Subj 2...Understand...How To Use Promissory Note
I have a deal...Foreclosure....Seller owes $45,000.....Assessment Value...$110,000...Lots of Equity........I will be giving promissory note for equity to be paid when house is sold.....I do not wish to L/O...nor owner finance......I would like to flip this house quickly and pay the equity and move along.......I have a LLC with myself as beneficiary.......According to the figures above...What would you offer? Show me pls. what your contract would look like.
Thanks
Coiner1
I am BRAND spanking new to this...The only other number I can post is FMV is $125,000....I am asking other investors who have experience to show me their offer and contract PLEASE!
Thanks..
Well....not to be harsh, but if that's all you know, then it may be best for you to do a little more studying before doing a deal.
To begin, you do not want to rely on assessed value. You want to use comparable sales (comps). You need to know how much is in arrears and how much total is owed on the house (e.g., all mortgages). Are there any leins, judgements, etc. recorded?
What is the monthly payment now? Is that PITI?
Does the house need repairs? If so, how much?
etc.....etc.....etc.
This is all information that is needed in order to evaluate a deal. It doesn't sound like you have anywhere near enough information to begin formulating a deal.
How much of a discount off FMV are yo looking to sell the house? Is the current owner in agreement with that or does she expect that you will sell it for retail? What does your promisarry note promise?
Seller bought house.......67,000
Seller owes.........45,000
Monthly Payment...........640.00 includes taxes and ins.
Comps....Low....125,000...High.....156,000
In arrears........1300.
No liens, judgements
No repairs needed
I Would like to profit....$10,000
Promissory note would be the agreed equity after accepted offer to be paid to seller after selling house........
Why do you only want to profit 10k? With the numbers that you mention, you can come out with alot more. Since this is a motivated seller, why not try this. If the house is mortgagable, see if the owner will let you refinance the loan with you as the cosigner for 80% of the appraised value. On the low side that is 80% of 125k or 100k. You pay off the first loan and pocket the difference (or split the difference, whatever works). Whatever you sell the house for, the homeowner can pocket the difference between the refinanced mortgage amount (100k) and the selling price.
If the homeowner does not like the split, and you really want the deal, make it more profitable for them, but remember, you are helping them and you should get more than just the 10k. Everybody wins.
Don't forget that you will be responsible for the mortgage payments until the house is sold. Don't rely on them for help. They haven't made their own payments, why would they help you with yours?
In refinancing this house, what expenses will occur? Points, survey, attorney's fees....Do you have a set percentage that you use in determing these costs..........? And thanks...
Ok, so, you are working on a split funded offer....
I will set aside the very large range you have for comps (you need to get better comps)
So, first things first. How much does the seller want for her house?
Here's a line LeGrand teaches his students to ask (paraphrased):
"Ms. Seller, if I were to make up your back payments, stop the foreclosure, save your credit, pay you cash upon resell, and close quickly, what is the least you would take for the house?" (you may want to tweak this line a little bit. I just paraphrased really quickly)
[She Answers]
"Is that the best you can do?"
[She Answers]
Now if her answer is less than the maximum offer (see below) you have figured for yourself, you will know if you and her can deal.
Generally speaking, you want at least an amount no less than 20% of the property's current worth for profit. Subtract another 12% (minimum) for contigencies (holding, advertising, closing, commissions, misc., costs) and that should get you pretty close to the maximum you should offer.
For example, using $125,000 as the price for which you will sell the property and 12% for contigencies, your offer should not be any more than $85K [125K X 68% = 85K] and should be below that if you can.
Let's say she wants $80K.
Now, while taking title subject to the existing loan, you offer her a promissory note for her equity. The note should have a low (simple) or no interest rate and be in the amount of $35K--which is the difference between what is owed on the house ($45K) and $80K. Note to be due in X months/years.
Summary:
Your purchase price: $80,000
You offer the following:
take title subject to existing loan: $45,000
Promissory Note with no interest: $35,000 due within 12 months
You sell for: $125,000
You pay off underlying loan: ($45,000)
You pay off promissory note: ($35,000)
Contigencies: ($15,000)
--------------------
Your Profit: $30,000
This is just an example of how you could structure the deal. Play with the numbers depending on your market. Make sure you have the cash reserves to cover the monthly payment (6-9 months is the rule of thumb) should it not sell right away.
Good luck[ Edited by Rogue on Date 12/09/2003 ]
Thinking about it a little more, you may want to bump the contigencies up a little more to account for taxes and the arrears. I tend to be fairly conservative, but I failed to think about these items in my example above.[ Edited by Rogue on Date 12/09/2003 ]
Thank you Rogue for taking the time to teach me about this deal. and creative investing techniques in a straight forward and easy to understand manner!..........HARSH? No not all...I need investors like yourself to speak straight up.....otherwise I will pay a price............Thanks
Worf......Being inexperienced, I had not thought of cosigning a refinance......Makes perfect sense....and profit...Thanks for the enlightenment...
Sorry to butt in on the conversation but I had to ask a question about something that was said.
How does the seller let you refinance as a cosigner? With you being a new holder on the title won't you run into seasoning issues?
Quinn
While an interesting idea, I personally would stay away from co-signing.