Potential Deal, Input Please

My plan is to then sell the property on a wrap for $225,000 (10.1% cap rate), require 20% down ($45,000), and to carry the balance at 9.0% (20 years).

My question is, does anyone see a better way of structuring this deal? Devil's advocates are welcome.

Edited: 06/26/2010 at 08:44AM

Loc R., Individual/Private Note Buyer
E-Mail: locatelli.rao@gmail.com
Website: http://www.lrprivatenotebuyer.com
I buy individual notes - all states, shapes & sizes.

Wayne Neal

Real Estate Investor · Phoenix, Arizona

35 posts
128 Influence

Icon_minipost Jun 27 '09, 12:32 PM

My first question would be do you already have a buyer lined up? The deal is structured pretty well from your end, but not so great to attract a buyer, even with 80% seller financing. However, if you DO have a buyer lined up that will do the deal this way, this is a pretty good structure for you.

45K is a lot to put down for a property that's going to cashflow $273/mo. Your buyer ends up with a 7.3% cash-on-cash return, and that's nothing to get excited about.

Maybe you should look for a way to increase the buyer's ROI so as to make the deal more appealing to them...lower interest rate, perhaps?

Just a thought.

Edited: 06/26/2010 at 08:46AM

Craig Grella

Commercial Real Estate Broker · Nashville, Tennessee

151 posts
981 Influence
5 Awards

Icon_minipost Jun 27 '09, 02:41 PM

Most buyers who can afford the 20% cash down can get better financing than 9%.
You also wont need to wrap anything. You're buying the property all cash and it will be free and clear. You're then offering it to a seller who presumably can't or doesn't want to mess with bank qualifying. Therefore you're the only lien. No wrap. Just make sure you work out a good agreement with your investor spelling out who gets what share of the profit and who covers what share of the expenses.

Edited: 06/26/2010 at 08:46AM

Dory Peters

Real Estate Investor · dc, Washington D.C.

393 posts
1985 Influence
3 Awards

Icon_minipost Jun 29 '09, 07:08 PM

Actually, I believe I do know of a better way to do this deal. If you two were my partners, then I'd pitch something similar to the following. (Please note that I underlined the proposed changes.)

buy side of transaction:
purchase price: 150K cash (as before)
your partner supplies 70% of the equity, and gets 70% of upside
you supply 30% of the equity (as before)

sell side of transaction:
selling price: 225K (as before)
down payment (5%): 11.25K
land contract for 95% (213.75K) at 7% APR, amortized for 30 years, with a 5-year balloon
escrow the title, and hold it deed in lieu
sell that note for 80% of its value

This way you won't have to wait 20--or even 5--years to pay off your partner, and you both will get paid much sooner. Plus, after your partner runs the numbers, s/he will realize that s/he will earn more (ie a higher IRR) via the upside than the interest over 5 years (due to selling the discounted note immediately).

Edited: 06/26/2010 at 08:47AM by Dory Peters

Loc R.

Note Investor · Pasadena, California

635 posts
5979 Influence
11 Awards

Icon_minipost Jun 29 '09, 07:54 PM

Dory,

Thank you for the input.

So...if I'm looking at it correctly...

Down payment of $11,250
Sell land contract note with face value of $213,750 for 80% ($171,000)?

So that would be $182,250 ($32,250 profit before leaks such as fees, etc.)?

I'm assuming that there's a year of seasoning involved here? Without seasoning I'm guessing that I'm going to be looking at offers of 70 cents on the dollar, if not less.

Edited: 06/26/2010 at 08:47AM

Loc R., Individual/Private Note Buyer
E-Mail: locatelli.rao@gmail.com
Website: http://www.lrprivatenotebuyer.com
I buy individual notes - all states, shapes & sizes.

Loc R.

Note Investor · Pasadena, California

635 posts
5979 Influence
11 Awards

Icon_minipost Jun 29 '09, 07:57 PM

I'd like to study up more on this proposal; however, for this particular property, I sold the contract yesterday.

I'm sure I could have followed your proposal, but this was an out-of-state deal and I wanted to get out ASAP.

Edited: 06/26/2010 at 08:47AM

Loc R., Individual/Private Note Buyer
E-Mail: locatelli.rao@gmail.com
Website: http://www.lrprivatenotebuyer.com
I buy individual notes - all states, shapes & sizes.

Dory Peters

Real Estate Investor · dc, Washington D.C.

393 posts
1985 Influence
3 Awards

Icon_minipost Jun 29 '09, 09:21 PM

Originally posted by SolidReturns

Dory,

Thank you for the input.

So...if I'm looking at it correctly...

Down payment of $11,250
Sell land contract note with face value of $213,750 for 80% ($171,000)?

So that would be $182,250 ($32,250 profit before leaks such as fees, etc.)?

I'm assuming that there's a year of seasoning involved here? Without seasoning I'm guessing that I'm going to be looking at offers of 70 cents on the dollar, if not less.

You're forgetting a few things. Assuming that the note goes to full-term (ie 5 years), it should pay out a total of roughly $286,531. 80% of that amount is $229,224.80. Add that amount to the down-payment (11.25K). (I didn't factor in the fees, because I assumed you factored them into your purchase price.) From that sum, deduct the purchase price ($240,474.80 - $150K). Your partner will receive 70% of the result (aka the upside [$63,332.36 - .7{fees}]), and you'll receive the remaining 30% ($27,142.44 - .3{fees}).

Not too shabby, right?

Updated: 01:43AM, 06/30/2009

grrr! please ignore the fees in both upsides.

Edited: 06/26/2010 at 08:47AM by Dory Peters