Utilizing An Investor For Take Out, Doing A Wrap, Need Advice!
My partner and I have an idea for financing two homes purchased from a motivated builder: These are two inventory homes that the builder has been sitting on for over a year now. Both homes are in the $1,000,000 price range. We believe that we can purchse these homes 20% below appraised value. We want to have an investor do the take out for 100% of appraised value and then do a wrap with my partner and I, who would then occupy the homes. We would then take the 20% proceeds and kick out a portion to the investor, we would put the rest in a escrow account to service the note for the next 24 months. We could utilize a loan servicing company who reports credit to service the notes, and report the positive pay history on my partner and I for the next 24 months. Then we should be able to refi after 24 months without to much trouble becuase of our established history of servicing this note.
I have put this in simplified form, and I am sure that this is not a unique idea. I would like very much to speak with someone who can help me muttle through the details and pitfalls. Can this deal be put together or are there issues which would prevent it?
Any help would be greatly appreciated as this will be our 1st deal.
Thank you,
KJones1129 in Texas
explain to me why an investor wants to buy at 100% of appraised value?
We will be walking away from the closing with $200,000 to $250,000. Our intent is to push $50,000 to $75,000 directly to the individual who does the takeout for us. The rest of the monies would be put in escrow to service the note for a period of time. We would add a point so that the individual who financed the note would profit monthly for the term of our agreement (probably 24 month balloon).
We are utilizing an individual who has the credit wherewithal to finance the homes for us. They are compensated for the utilization of their credit for a period and then our exit strategy takes them out of the deal. We are considering setting up a trust with which to maneuver this transaction, so that the risk to our investors credit is minimized, the escrow guarantees the servicing of the note for a set period of time.
The incentive for our investor would be a monthly cash flow and cash at closing. The investor is capitalizing on the utilization of their good credit, and we have minimized risk as much as possible. There could even be an equity sharing situation established. The benefit for my partner and I would be two very nice homes for our families, that we could not otherwise secure due to our credit experience; our credit is representative of entrepreuners who have taken a lot of risk. Our credit would be benefitted by utilizing a loan service company that reports credit; we would have proof of our ability to service this much debt.
I know this is long winded, but there are a lot of details to the structure. I am looking for any good advice, opinions, ideas on how to move a deal like this forward. We are not sophisticated REI's, yet, so everyones opinion is appreciated.
Thanks,
KJones1129
Ok, so you are going to borrow a million bucks and spend 800K to buy the property.
this leaves you with $130,000. or enough to make the mortgage payment for 19 months.
Assuming your good-credit millionaire can borrow at 6% and that he charges you another 2 points for using his credit. that means its going to cost $80,000 to own this house for a year (assuming all notes are interest only).
So you are going to take $70 K of the $200 K and push it to the guy who borrowed all the money (thereby giving him part of his own money back as a "fee"
Now even if you have 19 months of perfect credit are you going to have the income to pay $7,000 per month in house payments after that? in other words is there some reasonable expecation that two years from now you will have income of $240,000 per year?
Even that leaves out the extra 5 months of mortgage payments to get to the two years but I'm assuming you will make some mortagage payments out of pocket in the next two years to finesse this problem.
Only problem is finding a guy who'll loan you a million bucks on a two point spread and figureing out how your going to finance him out at the end of the two years. I see where its a great deal for you but its very slim for the investor.
Your assumption is that I can't service that note. That is the wrong assumption to make.
I will make the assumption that your next reply would be then why would I need an investor? As I had mentioned before my credit is representative of a guy who took risk to build a successful product related company. I can afford to service that amount of debt, but the down payment that would be required would preclude me from taking this out myself at this time. I prefer to maintain my reserves; after having suffered through the cash flow crisis of building a business. Repairing the blemishes on my own report should not take me more than a year to clear up properly; but the opportunity with the builder is here now.
This conversation is begining to feel more like an indictment than a constructive exchange, is that your intent? I am looking for someone with creative ideas, who have had experiences with a little bit of money, and can think beyond the box. $1,000,000 is not an outrageous amount for a home amortized over 30 yrs., at least not by some peoples standards.
If you have any CONSTRUCTIVE ideas please feel free to share them.
Regards,
KJones1129
KJones,
Don't go there. I understand commercialking's point. It's not what you're thinking. People that do this type of thing generally charge way more than the 2% spread that he's using in his example. You're indicating that this would be a low risk deal for the investor, maybe so. Someone access to the kind of money you're looking for should expect to make 8-10% minimum ROI. They could certainly get better than that acting as a hard money lender for smaller deals, and spreading their risk. They generally loan around 65% of value, charge 5-6 points in origination fees, and get 10-12% interest on their money.
Based on what I've read about the 1M+ home market is that it's quite common for them to be listed for extended periods of time. If you default, who is stuck with the costs of the money that bought those homes? The terms that you've offered just aren't inspiring.
Jeff[ Edited by jeff12002 on Date 05/20/2004 ]