How Is Money Made On The Back End Of The Deal?
O.K. so I am somewhat of a newbie regarding the subject to's. I keep seeing scenarios where money is being made on the back end of the deal. If you have a house that is fmv @ 200K, buyer owes 185K, you offer 1K subject to existing loan that sits at 6.5%. You get a buyer in with financing at 7.5%, with 7 - 10% down. I understand how the money is made on the front end and interim, but how is the money made on the back end? Also, what types of purchase and sales agreement forms work best for this scenario. I am in Washington State. Finally, does the transfer get recorded via a title company or do you just hold on to the agreement until sale? I know these are somewhat Newbage questions, and I appreciate all responses!
Thanks,
Andy
You sell the house at an option to buy it 220K
You pay the bank the 185K to satisfy the original mortg so there is your profit at the end.
Make sense?[ Edited by MrMike on Date 01/30/2004 ]
Axisinv,
Glad to meet you.
This link should answer many questions.
http://www.thecreativeinvestor.com/ViewTopic20031-34-26.html
John $Cash$ Locke
Ok, here goes....
The 'typical' scenario for making money on the back end comes from the sales price on the house less the sum of the underlying loan (the "subject to" financing), the $$ you paid the seller for their equity and what you get as a down payment (the DP is also profit but you are asking about the back end portion). So, for example:
FMV: $200K
Your purchase price: $176K (Sellers loan bal: $175K + Amt pd to seller for their equity: $1K)
Your sell price: $210K
Down pmt: $10K
Back end profit when your buyer refi's:
$(210-175-1-10)K = $24K
Now, a couple of points. First, you wont often get 7-10% down. Maybe 5-7% on lower price houses. Second, you dont have to sell for FMV as the actual close of sale wont be for a year or two (if sold on a contract for deed/land sales contract) and you should be able to add in some margin for market appreciation (assuming it's going up or you can make a case for it going up). You can also bump the price above FMV due to the fact that your buyer is (often) credit challenged and knows s/he needs to pay above market to play in the American Dream Game of home ownership.
I'll let someone else address your other questions.
Molotov
molotov,
Excellent point:
"You can also bump the price above FMV due to the fact that your buyer is (often) credit challenged and knows s/he needs to pay above market to play in the American Dream Game of home ownership."
This is why the interest rates vary on loans depending on a persons credit.
Just compute in the "credit challenged factor."
John $Cash$ Locke
Thank you everyone once again for the info. This site has been and continues to be absolutely amazing! I appreciate the input!
Andy