Creating a note to sell my house
Hello,
I'm about to close escrow on a situation where I plan on creating a seller carry back note and then immediately selling the note after closing. I would appreciate feedback and opinions on if this was smart or a little crazy. Here are the details:
(My background is a real estate broker and currently doing mainly fix and flips)
In May of this year an old 1000sq. ft. fixer house on a nice 1.5 acre lot came on the market being sold by executor of estate. Listed for $125,000. I offered immediately and since there were no other offers I got under contract for $121,000 cash with a quick closing. The thing that was very interesting to me was that of the 1.5 acres, there were two APN's, one was the fixer on 1 acre and then a separate, flat build able .5 acre lot. I knew instinctively that the fixer house on 1 acre was essentially worth the same price even without the separate .5 acre lot. I figured that the separate lot could sell for $40,000 pretty realistically to a builder to build a spec home. It's an area of decent older homes and a new 1500 sq. ft. home would sell for $260,000. Also, I checked with city planning and they confirmed that the 1 acre lot with the house could easily be split into 2 half acre lots, creating another building lot with about $5,000 in survey and permit fees to create the lot. That lot would also be worth about $40,000. So I was potentially sitting on 3 properties that could each be conveyed separately.
After inspections and finding out several things that were discouraging about the house (needed roof, no crawlspace under the house, several un-permitted add-ons, etc) I almost thought about backing out. I didn't feel it would be worth it to put money into the house, but I also felt there was too much risk to tear down the house and build 3 spec homes there- didn't want a long term project on this and honestly not many people are building specs around here right now as there isn't much money in them and permit fees are astronomical. After much thought I decided I had several exit strategies I could employ so I went ahead and closed on the deal.
My first instinct was to just put everything on the market immediately after I closed but list the vacant lot separately from the house to isolate the value on each of the 2 properties. I listed the house as a fixer on 1 acre with potential of being split for $119,000- essentially what I had just paid for the whole package. I listed the vacant land for $59,000. I started to get excited about the prospect of buying the package for the same price as selling just the house for, essentially creating no taxable gain but suddenly owning a $40k lot free and clear and just holding that long-term. Out of the gate I actually got several offers for around $100,000 for the house in the first week, but they were both owner-carry offers. Then I accepted another owner-carry offer for $129,000 which was $10,000 over asking. This is where it gets complicated. The buyer is also a real estate broker in a nearby county and his wife is getting a job transfer to Redding so they want to occupy this as their primary and fix the house up. He pushed pretty hard to get the property and really seemed to want it. I imagine he plans on splitting the .5 acre off eventually or at least sees the value-add play in that. This buyer has been active with buying and selling in the last few years and I researched him, checked credit, did my homework and he appeared to be clean. I told him from the beginning that I did not want a long term carry and preferred to cash-out. Then he brought up his friend/associate who has bought several notes from him in the past and he suggested that if we engineered the deal a certain way then basically I could be cashed out soon after our closing and net the $119,000 I was trying to net. Our deal is like this:
$129,000 purchase price. He is paying all closing costs and there is no commission since he is a broker also.
I'll get paid out $15,000 at closing which is his down payment
I'm carrying a 1st for $104,000 at 9% interest-only for 5 years with no pre-pay penalty.
I'm carrying a 2nd for $10,000 at 7% interest-only due in 1 year (he has his primary home on the market and will pay off this $10,000 2nd with those proceeds)
After 30 days from closing then his note buyer will buy the 1st at 90% of face value for $93,600.
Unless this guy is running a big scam and unless this note-buyer who I vetted and talked with is also scamming me, it seems legit. Since I really don't deal with notes ever, I am just curious to know if any other note-buyers would purchase this note or if this would be too risky if there wasn't the established relationship that these two already have. I probably provided too many details, but thanks for hanging with me through the scenario. I'd love to hear any thoughts or comments or how I could have structured it better. Thanks!