I Need HELP With Poss. LO..my 1st Deal!
I need urgent help and advice. I'm a true newbie to RE investing and have possible found a good deal. I've found a homeowner who bought his home for $180K a year ago. He is being transferred in less than 2 months and is currently trying to sell it on his own. He is willing to do a LO with me if he cannot sell it by then and wants to sell it to me for the payoff amount. I'm not sure how to make this deal profitable for me. The home doesn't have any equity yet. Can I negotiate a short sale with the bank and then buy it for the lesser amount to flip? Does a short sale affect the homeowners credit? How would I draw up a contract for the LO? Heeelp! *please see my profile* . Thanks in advance!
Ronnie,
You may first want to go back to the homeowner and explain to him the benefits of doing business with you and get him under contract.
You could do this several ways. You say he bought the home a year ago for $180K and is willing to sell to you for payoff. What is the payoff? What is the current value of the home? What is he really trying to accomplish and what will make him happy?
If we know these answers, we will be better able to help you with this deal.
Good Luck.
Dave
[addsig]
Wow! I love this forum - such fast responses.
Anyway, to be more specific, the homeowner bought this home 100% LTV and says that it could probably sell for $185K according to what a RE agent told him. His current payoff is about $178K but is trying to sell it for $179,9 to cover any closing costs. Basically what will make him happy is to have assurance that the mortgage will be paid on time. He's also willing to let us sub-lease his home. How should I structure this deal? The home is in excellent condition. His current payment is $1200/mo.
I know I asked this already but does negotiating a short sale with the bank affect his credit at all? Also,
sorry, what's sub2? is that better than a LO? there are no derog... will the bank allow me to neg. a short sale and then let me buy it for that price (so that I have equity)?
Also, what's the likelihood of the bank accepting a short sale since the home isn't in foreclosure? Is stating that the homeowner 'will' go into foreclosure good or not?
Thanks in advance (again)!
hi, newbie here. my father in law sold his second home last year on a short sale, the mortgage company sent him a 1099 for 30,000 come tax time. dont now the details on why, but something to ponder?
Ronnie:
I'm no short sale expert, but I have to question why the bank would even entertain a short sale when the loan is current (is it current, by the way?). This doesn't sound like a short sale opportunity here.
My understanding on short sales is that a bank will consider short saling a loan where the borrower is behind on payments, and has no intention or ability to make up those payments and is looking to sell to get out, or if the bank has already begun foreclosure proceedings against the borrower.
In a short sale, an investor comes in with an offer to buy the property at a discount (using a purchase and sale contract with the homeowner) and then negotiates with the bank to accept a lower payoff. Read up on short sales here on the web site to find out more.
Read up also on L/O and sub2 on the site, but here's a quick description of sub2:
- Seller deeds property to you, but keeps original mortgage in their name.
- Now that you have deed, you own and control the property, which means you can do what you want with it (sell it, rent it out, etc.).
- Your purchase agreement with the seller states that you are taking the property "subject to the existing mortgage" (hence the name of the technique Subject To). Of course you would spell out all the details of that mortgage so that everyone is clear on responsibilities.
- When your buyer refinances or buys the property, you pay off the original mortgage and keep the difference.
Differences between sub2 and L/O (just my opinion: both methods are certainly valid investment strategies):
- Control of property: L/O gives you less control: if the owner gets into financial trouble and has judgements against him, they can go against the property he owns, including your house (with your tenants or buyers in it).
With Sub2, you own the property, so future money troubles from your seller won't attach to the property.
Advantage: Sub2
- Being a landlord vs. being a seller: if you lease/option, you're more likely to get renter-types who MAY buy (exercise their option), but may not. You are now in a position of landlording that property, with all its responsibilities and potentials headaches. Just be sure you are aware of what property management entails and ythat you work the monthly numbers carefully to make sure you'll get positive cashflow.
In Sub2, you can certainly elect to rent out the property, but you could also elect to sell it, either outright for quicker cash or over time (like on contract for deed).
The advantage of both of these strategies is that you are getting BUYERS, who a) typically take better care of the property, and b) are responsible for all maintenance of the property while they're in it (no calls in the middle of the night for a busted toilet...).
Hope this helps.
Andy
[ Edited by arytkatz on Date 06/29/2004 ]
Hi there, i'm a newbie to this site but i've done two L/O deals before so i guess i'm slightly qualified to pass along some advice.
1. I will never take an owner's word on the value of a property. I will always make sure that I do an appraisal.
2. If the house doesn't have any equity, i will not attempt to purchase it, but will rather do a L/O. I'm sure someone else will have a different approach to this.
3. To protect yourself from owner's default in a L/O, have a title company record a "Performance Mortgage/Performance Deed of Trust" against the property. This puts a cloud on the title which makes it hard for seller to sell the house or refinance and if the owner defaults, u get to foreclose on the property
4. Also record a "memorandum of option" to do the same thing above. It adds more weight.
5. Or you can ask the owner to sign an "Authorization for Direct Payment" form so you can pay the lender directly
6. You need 2 separate contracts. A residential lease contract and a Option to Purchase Agreement.
7. There's a lot of concern about lenders calling a Due on Sale clause if they found out that the owner is selling the house (a lease option could be considered a sale esp. in certain states). I'll have the owner sign a Due on Sale Addendum basically saying that the loan will remain in the owner's name until it is paid or assumed by a future buyer, and will not transfer to (yours or your company name). The Buyer is under NO obligation to and wll not assume said loan, nor will the Buyer have responsibility to pay off said loan.
Here's a good website to download some free forms:
http://www.uslegalforms.com/real-estate-forms.htm
However, you should always utilize a qualified RE lawyer to go through the forms with you.
Hope this helps.
You guys are AWESOME!
~Arytkatz~
Thanks for explaining the difference bt. L/O and Sub2. I'm now leaning towards a Sub2 rather than a L/O because of the "control" aspect. I will be spending the rest of tonight doing 'homework' and educating myself more on this technique. About the short sale, I guess I can forget about that. I thought it would be an option because the homeowner has no way of making the mortgage payments when he moves to Cali for school and so I thought that the bank would 'entertain' a short sale if I mentioned that the property would go into foreclosure.
~Patojetlim~
Any luck with REI in Utah County? Thanks for that website - I'll definetely give it a looksee.
Ronnie,
I agree with pat for the most part.
I do L/O acquisitions of property and this certainly sounds like an L/O to me.
This property owner has given you all the signs that he is ready to close this deal with you, including your right to lease the property, or any portion thereof, at your sole discretion during the term of your agreement with him.
Sounds to me like he's looking for a little "U Haul" money to close the deal. Remember, you're agreeing to take the property at its value today, not when your TB buys the property down the road.
The "Due On Sale" clause is a risk that I, and other investors, will take if the deal is done properly. Good Luck.
Dave
[addsig]
Hi Ronnie,
I see a sub2 possibility here. From my limited experience, i've spoken with desperate owners and they frown at a sub2 deal. If someone else gives them a better deal, you can bet they'll take the other option. But read this thread and i think it'll help
http://www.thecreativeinvestor.com/ViewTopic29692-34.html
BTW, I think your area has one of the best REI opps. Go get em'!
Pat~
For some reason, I was getting the idea that a Sub2 would be better. Why would a homeowner frown on a sub2? To me, a sub2 is more ideal for the Seller becaue it releases them from the mortgage responsibility (if I don't pay, they can sue me). And the Sub2 is also more ideal for me because it gives me more control. Are you saying that for this particular deal, I should pitch a LO instead of a Sub2? I read the thread that you linked and got a lot of helpful info. Thank you so much
DealFinder,
Actually, the seller is not wanting any UHaul money...he just wants out of the loan! As for the Due On Sale Clause, are there any suggestions you have as to how to make the deal safe on my end? Thanks in advance!
Hi Ronnie,
Just my thoughts, of course...
L/O - You make the monthly payments to the homeowner who may or may not pay the mortgage co. If he doesn't pay, the mortgage co. will foreclose and you loose.
Sub2 - You make the payments directly to the mortgage co. and have more control. If you don't pay, then the mortgage co. sues the homeowner not you. However, you will still loose the home to foreclosure.
I choose Sub2 so I control both the property and the mortgage.
To avoid the Due On Sale Clause, simply have the homeowner Quit Claim Deed the property into a Land Trust and have him assign the Beneficial Interest to you. The Land Trust is a private agreement and the Beneficiary is the owner of the property. It also helps to name the Land Trust using either the homeowners name or the actual property address. ie Smith Home Trust or 123 Main Street Trust. Of course, see your RE atty for details. :-D
lmajProp~
Great reply! I will definetely ask the homeowner to quit claim deed the home to me. I meet w/ homeowner on Friday so I have plenty time to draft up my contracts. So just to clarify things, I would:
1- Have seller quit claim deed
2- Set up land trust
3- state in contracts that I can sublease
4- when I do sublease, collect 'option' money...from what I've gathered in this forum and from my readings, if the tenant ends up not buying, great! I keep the option money and start all over again, right?
quick question: if tenant doesn't pay, what time frame do I have to evict them so that I can get another tenant in the home?
It is different state by state.
You can also start looking for t/b...since it looks like you will L/O soon.
Ronnie,
Switch 1 & 2... Set up the Land Trust first with you as the beneficiary, then the homeowner Quit Claims to the Trust.
Using the Sub2 method, you won't be sub-leasing. You will own the property via the Trust & Deed. You will have complete control to Rent, Lease w/Option or Sell.
Check with your Atty regarding State specific contracts/docs. Florida is very landlord friendly and Option Money is given as consideration for the Option regardless if the Option is excercised or not.
Furthermore, (in my county) if the tenant doesn't pay according to the lease and I follow the proper eviction procedures (ie. 3 Day Notice), I can obtain the Writ of Possession within 3 weeks.
Cheers
ImajProp~
Your post was great help as was the posts from the rest of you in this thread. I can't believe professionals like you folks are willing to take the time to help newbies as myself. TCI ROCKS!
How do I go about setting up a land trust? I've been unsuccessful in finding that info in here. (I've been reading thru the forums for the past 2 hours...I'm hooked!)
A RE attorney is one of the key members of your team of professionals. A knowledgeable attorney in RE transactions should have no trouble providing you with Land Trust documents that are State specific.
Try searching for vendors that are members in your local Real Estate Investors Association.
larryhatch said "1099 for 30,000 come tax time. dont now the details on why, but something to ponder?"
It's call debt forgiveness. they "wrote off" the abount of the discount in the ss. Some has to "pay" for this to make the books balance.
ImajProp~
Are RE Attorney's expensive? What's the average price they charge for something like this? Once again, thank you so much for your much needed help!
Hi Ronnie,
Those are some awesome posts here! Definitely a Sub2 is great if the owner doesn't mind keeping the mortgage in his name and taking the risk that you'll always stay current on the mortgage. It's his credit that's on the line! That's why some are not willing to do sub2 if they understand their risks. But by all means, a motivated seller is always a lot easier to persuade as long as you're honest and upfront with you on what you'll do and what his risks are.
What i do with concerned sellers is I'll use an escrow company to handle the payment and provide updates to both seller and me monthly once mortgage is paid. This provides assurance to sellers.
As for RE lawyers, the best thing is to pre-qualify them by calling each one of them in your phone directory and asking some questions such as:
1) Do you own rental property?
2) How many closings do you do per year?
3) What kind of creative real estate transactions have you done before?
4) Do you do evictions? Foreclosures? Zoning board appeals? Condo conversions?
5) Can you explain to me the following: lease/option, wrap, installment land contract, discount mortgage, etc.?
(Questions courtesy of Bill Bronchick)
Get a feel for the experience and personality of the attorney. A good attorney on your side is worth his/her weight in gold. Initial consultation should be free. Find out who you want on your team and be willing to pay them well, esp. if they can possibly refer pre-foreclosures clients to you.
I believe a title company can help you setup a land trust.
Hope this helps.
Patrick
Patrick~
Hello again, my fellow Utahn! Yes, I agree - there are some awesome and very informative posts here.
Thanks for the heads up on the RE Attorney. I've already started calling around and I'm getting a good feel as to who I should use. As for the Escrow co., I was pondering that. It seems to me to be more professional for the seller to see that I'm using an Escrow co. therefore reducing his concern.
I was reading the Sub2 Forum forever and it's persuaded me to purchase John Locke's manual. I hope it helps me in my future Sub2's.
I had a question to ask you but can't think of it right now....Hmmm...I'll have to get back to you on that.
Thanks for all your help!
Quote:
On 2004-06-29 16:32, ronnie1679 wrote:
Also, what's the likelihood of the bank accepting a short sale since the home isn't in foreclosure? Is stating that the homeowner 'will' go into foreclosure good or not?
Thanks in advance (again)!
No the homeowner must be in default for the bank to accept a short sale
Madame-
Thanks for clearing that up for me...I should've known the answer already but I just wanted to double check with the professionals. Cheers 2 You
Quote:
On 2004-06-29 18:43, arytkatz wrote:
Ronnie:
I'm no short sale expert, but I have to question why the bank would even entertain a short sale when the loan is current (is it current, by the way?). This doesn't sound like a short sale opportunity here.
My understanding on short sales is that a bank will consider short saling a loan where the borrower is behind on payments, and has no intention or ability to make up those payments and is looking to sell to get out, or if the bank has already begun foreclosure proceedings against the borrower.
In a short sale, an investor comes in with an offer to buy the property at a discount (using a purchase and sale contract with the homeowner) and then negotiates with the bank to accept a lower payoff. Read up on short sales here on the web site to find out more.
Read up also on L/O and sub2 on the site, but here's a quick description of sub2:
- Seller deeds property to you, but keeps original mortgage in their name.
- Now that you have deed, you own and control the property, which means you can do what you want with it (sell it, rent it out, etc.).
- Your purchase agreement with the seller states that you are taking the property "subject to the existing mortgage" (hence the name of the technique Subject To). Of course you would spell out all the details of that mortgage so that everyone is clear on responsibilities.
- When your buyer refinances or buys the property, you pay off the original mortgage and keep the difference.
Differences between sub2 and L/O (just my opinion: both methods are certainly valid investment strategies):
- Control of property: L/O gives you less control: if the owner gets into financial trouble and has judgements against him, they can go against the property he owns, including your house (with your tenants or buyers in it).
With Sub2, you own the property, so future money troubles from your seller won't attach to the property.
Advantage: Sub2
- Being a landlord vs. being a seller: if you lease/option, you're more likely to get renter-types who MAY buy (exercise their option), but may not. You are now in a position of landlording that property, with all its responsibilities and potentials headaches. Just be sure you are aware of what property management entails and ythat you work the monthly numbers carefully to make sure you'll get positive cashflow.
In Sub2, you can certainly elect to rent out the property, but you could also elect to sell it, either outright for quicker cash or over time (like on contract for deed).
The advantage of both of these strategies is that you are getting BUYERS, who a) typically take better care of the property, and b) are responsible for all maintenance of the property while they're in it (no calls in the middle of the night for a busted toilet...).
Hope this helps.
Andy
would the sub2 scenario trigger the due on sale clause in most mortgages?
kevin
<font size=-1>[ Edited by arytkatz on Date 06/29/2004 ]</font>