Creative Financing Question From A Newbie
I have very recently started REI. I moved into a new home over the summer and rented my existing home to create my first rental property. I have recently run across another property that I want to buy as my second rental property. I'll give some background, then get to my question/request for advice. The tax roll value of this house is 127k. Houses in this area are going for tax roll or slightly higher. House needs work... some foundation repair, new fence, some wood replacement, painting, and other minor repairs. I estimate 10k in repairs tops. House is owned by my friend who needs out quickly and has already moved out of state. She will sell it to me for 78k. I want to do the repairs and keep it as a rental. Should be positive cash flow, given all my research.
Here's the problem. I thought I could buy this with my own financing. I have good credit, though debt ratio is a tad high. Talked to my mortgage loan contact initially, they expected getting 6-ish % on the loan. Now, however, for the loans with decent interest rates that will accept signed leases on the property to not count the mortgage payment as debt, they are requiring that I have a 2 year history as a landlord (given the now multiple properties), which I don't, and I also have a high debt ratio. Other loans will not accept the leases to cancel out the rental property mortgages, so obviously counting those mortgages puts my debt ratio out of the ballpark. Seems as if the combination of the short history as a landlord and the higher debt ratio makes me high risk. So... my mortgage loan person is "looking on the B side", which I don't like the sound of at all. Though she still thinks we can get under 8.5.
Here's where the question comes in. Though I've read a lot (and am reading more) about owner financing and creative financing, I don't have a handle on what my options are here or how it would work. I know I could work out any fair deal with my friend (the owner) that gets her the immediate cash she needs (6k) and removes her from having to make the mortgage pymts. She currently has a mortgage in the last year of her 5 year ARM and it's currently at 8.5%. She has bad credit, high payments ($975 on a 72k loan), has missed the last 2 pymts, and wants out quickly. She's scared of what the interest rate and payment will be next year, and has already been denied for a refi, based on credit problems.
Does anyone have any ideas for creative financing for me? Or should I just try to get whatever financing I can now, knowing I'll have to refi in a few years?
Any suggestions are welcome, or let me know if I left out any pertinent info.
Thanks!
Becky
Well first of all welcome to this board! I have a few comments for you:
1. Have you heard about buying properties "subject to" the existing mortgage? In this case you could give the seller $6k and then make up the back payments and start making the $975 payments. Only problem is that the interest rate is high and could go higher after the fixed payments are up. So while this is possible, not sure if it is smart...you'll have to decide.
2. Item two that I look at is if the seller doesn't have an advantagous loan, can he/she refinance? You've already answered this as no so now you're onto your own financing.
3. Are you saying that you CAN'T get a loan or simply can't get one that the numbers work with?
4. When you buy subject to the existing mortgages you could provide your seller a purchase agreement and hud1 so that the seller can go obtain new financing without the current mortgage affecting the DTI ratio. Maybe this could work for you here to??
I haven't tried this but I don't see why it wouldn't work.... Sell your current rental to an LLC that you set up. You set the current LLC up as you 100% owner but a trusted friend (or relative with a different last name) as the manager. You can "sell" the property subject to the existing financing to your new LLC, get your new loan, and then as the owner of the LLC you can vote yourself in as manager. You risk the "due on sale clause" in the mortgage you transfer to the LLC so you have to be willing to take that risk. Not a big deal because I suppose you can always transfer title back to your name personally if need be.
5. But without all of this creativeness, there is a way to get more loans and that is a local bank with local underwriting. If you have a good business plan you can likely get the loan.
Just some thoughts...GOOD LUCK
Hello BeckyS,
I recently joined TCI myself and continue to be an active investor for many years now. Based on the information provided, I would renegotiate with your friend regarding the terms of the contract.
First, instead of paying her 6K I would agree to 4K or lower, this way you will be able to use at least 2K to cure the mortgage(back payments). Second, I would look into purchasing the property on a sub 2 contrcat based on existing finance.
Also, somewhere in the contract should address how you will handle any future increases because of the ARM. Third, look into obtaining a loan of some sort to cover the needed repairs, and then advertise the property as a Tenant/Buyer opportunity with 5% down.
The down payment should be used to pay off your friend, remember to plan for holding cost and any unexpected expenses. This is truly a no money down deal and can be a win win situation for all parties. Good look! I hope this helps. :-D
Thank you for the great ideas so far! I am going to explore these.
myfrogger... to answer your question, it is not to the point that I can't get the loan. My mortgage person still thinks I can, it just won't be nearly as good a loan, at around 8.5% instead of the 6-ish I was hoping for. I was also looking at one of the newer option ARM loans (which include interest only options), but I don't think I can qualify for that, given the problems listed above. My mortgage person is still working on it, and hasn't given up, I'm just quickly trying to see if I have other alternatives or a backup plan.
Thanks again for the quick replies. I'm open to any and all suggestions!
Becky
You might be able to determine the structural integrity of the plaster to the lath by gently pushing on the drywall on the ceiling, if it puckers at all, you'll want to replace the ceiling - the last thing you would want is to have someone get hurt becuase the ceiling fell someday.
Here is an update,
The unit is drying out fairly well. The hardwood floor has not flattened out yet and there is discoloration on most of the first floor ceilings.
I called my insurance agent to see what they suggested and they said that the tenant is responsible in this case. They also suggested replacing any drywall that has been significantly soaked with water. This will avoid any potential black mold problems in the future.
Any feedback.
The tenant of course has asked if it is her responsiblity because she didn't know that turning off the heat might cause this problem?
Curt,
In not so many words, your insurance agent is telling you that his company will not pay a claim should you decide to file one under your landlord's policy.
In not so many words, your insurance agent is telling you that you should file a claim against your tenant's renter insurance policy.
Had the same thing happen in my rental. Tenant turned off heat and a neighbor called about water running down behind the unit. Tenant paid the $1,000 to fix pipes and other damage caused.
Yes, tenant is responsible and if there is insurance involved, better for tenant...
Wood floors will not flatten back into shape after they dry out...you will need to replace.
It appears that the tenant has no renter's insurance. I checked my lease and the language is weak on renter's insurance. The lease only "strongly recommends that tenants obtain renter's insurance and that the tenants "assume all liability for damages that can be insured by renter's insurance."
Aside from this mistake, she is a good tenant. I don't think she has the personal resources to deal with a large expense, but her family may well bail her out if necessary.
I would like some feedback from other members of the forum as to the likelyhood that I will end up footing the bill for the repairs. Several people I have talked to have said that it would be best to remove all drywall that has gotten wet to avoid an issue with mold in the future so this may get fairly expensive. If I do this it means replacing the ceilings in 3 rooms.
In the absence of renter's insurance, it is likely you will end up footing the entire bill. Talk to your insurance agent to see if your landlord policy will cover the repair costs caused by water damage from a frozen pipe.
Be aware that filing a claim will stay on your insurance record for three years, even if the company denies your claim. Don't file a claim just to see what the claims adjuster has to say; instead, only file a claim if you are reasonably sure that the claim will be paid.
Newkid,
When you say that I will end up footing the bill, do you mean that I am legally liable for the damages or that the tenant is legally liable, won't pay, and then I will get stuck with the damages?
Also, can you tell me a bit more about how the insurance thing works. I have heard about a "Clue" report, and it makes me very hesitant to even talk to my insurance agent. After 3 years, does a claim completely drop off your record for insurance. The reason I ask is that I had 4 out of 4 properties damaged by hail last year and thus had 4 claims.
Curt,
I say you will probably end up footing the bill because you are the property owner and need to get your property back into proper order quickly. Whether you get reimbursed by the tenant or your insurance company is another question altogether.
Taking the tenant to court will only get you a judgement if you prevail. A judgement does not guarantee that you will collect. Prevailing in court is not a sure thing (despite the liability clause in your lease) because (IMHO) the court is unlikely to award damages in the absence of gross negligence or malicious intent on the tenant's behalf.
Rather than taking the case to court or negotiating with your insurance company, you may have better luck doing some sort of workout with your tenant. Negotiate with the tenant to increase the rent by $50 or so per month, with the increase applied directly to the repair cost until you have full recovery.
I only caution about filing a claim if you intend to acquire more property in the near future. Because I had a (denied) claim in 2002, Allstate would not write a landlord policy for a new property I acquired this year. Their underwriting criteria prohibit a policy if there is any claim history in the previous three years.
I don't know why you are reticent about talking with your insurance agent now, since you have already had a conversation about your property damage. Talking does no harm, actually filing the claim is when the insurance system takes note. I suspect that filed claims stay on record a lot longer than three years, it is only the previous three years of claim history that counted against me.
I would think that there is wording in your lease that states that the tenant is responsible for tenant caused damage that is not normal wear and tear. It may also be in Ohio's landlord-tenant statutes. Here in CA this would be tenant's responsibility. The remaining issue is the tenant's ability to pay.