Real Estate Investor · McAllen, TX · Member since 2011 · 21 posts · 8 votes
Fair warning...I'm a newbie here.
I've been meeting with two individuals in a partnership that have their own real estate investing company.
They're willing to mentor me and help me through deals as I find the time available to shadow them and watch them work.
They've taken time out of their schedule (10-15 hours thus far in the past month) to show me properties in various stages of rehabbing, staging, and have started to show me how to analyze deals.
I've come across a property where I can buy it Sub2 and do an owner financing deal on it. The property requires an initial investment of ~$30,000 with a owner finance price of $175,000. Estimated profits are $60,000 at the end of the 5-year balloon.
They've done all the work including finding the deal and will handle all of the paperwork for the Sub2. They've also found a tenant/buyer and will also handle all the paperwork through to the end.
They've given me the analysis of the deal breakdown and the assignment fee is $25,000 on top of the $30,000 for the deal. Is this fee too steep -- or is it fair?
I'm not trying to be greedy -- just seeing if I'm being taken for a ride.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
14y
This is easy. My biggest concern for you (assuming the estimate are accurate) is that you'll have trouble finding a real buyer who has $20K to put down. Now, supposedly these "mentors" have a buyer already lined up who is willing to put down $20K, correct?
In that case, I'd suggest you do one of two things to ensure that buyer is real:
1. Have the buyer put the money in escrow as a condition of your purchase. In other words, sign the lease purchase or option contract with this end-buyer before you purchase; or
2. Have your mentor's assignment fee be the $20,000 that the buyer is putting down. If for some reason they can't deliver the buyer, they forgo their assignment fee.
If these mentors are for real, they should agree to one of the two suggestions above. If not, they're probably taking you for a ride...
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
Its always good to assume you're being taken for a ride and work through the numbers to convince yourself that you're not. A $25K assignment fee is VERY steep on a $205K purchase. But you haven't given us enough details to understand the deal. Plus, you're describing a complex deal. Buy subject to, put in $30K, owner financing, five year balloon? I don't get it.
Let me put it this way. If you cannot explain the deal so we can understand it, you certainly should not make this investment. Convoluted, "trust me" deals are the hallmark of a scam. Not saying this is, this may be perfectly legitimate and a good deal for you. But you need to be able to understand every aspect of it in detail.
Investor · Statewide, MO · Member since 2011 · 813 posts · 424 votes
14y
How credible do you consider these "mentors" to be? I would have another set of totally independent eyes look at the deal and see what they think. From what I have seen, a $25,000 assignment fee seems high, based on your numbers. 25k for 15 hours of anyone's time is a good deal. Have some other investors look at the deal and see what they say. Don't give them all of the numbers. ask them what they think of it. You stand to put a lot of money in the pot on the front end. People are ALWAYS at their nicest when you're wallet is out. I'd suggest acquiring a course from ebay from one of the gurus for a few hundred bucks and crashing through it, so you have a better understanding of what you're getting into, without making your partners privy to the idea that you're sort of fact-checking them.
I'd suggest asking them to see some proof of their success, "because my wife is being standoffish with me about investing this much money" or something like that. If the deal was so hot, why are they "giving it" to you? Lots of lease/options blow up and need to be resold. If they miss the balloon date, then what?
Rehabber · Charleston, SC · Member since 2011 · 11 posts · 3 votes
14y
My concern is where the 60K profit is coming from, if you are guessing what the property will be worth in 5 years do not do this deal! If your gross rental income potential is 12K a year then it's a no-brainer assuming you can also get the money back you originally invested. As far as fees 25k is steep to me but if the deal makes sense that's what matters.
Real Estate Investor · McAllen, TX · Member since 2011 · 21 posts · 8 votes
14y
@Jon Holdman: I didn't want the first post to be inundated with numbers, but you're right.
Here are the figures:
Acquire:
- Principal left on mortage: ~$85,000
- Cost to buy: $29,250 ($20,000 to owner of property + $1,500 in light rehab + $5500 + $2,250 closing). There will be a buyer/tenant ready to move in at closing of the sub2.
Assignment fee: $25,000
Sell:
- Owner-financing sales price: $175,000 w/ $20,000 down payment from tenant/buyer.
- Monthly cash flow: $526 (P&I of 155K @ 8.5% $1191 - underlying mortgage $665) x 60 months = $31,560.
- At the end of the 5 year period, the outstanding principal due to me from the buyer/tenant = $147,722.
Total: $31,560 + $147,722 = $179,282
@Ed O: Thanks, I'll try to find some people and have them look into the numbers to see what they think. And I don't think they're "giving" it to me if their fee is $25,000!
@David Belote: The ~$60,000 in profit is not taking into account any possible appreciation in the property. I've compared comps in the area for rentals and sales and if I were to do around $9,000-12,000 in rehab in the property, I could rent it for $1,800 a month on the conservative side.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
I'll analyze the numbers in more detail when I have more time. Thanksgiving dinner awaits.
Who is paying taxes and insurance? I assume this is your end buyer, since they're not in your calculations.
This appears to be not a lease/option but rather a wrap mortgage. You have a new $155K/8.5%/30 year amortization/5 year balloon mortgage that is wrapping the existing mortgage you're taking subject to. I would run this by YOUR attorney to be sure you're not running afoul of the SAFE act.
I see how you got to the $60K profit. It should actually be just a bit more because that $85K mortgage should be paid down somewhat over the next five years. Be SURE you know the terms on that mortgage. You wouldn't want to take over a loan if its going to balloon or reset sometime soon. Be sure that loan is current.
Subject to's require disclosure, disclosure, disclosure. You want to be sure the seller is truly committed, since this mortgage remains on their credit report and is their responsibility until you pay it off.
If you commit to sell the property at $175K, the appreciation belongs to your buyer's, not you.
Have you personally verified the $175K price? Not just looked at a handful of comps you've been given, but reviewed all available comps? Cherry picking the best comps doesn't work any more. You hope is that an appraiser will not pick the worst possible comps. So be sure you know all possible comps. if the buyer's can't refinance down the road and pay you off, its going to be your house. Realistically, you will end up selling it to them for whatever it appraises for when the time comes, or the $175K, whichever is lower.
You will have a LOT of cash tied up in this property, almost $35K. $1500 is nothing for rehab, not even paint and carpets, so I suspect you will either have less (i.e., they buyers will buy as-is) or more. Subject to's being called seems pretty rare, but its not impossible. If interest rates spike, I suspect many more of these loans will get called. Since you've sold on a wrap, you can't refinance. Be sure your buyers are aware of this situation. If the loan does get called, it will be up to the buyers to refi and pay it off or else they will lose the house through no real fault of theirs. Rest assured you're getting sued by them if that happens.
This is a complex deal with a lot of risk. Not one I would want to take on, and certainly not for my first deal. With $35K to invest, I think you could do better. If you can really buy a house for $85K in your area, put in $10K for rehab and rent it for $1800 a month, just do that. You would put in about $20K for down payment, pay the rehab and you would have a simple, profitable rental.
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
14y
My concern would be the fact that they are the ones estimating the repairs and doing the paperwork.
You need your own trusted contractor to estimate the repairs. Maybe even a home inspector to make sure nothing was missed.
And I would get an attorney to look over the paperwork before I signed.
Also the title of this thread mentioned a 'mentor fee'. But I didn't think you ever elaborated on that.
This is important for the 1st deal with these guys and you being new. Once you see that they are legit (after you do 1-2 deals with them, become more experienced and verify everything with your contractor) then I'd trust them a little more.
Real Estate Investor · McAllen, TX · Member since 2011 · 21 posts · 8 votes
14y
Originally posted by Jon Holdman:
I'll analyze the numbers in more detail when I have more time. Thanksgiving dinner awaits.
Thanks! Enjoy your Thanksgiving. :)
Originally posted by Jon Holdman:
Who is paying taxes and insurance? I assume this is your end buyer, since they're not in your calculations.
Yes, the buyer. Both taxes and insurance for next year will be escrowed at the beginning of the year.
Originally posted by Jon Holdman:
This appears to be not a lease/option but rather a wrap mortgage. You have a new $155K/8.5%/30 year amortization/5 year balloon mortgage that is wrapping the existing mortgage you're taking subject to. I would run this by YOUR attorney to be sure you're not running afoul of the SAFE act.
Will do.
Originally posted by Jon Holdman:
I see how you got to the $60K profit. It should actually be just a bit more because that $85K mortgage should be paid down somewhat over the next five years. Be SURE you know the terms on that mortgage. You wouldn't want to take over a loan if its going to balloon or reset sometime soon. Be sure that loan is current.
The loan is current. I will check into the other factors ASAP.
Originally posted by Jon Holdman:
Subject to's require disclosure, disclosure, disclosure. You want to be sure the seller is truly committed, since this mortgage remains on their credit report and is their responsibility until you pay it off.
If you commit to sell the property at $175K, the appreciation belongs to your buyer's, not you.
Have you personally verified the $175K price? Not just looked at a handful of comps you've been given, but reviewed all available comps? Cherry picking the best comps doesn't work any more. You hope is that an appraiser will not pick the worst possible comps. So be sure you know all possible comps. if the buyer's can't refinance down the road and pay you off, its going to be your house. Realistically, you will end up selling it to them for whatever it appraises for when the time comes, or the $175K, whichever is lower.
I've checked comps of properties sold within 1 and 3 miles of that property. The county has the property appraised at $212,000 for tax purposes.
Originally posted by Jon Holdman:
You will have a LOT of cash tied up in this property, almost $35K. $1500 is nothing for rehab, not even paint and carpets, so I suspect you will either have less (i.e., they buyers will buy as-is) or more.
Yes, the buyer is buying it basically as-is.
Originally posted by Jon Holdman:
Subject to's being called seems pretty rare, but its not impossible. If interest rates spike, I suspect many more of these loans will get called. Since you've sold on a wrap, you can't refinance. Be sure your buyers are aware of this situation. If the loan does get called, it will be up to the buyers to refi and pay it off or else they will lose the house through no real fault of theirs. Rest assured you're getting sued by them if that happens.
Something I hadn't thought about yet. Thanks.
Originally posted by Jon Holdman:
This is a complex deal with a lot of risk. Not one I would want to take on, and certainly not for my first deal. With $35K to invest, I think you could do better. If you can really buy a house for $85K in your area, put in $10K for rehab and rent it for $1800 a month, just do that. You would put in about $20K for down payment, pay the rehab and you would have a simple, profitable rental.
I've dealt with rentals in the past for my parents and they're no cup of tea. I would REALLY like to avoid having to deal with tenants and toilets if possible.
Originally posted by Jon Holdman:
What's that $5500 for at closing?
Taxes for 2011 which haven't been paid yet and miscellaneous documentation fees.
Originally posted by Ibrahim S:
My concern would be the fact that they are the ones estimating the repairs and doing the paperwork.
That is my concern also.
Originally posted by Ibrahim S:
And I would get an attorney to look over the paperwork before I signed.
Definitely will get someone to review it.
Originally posted by Ibrahim S:
Also the title of this thread mentioned a 'mentor fee'. But I didn't think you ever elaborated on that.
Based on the replies thus far, I believe the $25,000 includes more than the usual and customary assignment fee and probably includes a "we put this deal together for you and spent some time with you so we're going to get compensated some for that" fee...the mentor fee I mentioned. ;)
Originally posted by Ibrahim S:
This is important for the 1st deal with these guys and you being new. Once you see that they are legit (after you do 1-2 deals with them, become more experienced and verify everything with your contractor) then I'd trust them a little more.
I know a handful of folks that have worked with these individuals already and nothing but good information so far. These two guys are also on the board (one is the President) of the local Real Estate club with 30-40 members. I don't think they'll blatantly rip me off, but I personally feel that a $25,000 fee is a little on the high side.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
14y
This is easy. My biggest concern for you (assuming the estimate are accurate) is that you'll have trouble finding a real buyer who has $20K to put down. Now, supposedly these "mentors" have a buyer already lined up who is willing to put down $20K, correct?
In that case, I'd suggest you do one of two things to ensure that buyer is real:
1. Have the buyer put the money in escrow as a condition of your purchase. In other words, sign the lease purchase or option contract with this end-buyer before you purchase; or
2. Have your mentor's assignment fee be the $20,000 that the buyer is putting down. If for some reason they can't deliver the buyer, they forgo their assignment fee.
If these mentors are for real, they should agree to one of the two suggestions above. If not, they're probably taking you for a ride...
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
14y
Why not just go triple net and buy a commercial property with a corporate guarantee??
No tenants,toilets,termites to be responsible for just a check in the mail.
With greater returns wanted comes greater risk no matter the structure.All depends on what margins you want.I think you can do much better with less risk and less money in the deal.
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
14y
Originally posted by J Scott:
This is easy. My biggest concern for you (assuming the estimate are accurate) is that you'll have trouble finding a real buyer who has $20K to put down. Now, supposedly these "mentors" have a buyer already lined up who is willing to put down $20K, correct?
In that case, I'd suggest you do one of two things to ensure that buyer is real:
1. Have the buyer put the money in escrow as a condition of your purchase. In other words, sign the lease purchase or option contract with this end-buyer before you purchase; or
2. Have your mentor's assignment fee be the $20,000 that the buyer is putting down. If for some reason they can't deliver the buyer, they forgo their assignment fee.
If these mentors are for real, they should agree to one of the two suggestions above. If not, they're probably taking you for a ride...
I had the same concerns. But I was under the presumption, based on statement Nick made in his first 2 posts, that this $20k option money would be given at the closing. I could be wrong.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
If this is in the county those distances might be fine. If this is a typical city lot that's 10,000 sq.ft. or so, you need to be much closer. Under 0.25 miles, 0.5 tops. In the same neighborhood, same style, same age, etc. It may be worthwhile to actually pay for an appraisal. From an appraiser YOU choose.
Tax assessments are useless for determining value.
Lease/options are really nothing more than glorified rentals. This appears to be a wrap, which is a tighter contract. However, you give up ownership, which makes dealing with non-payment MUCH more difficult. With a rental or lease/option, if they stop paying, you evict. With a wrap (i.e., you grant them a deed and they give you a mortgage or deed of trust), you must foreclose if they stop paying. In some states this can take many months, even a year. Now, of course it being a subject to you can always just stop paying. But then you're wrecking the seller's credit and probably getting the lender to foreclose, too. Lots of ways for you to end up on the losing end.
J Scott makes a really good point about the down payment money. I'd go a step further and do both transactions at once with the first one contingent on the second.
Any relationship between the seller and your mentors?
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
We had a class on subject-to deals at my local REI group a couple weeks ago. These deals might be simple for the more experienced investors, but they seam pretty complicated to me. As Jon stated, the risk of getting the loan called is low right now, but it does happen and several investors in the room during the REI group meeting had it happen to them.
So, there are a bunch of safe-gaurds you can put in place. These include things like contracts with the seller stipulating they will not contact their lender anymore after the deal (I don't think this contract puts a force field around their phone, though). Another thing that can trigger due-on-sale is when the lender verifies insurance and sees a different party on the insurance. A way to get around this is to leave the insurance in the sellers name. But you would change the inurance mailing address to your addrss and not the residence AND have the seller sign a partial power of attorney agreement over to you so you can endorse checks made out to them - that way if there is a claim on the insurance, you can cash the check. There were further discussions about setting up land trusts to create another smoke screen.
To me, it seams like a significant amount of maintenance for an owner financed property (paperwork maintencance). There appears to be a lot of things to stumble on and the guys that were doing it appeared VERY saavy.
I wonder, if this deal is so sweet, why aren't these "mentors" just doing it themselves and cutting you out of the picture? They are just really nice guys? Subject-to deals, by the way, were being discussed as an oppertunity to do a cherry picked deal with LOW capital. You are talking about a significant capital outlay, which is kind of missing the point of a subject-to deal. Why would you want to tie your money up in a strategy that is structured so you don't have to tie your money up?
I agree with most other comments that you could probably do better. Better in regards to a simpler deal for which you are less dependent on others. With the kind of capital you are working with, you could do a flip and see faster profits than 5 years.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
14y
Regarding "I wonder, if this deal is so sweet, why aren't these "mentors" just doing it themselves and cutting you out of the picture? They are just really nice guys?" They are getting $25,000. Sounds like business to me, not a "gift" or them being nice.
This deal seems complex and has lots of room for problems. For a first deal, I would think a simple deal that has substantially fewer deatils is more appropriate. Mentors paid $25,000 shouldn't put you in a deal that doesn't fit your novice investment experience, IMO. Same logic as other "professionals" who should only pitch investments appropriate for their clients tolerance and experience....
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
Originally posted by Chris Martin:
Regarding "I wonder, if this deal is so sweet, why aren't these "mentors" just doing it themselves and cutting you out of the picture? They are just really nice guys?" They are getting $25,000. Sounds like business to me, not a "gift" or them being nice.
True, but they are also walking away from (apparently) $60K.
Real Estate Investor · McAllen, TX · Member since 2011 · 21 posts · 8 votes
14y
Originally posted by Brian Hoyt:
Originally posted by Chris Martin:
Regarding "I wonder, if this deal is so sweet, why aren't these "mentors" just doing it themselves and cutting you out of the picture? They are just really nice guys?" They are getting $25,000. Sounds like business to me, not a "gift" or them being nice.
True, but they are also walking away from (apparently) $60K.
Just a quick reply while I read through the other posts in detail, but these two are still building capital and don't want to tie up money in a deal that for that time period.
And one of the main reasons I'm considering this deal is because I work around 60 hours a week and unfortunately, at this juncture in my career, cannot set aside time to play a more active role in real estate (ie: wholesaling, looking for buyer/tenants, fix & flip).
I'd consider myself a newbie investor looking for somewhat of a more passive role while I learn the ropes. I just don't want to bite off more than I have time to chew.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
That $60K, though, comes in the form of payments made over five years ($526 a month) followed by a big payoff if the buyer's are able to refi (about $60K). This requires an initial cash outlay of about $35K, mostly in the form of the assignment fee. There is a non-trivial risk of the deal going south.
OTOH, the mentors stand to make $25K right now with essential zero risk.
On the thrid hand, the mentors could take this deal themselves for an initial outlay of about $10K. They could pocket the $526 a month, $6312 a year. That's a 60% return on their $10K. In five years, they pocket $60K. There are still risks, but they're considerably less. Even if the loan is called after only a year, they would have less than $4K still in the deal, and if it goes south after two years, there is no loss at all.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
Saw Nick replied while I was typing.
Originally posted by Nick Q.:
Just a quick reply while I read through the other posts in detail, but these two are still building capital and don't want to tie up money in a deal that for that time period.
For them, the outlay would be minimal. They're getting $20K from the buyer and pass that along to the seller. The $5500 in taxes probably isn't due just yet. Tax due dates vary widely, but in some areas (like here), they're aren't due until next spring or early summer. They certainly aren't due at closing. So, the actual cash to close this deal is only a few grand.
Don't bet on this being as passive as you might hope. Real Estate just isn't a passive investment.
Real Estate Investor · McAllen, TX · Member since 2011 · 21 posts · 8 votes
14y
Originally posted by J Scott:
This is easy. My biggest concern for you (assuming the estimate are accurate) is that you'll have trouble finding a real buyer who has $20K to put down. Now, supposedly these "mentors" have a buyer already lined up who is willing to put down $20K, correct?
In that case, I'd suggest you do one of two things to ensure that buyer is real:
1. Have the buyer put the money in escrow as a condition of your purchase. In other words, sign the lease purchase or option contract with this end-buyer before you purchase; or
2. Have your mentor's assignment fee be the $20,000 that the buyer is putting down. If for some reason they can't deliver the buyer, they forgo their assignment fee.
If these mentors are for real, they should agree to one of the two suggestions above. If not, they're probably taking you for a ride...
Good point. I'm probably going to try option #2. Thanks for the idea.
Originally posted by Joel Owens:
Why not just go triple net and buy a commercial property with a corporate guarantee??
No tenants,toilets,termites to be responsible for just a check in the mail.
With greater returns wanted comes greater risk no matter the structure.All depends on what margins you want.I think you can do much better with less risk and less money in the deal.
How would I even start looking for commercial properties? I know absolutely nothing about this arena. I'll send you a PM with a few questions if you don't mind.
Originally posted by Jon Holdman:
Any relationship between the seller and your mentors?
Not that I know of.
Originally posted by Jamie Gaymon:
Is the 20K that you're paying to the seller being paid upfront or after the sale to the tenant buyer?
The closing of the Sub2 and the sale to the tenant buyer is practically simultaneous since there's a buyer lined up already.
Real Estate Investor · Somerdale, NJ · Member since 2008 · 42 posts · 30 votes
14y
Is the 20K that you're paying to the seller being paid upfront or after the sale to the tenant buyer?
The closing of the Sub2 and the sale to the tenant buyer is practically simultaneous since there's a buyer lined up already.
No, I understand how a simultaneous close works, but here's where my question stems from.
Your seller is getting 20K UP FRONT. Are you paying him 20K to move out, or 20K for the privilege of buying his house sub2? Because my understanding of the optimal usage of sub2 as a purchase strategy was to avoid having to put up a ton of money upfront, and because you have a seller who you might have a concern about getting into lien trouble if you had been considering them for a lease option.
I guess a better question would be, what's going to happen to this house if you don't purchase it sub2? Why is he motivated to sell you his house sub2?
Unless there's some extenuating circumstances, in the current market we live in, I just think you could find equally good sub2 deals out there that would require you to put up considerably less upfront.
The way this deal is structured doesn't seem to make a whole lot of sense. I'm a newbie to, so I might be looking at it wrong, but it seems like everyone is positioned to win on this deal right now but YOU. Which is fine, but how involved are you in screening your tenant buyer to know that he's going to be able to qualify for a mortgage at any point in the future?
To me, this just seems like a far too complex transaction for a newbie with a goal of being somewhat hands off, with mentors that he's not really sure about to take on. All of the variables that will cause you to realize your profit seem to be in the hands of the mentors that you're not sure you believe in?
if anyone can explain it differently, I'd love to hear it, but that's what I'm seeing.
