appointed golden law and instill fear in others. I would argue that NEW investors are the ones that would be scared of this deal, but you say smart ones would be. I argue the exact opposite. Any new person will be confused by this and see the risk and run away. It will take a more patient and inquisitive person to say, ok, tell me more, and weigh the risks with their own judgement. They will have to have the experience to see all of the potential upsides. And they have possibly been frustrated with their very little rental cash flow in the past due to vacancies, repairs, etc.
It is a free forum where you can say your opinion, of course. I am not ticked off that you did so. I am ticked off that you did so without care, without doing it responsibly. With great power comes great responsibility. With your decades of experience, your words hold great power. Use them with extreme responsibility. Your word could destroy my reputation.
In your opinion, you are allowed to say things like, "in my opinion", and "it would not be a good idea for me because...". But you lay a blanket statement of fact over ALL investors. The fact is that this is not a good deal for YOU. YOU are afraid of the complicated legal caution that needs to be used. We all have different meters of risk tolerance. I know you know that, being a veteran. But not all of us are afraid of it. Legal caution is readily available and we will use it. You don't need to cast your risk-tolerance onto everyone else.
In the end, I think we all appreciate you giving your free time to watch the forums and your inclination to help newbies in a way you think is best. Just please make sure what you think is best is fair and responsible.
If you're interested, let's route out all of the risk you see. I will show you that it is not risk-free because then you'd really call me a confidence man. Instead, I will show you that all of the risk is well-mitigated. As well, if not better, than any other deal. I'm sure I could name a lot more risks in buying and holding a rental. So what is the first thing that makes you wince about this proposition? I already explained the default possibility. The man is putting in 50k and proving that he can afford the payments. All legalities and background checks are made, and an attorney has drawn up all the documents. Now, what happens? You name it, and we will discuss it.
Bill, I appreciate your input although I find it a bit insensitive. Your opinion is not the end-all be-all of the world of real estate. Do you believe it is your job to go around scaring people away from deals that you don't like? At least ask me for more information and make sure you understand completely before making a condemning response.
I do plan to use an attorney. Sounds very prudent. But what about this deal sounds predatory or irresponsible? The man has $49,000 for a down payment and $5,500 a month for a mortgage. An RMLO can easily document his income, tax returns, and whatever else is needed. None of that is forgotten, and I don't know why you would say that. After his divorce, his ex-wife let his car be repossessed and now his credit score is low 600s.
You are judging my offer based on your paranoid, exaggerated opinion, telling people to run away like mice. You do realize that what you say effects people, right?
You're right about the refi not being guaranteed. I said that because that is the plan, but if he continues to give you cash flow with absolutely no land lording, then I think that is ok. This is a cash flow investment. The note can be sold which is the same as the tenant refi and paying you off. I explained all of that.
Your words effect people. Use them carefully and responsibly.
But I did make a mistake. I said that we would split the down payment. Well that would require that the tenant pay at least half of the down payment ON TOP of the list price of the house, which he would never do. Maybe that could happen on much cheaper houses. So for this deal, I would propose that I take 1/3 of the cash flow instead, or $500.
But no one is going to contact me now that someone planted the idea in their head that they should run away like mice.
Hi all,
I have a home buyer that is suffering from bad credit due to divorce. His credit score is low 600's. So he will be able to refi in the foreseeable future.
He has $5,500 that he can pay per month for a mortgage, although he would prefer to pay less. But he has a great income. He has 10% to put down on this house he wants. He picked it out already. We don't have to spend a dime on marketing to motivated sellers or trying to get a house at a huge discount.
House list price is 489k which is an accurate and fair asking price. I propose that you, the wise investor, buy the house. Collect his down payment of $48,900 which you will split with me 50/50. I know of other companies doing this that take 100% of the down payment. But I don't need it all. I want everyone to benefit.
Now you put 20% down or whatever your lender requires which would be 88k. Finance the remaining 352k at 6.5% commercial loan, or whatever best deal you can get.
The home buyer's payment to you will be $3,828 per month. Your payment for 352k at 6.5% for 30 years is $2,224.
You will cash flow $1,604 every month without any of the headache of land lording. You will owe no property taxes, do no repairs. You don't even have to collect the payment or make your own payment. A finance agency will collect your payment and make your payment for you for $30 per month or less. They will also report the buyer's payment to a credit bureau to help repair their credit. When their credit is good enough, they will refi and pay you off.
If you ever need your money back for whatever reason, you can sell the note for full price to someone else that is interested in great cash flow. I won't guarantee that you will sell it immediately. I have never sold a note and I don't know how long it would take. That is something you would need to research. I also can't guarantee that your lender would not call the note due when you try to sell it. From what I understand, if they call the note due, you can simply back out of selling it. I am told big banks will never call the note due so long as it is performing.
I won't say there is no risk. I will say all the risk is mitigated. If you think that this home buyer is going to default, just ask yourself who is going to throw away a $48,900 down payment? Plus the payments he made up until then. Plus, you have half of the down payment to cover your debt service until you find a new buyer or are able to sell the house. You know the house will be in good condition because this buyer owned the house instead of renting it. We will require that he pay for home-owners insurance for a year up-front. His property taxes escrowed. All risks should be mitigated.
If you're trying to create passive income through rentals, well, that is one way to do it. If you want to be responsible for tenants mistreating the property, all the repairs, all of the CapEx repairs like the roof and everything else. Plus paying property taxes and insurance. Plus vacancies! The list goes on and on. I truly think seller-financing is awesome.
Please reach out to me if this sounds awesome to you!
Trevor Smith
928-451-2071