owner will carry on five homes...

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owner will carry on five homes...

Arcinio Arauz
Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes

I went for a revisit and coffee session today .After some time, her homes came up for conversation.
Here's the break down....

Five homes free and clear,
owner 82 years old/ daughter 55 years old
Income cashflow:$3025 per month
Expenses (taxes/insur): $890 per month
Current market value: $350K
Repairs: none, all homes have long term tenants and need nothing at this point

So she asked what I thought about the homes and what I planned to do if I bought them. I honestly told her I would like to keep them long term as income and for my kids in the future. I then told her what the market values were and she grimaced, stating that she would rather die versus selling them for current market price ($350K). So then I remembered reading that Jack Miller says its ok to pay more as long as the terms work out. So I presented to her that I can buy them for her asking price of 600K only if she carries paper. She asked how much I wanted to put down and I told her I had my money tied up. So said " no problem can you make balloon payments on the down".
She's willing to carry the whole package deal with nothing down. She'll get $2,070 a month for 30 years with 1.75%.
She mentioned that the interest is low and she normally would ask for 7% and that in 30 years she or her daughter won't be alive. She has no other heirs nor wants to give to any charities. She mentions a 15 year note. So I figure I would present to her again the fact that she'll collect 2k a month and every five years I can give her a 25K balloon payment for the 100k she wanted down. She liked that idea but then asked about the closing cost and 3.5% state taxes she'll pay on the sale of each home. I told her I'll go to title and get an exact amount to close and inquire on how to divert those taxes. I think if I cover the closing and work some way for her not to pay the taxes...she'll move on the deal. She is not interested in a lease option as she stated that if she sells, she wants title to transfer, get away from paying taxes and insurance and carry the paper.
We so are close to making this deal... I just need some help on the lose ends. We'll meet again soon.

What if she mentions that 7% interest rate again?

What if she mentions the " we won't be around in 30 years again"?

Is there any way to get away from her paying those taxes to the state?

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John HornerPro Member
Flipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
13y

There's an old saying, "If you wouldn't let your grandmother sign that deal, it's probably not ethical".

Ok, I totally made that up, but it's true.

Sounds like you're banking on the 82 yo passing to come out on top. What if the 55 yo takes over and wants everything to go to charity. You're out $100k and STILL HAVE NO EQUITY.

Bad deal. Bad business.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Please explain: "... you make balloon payments on the down". You sure it wasn't supposed to be additional payments along the way to cover the down?

    0Reply
  • Arcinio Arauz
    OP
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    She wants 100K as a down on the 600k.
    Four 25K balloon payments (additional) every five years. Hope that helps.

    0Reply
  • Paul Sorgi
    Real Estate Investor · Abington, MA · Member since 2011 · 356 posts · 114 votes
    13y

    30 years is a long time for an 82 yo. I also think overpaying 250k for 5 houses is a mistake.

    What is her biggest concern the total payout? or the monthly payments?

    Even your additional payments every 5 yrs is a long time for an 82 yo.

    How did you determine a market value of 350k and how did she decide it is 600k?

    Is the income of 3025 gross or net?

    I use a GRM of 8 which values the properties at 290k. So for starters 350k to me is overpriced. Second if your paying her 2070 per month and income is 3025-890=2135 Net where is your profit?

    How would you come up with the additional 25k payments?

    I assume each house would be deeded separately and I would recommend separate notes and mortgages to make it your exit strategy easier.

    But as presented I don't see a deal here.

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    I'm with Paul.
    Zero cash flow.
    IF you were buying at 100% of FMV, with 100% financing, and betting on great appreciation....maybe, just maybe.
    But no cash flow and paying 70% ABOVE FMV....hell no. What's your best case scenario....getting UP to zero equity in 6 years, 10 years, with no cash flow for repairs, vacancies, etc.?

    0Reply
  • Arcinio Arauz
    OP
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    I guess you must not see what I see....
    It's not always about getting a house for market value or below value. What's more important is the terms or condition of the deal.
    0 down,
    100% carry
    no liens free from any other set backs in great locations.
    This isn't a quick cash maker. In the long run, I hold title and like she says, she wont be around in 30 years (with no heirs). So what do you think will happen to the note or the additional 25k payments with no heirs?

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    Oh, so you're thinking she'll die before you get half way through and you won't have make any more payments? Not the strategy I would use, but different strokes...

    0Reply
  • Charles Morgan
    Investor · El Paso/Socorro, TX · Member since 2012 · 365 posts · 75 votes
    13y

    Kind of like a reverse mortgage but no chance of Heirs being able to redeem it? Make sure you get a clause that cancels the debt on death of seller. Don't want the 55 year old daughter to take it.
    *Disclaimer* Of course I am not recommending any course of action or inaction on this.

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  • John HornerPro Member
    Flipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
    13y

    There's an old saying, "If you wouldn't let your grandmother sign that deal, it's probably not ethical".

    Ok, I totally made that up, but it's true.

    Sounds like you're banking on the 82 yo passing to come out on top. What if the 55 yo takes over and wants everything to go to charity. You're out $100k and STILL HAVE NO EQUITY.

    Bad deal. Bad business.

    2Reply
  • Gil Lieblich
    Real Estate Investor · North Brunswick, NJ · Member since 2012 · 85 posts · 8 votes
    13y

    Not sure if i missed something but why won't the daughter be a live in 30 yrs ? If th emom is with it enough to talk terms at 82 isnt fair to assume the daughter will be around in 30yrs?

    1Reply
  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    I don't mean to sound confrontational, but this is a horrible investment and a formula for failure!

    I can get owner financing for just about any grossly overpriced bad deal out there too. It is important that you don't lose sight of whether it is an investment or a future failure.

    I haven't even penciled out income versus expenses. It costs more to operate a property than just taxes and insurance. Your income won't even cover principal/interest/taxes/insurance. Who fixes the property? What about management costs?

    If you have to come up with even one $ 25,000 payment on the down payment, there is no upside on this deal that I can see. Since this property bleeds cash every month, you will need to make up the short fall every month from somewhere else AND the payments toward the down payment.

    Regarding the "hope she will die before I finish paying her" part of the deal, that is risky and certainly unethical and gives the rest of us trying to make profitable investments that are fair, reasonable, and above board a black eye.

    I am all for a great deal from a motivated seller. You may be thinking (dreaming?) that you will have a terrific deal if she dies soon after the deal is made. If she is negotiating this hard now for nothing, you are being very short-sighted. My guess is that she is much smarter than you have given her credit for. You may think you are ready to grab a good deal, but I think YOU are the one sitting clearly in her cross hairs.

    I also think that you are in for a rude awakening when she does pass on when the daughter and/or her fiduciary start looking at all of her assets (the note/mortgage will be HER asset) and start wondering where the money is. I am not an attorney, but I would be willing to bet that the executor of her estate will be very diligent in making sure that the estate is settled and that all assets are properly handled, even if that means foreclosing.

    Again, I don't mean to sound confrontational, but the little man on my shoulder is screaming "run away" for your sake. This deal doesn't make any sense at all to me. Interest rate means nothing, you are grossly overpaying for the properties and I think that YOU are the prey in this deal. Be very careful.

    2Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    13y

    So let's get back to the terms here and away from the ethics which others might have taken something the wrong way but wasn't what you intended.

    Any buy and holder that says they will be holding for 10 years may believe it but you can't bank on it. What if you see a huge run up over the next 3 years feel the bubble coming and want to sell and hold your cash to buy cheap RE after the decline (replay of '07-'12) if you're still upside down that isn't happening.

    The ability to "overpay" for better terms would (to me) be overpaying 10-15% with almost 100% financing, as long as you still cash flow. If you do this deal the way you've described you will literally have NO exit strategy other than holding for long enough for appreciation/debt pay down to rescue you. So at 6% average appreciation and your stated terms for the loan it would be 6-7 years before the two balances would be back where you could sell/refi/do something else. And that entire time you would need to be coming out of pocket for any maintenance or repairs on the homes since you would have 0 cash flow.

    Me personally I think this lady may be the better negotiator. She definitely will not get her 600K anytime soon but she has you convinced to pay her that. I'd walk away and keep the lead warm until she comes to grips with what she has to do to sell these.

    If you want to make her a terms offer I'd make her a 400K 4.5% offer now you will be break on the balances/value at year 2 and be able to sell or refi at year 3. The payment to her is the same per month but she got the higher interest she wanted at the same time. If during that time you had any rent increases you'll have a little cashflow and by the time year 5 rolls around could sell and pay everything off and still have a good chunk of money to do something with.

    Me personally though it still won't CF and unless you have the financials to appreciation bank and put money into it every month and still meet your obligations I wouldn't do it.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Those balloon payments are a killer, no deal there, IMO.

    Next, buying on just terms and not to the value of the property can get you in trouble, search here on BP for "life events".

    No one dies without an heir, no one. If you die without a will and have no family, an administrator is appointed to dispose of assets to pay debts, unsold assets then go the state.

    That daughter could will her estate to local humane society who would then probably get an attorney, have that note sold and you'd still be paying it until it's paid off or someone foreclosed on you.

    She could die any day, I doubt she'd go for any termination upon death and besides, you'd owe uncle sam for the forgiveness of debt, that could be next year.

    Let's not get creative, negotiate terms without balloon payments as those are default opportunities for her, she's been around the block a few times I'm sure! :)

    0Reply
  • Arcinio Arauz
    OP
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    Yes indeed, she's not your average run of the mill old lady. She has 30 other properties has been doing RE for 50 years. She doesn't need hearing aids, no eyeglasses, no medications, no cane to walk with and no shaking. She's been smoking since she was 10, smokes a pack a day, builds fences, spits on the ground, collects rents in person and calls the shots. For those of you that mentioned "unethical"...if anything she may be taking advantage of me! I would rather suffer affliction myself versus doing ill harm to the old lady. Also, the daughter was with us at the table to discuss the deal. I was also the one that recommended that they put their properties in a trust versus having them in her name for asset protection estate planning. So no, I'm not banking or hoping for anyone to die. It was just something that I thought of as a "what if".
    Worst case scenario: I get 5 properties with 0 down, less than 2% on a 30 year note and no cash flow and tenants basically pay for my note.
    I'm not looking for current cashflow as some of you...that may be all you think of. I think of the future; When I'm 62 years old I own 5 more properties by allowing tenants to pay the note for me and I never invested a single dollar (save some repairs). As for maintenance: ALL her homes are a +10, new roof, new AC units, new paint, new flooring and ect. I won't need to do anything for a long while, especially since she also has good current long term tenants.

    But yes the balloon payments are something to reconsider.

    0Reply
  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y
    Originally posted by Arcinio Arauz:
    Yes indeed, she's not your average run of the mill old lady. She has 30 other properties has been doing RE for 50 years. She doesn't need hearing aids, no eyeglasses, no medications, no cane to walk with and no shaking. She's been smoking since she was 10, smokes a pack a day, builds fences, spits on the ground, collects rents in person and calls the shots. For those of you that mentioned "unethical"...if anything she may be taking advantage of me! I would rather suffer affliction myself versus doing ill harm to the old lady. Also, the daughter was with us at the table to discuss the deal. I was also the one that recommended that they put their properties in a trust versus having them in her name for asset protection estate planning. So no, I'm not banking or hoping for anyone to die. It was just something that I thought of as a "what if".
    Worst case scenario: I get 5 properties with 0 down, less than 2% on a 30 year note and no cash flow and tenants basically pay for my note.
    I'm not looking for current cashflow as some of you...that may be all you think of. I think of the future; When I'm 62 years old I own 5 more properties by allowing tenants to pay the note for me and I never invested a single dollar (save some repairs). As for maintenance: ALL her homes are a +10, new roof, new AC units, new paint, new flooring and ect. I won't need to do anything for a long while, especially since she also has good current long term tenants.

    But yes the balloon payments are something to reconsider.

    After thinking about my first response, I'm probably more concerned about YOU than I am HER. Your recent response confirmed my suspicion that this wasn't her first rodeo and reaffirms my advice to "be careful".

    I, too, like the thought of having tenants pay down my mortgages so I have something several tomorrow's from now. I am blessed with living in an area that I can have my cake and eat it too. In my area, we don't see much for appreciation, so positive cash flow is critical. Also, in my area, due to lack of appreciation, buying a property that "breaks even" is risky, for that same reason.

    I LOVE to do no money down deals along with creative financing. I rarely, if ever, do anything else. One lesson that I learned, first hand and very expensively, is to ALWAYS, ALWAYS, ALWAYS have more than one exit plan when you buy. I had a seasoned investor friend/hard money lender explain it to me this way - if you go to cross the street tomorrow and get hit by a truck, what will your family do with what is left of the deals you are involved in? That sucks to think about, but it is true, and real. You may plan on running through the terms of the deal, but if "life" changes tomorrow, ALWAYS have a secondary escape route. If not for you, then for those you care about.

    I am a buy/hold investor. The deals I go after aggressively have multiple ways to win. I gain equity quickly either by buying at a discount or seeing a way to increase property value in the first year or two for more than what it costs me to raise the value. I negotiate decent financing in the beginning OR I buy right so that I can refinance out of expensive debt within the first couple years. I also always want to see strong positive cash flow so if I (or my family should something happen to me) can simply sit on the property if it won't sell and let it carry itself without worry of unforeseen expenses or changes in occupancy, etc.

    Be careful, sleep on the deal a few nights, and don't talk yourself into a bad deal. There may be one waiting to happen next week that you don't even know about yet.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    The grimacing and the line "I'd rather die than......" is old-school negotiating and pre-dates Jack Miller seminars. Taking "balloon payments on the down" on a massively over-valued note is very smart on her part. IMO, your seller totally knows what she is doing and you are her next victim. She'll get the same monthly net she got as a landlord and you'll be doing all the work.

    It sounds like you want to buy 5 houses at $120K each that rent for about $600 each. Zero down and even zero interest wouldn't make that a good deal. Putting the no cash flow issue aside, most properties in CA that rent for $600/mo come with a difficult tenant pool. It would be different if it was a 5-plex. But this deal is 5 roofs, 5 mainlines, 5 paint jobs for properties that are probably enduring the max wear and tear. You'll have negative cash flow in any year with a serious repair. Negative means cash out of pocket. Do you have cash?

    I'm not sure what you think happens to the note when the seller dies. Until you pay it off, the properties are encumbered by a $600K lien. The note doesn't go away with or without heirs, with or without a probate.

    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    One more thing: there is no automatic state tax on the sale of CA real estate. The 3.3% is a withholding, not a tax. The law requires that the buyer withhold these funds and submit them to the state. There are certain exemptions from the withholding. The seller doesn't owe any taxes until she files. The withholding is refunded if she doesn't owe it, just like any other withholding. I suggest that you don't advise or make suggestions to sellers about any tax matters, especially if you don't know what you are talking about.

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  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    13y

    I can already see the outcome of this story.....you'll default on the first balloon and she'll foreclose and take the properties back.

    You'll lose money every year on them because you haven't factored any of the expenses that go into running them above your monthly payment and the taxes and insurance (vacancy, management, repairs, capital expenses).

    Yes, you could pay above market rate if you're getting 100% financing and getting below market rate financing. I can't think of any time when it would be appropriate to pay double what something is worth just because someone will give you a loan on it.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y
    Originally posted by Patrick L.:
    I can already see the outcome of this story.....you'll default on the first balloon and she'll foreclose and take the properties back.

    You'll lose money every year on them because you haven't factored any of the expenses that go into running them above your monthly payment and the taxes and insurance (vacancy, management, repairs, capital expenses).

    Yes, you could pay above market rate if you're getting 100% financing and getting below market rate financing. I can't think of any time when it would be appropriate to pay double what something is worth just because someone will give you a loan on it.

    I deleted the part of my response where I said Arcinio would default on the first balloon. After he realized that the deal was bad. After the seller comes out ahead having had a 5 year break from landlording but with the same monthly net. I thought we had given him enough objective info without hitting him over the head with likely scenario that he will default. I'm glad somebody said it!

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  • Arcinio Arauz
    OP
    Wholesaler · Atwater, CA · Member since 2013 · 161 posts · 27 votes
    13y

    This is the reason I post here...to get feedback. Your feedback has always been constant with what I was already thinking but just wanted to see if there any other possible solutions.
    Yes she wants way too much for her homes, yes the balloon payments are crazy and her rental income versus expenses is out of wack also. So far nobody has come up with alternatives though. I wanted to play dumb but I'm really not. I was born at night but not last night. I through this out to see if anyone can come up with a better plan. One positive aspect is that the owner is willing to listen and open to options that work for both of us. Just need help figuring it out. Thanks for reading.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    No one came up with a better solution? Seriously? Don't buy it was one option that was loud and clear. Buy it for market value or less was another. Buy it for market value if price and terms works as a long term hold. But it for less if you want to wholesale or flip it.

    I disagree that the seller is listening for solutions that work for both of you. She got you to agree to a price that has nothing to do with reality and where you would not come out ahead. A lot of sellers will carry back a note if you offer them 100% over FMV. Let the seller try to sell her $600/mo rental houses for $120K each and see how far she gets. Let her figure that out and keep communication open if she decides to sell.

    I'd bet money that the seller won't sell before she dies. I've talked to people like your seller hundreds of time. Long time landlords don't sell because they are tired. They sell when they have to or when they have a plan for the money. However, they do love talking about the idea of selling, especially if it will keep you on the phone or get you to visit with them.

    1Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    13y

    I agree with K. Marie Poe on this last one. I once talked to an elderly seller (80+) who owned a 4-garage building for 40 years. Sharp as a tack. Long since paid off, 'hood had deteriorated, grown kids didn't want it, she wanted cash only, wanted a ridiculously high price, claimed she collected the rents in person every month and everyone paid, no repairs needed....you get it.

    She wouldn't budge on price or terms but she was happy to chat on the phone as long and as often as I wanted...which wasn't much once I realized she didn't really want to sell.

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  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    13y

    I think he lost a lot of negotiating power once he agreed to her terms. At that point you could go back and make small changes but it's going to be hard to get her down hundreds of thousands of dollars so I don't see negotiations getting very far at this point. I'd make sure the daughter had my contact information because she may be a motivated seller at some point in the future. Stay in contact, situations change and if she starts having health problems and can't stay on top of them all maybe she'd feel the need to sell some.

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y
    Originally posted by K. Marie Poe:
    No one came up with a better solution? Seriously? Don't buy it was one option that was loud and clear. Buy it for market value or less was another. Buy it for market value if price and terms works as a long term hold. But it for less if you want to wholesale or flip it.

    I disagree that the seller is listening for solutions that work for both of you. She got you to agree to a price that has nothing to do with reality and where you would not come out ahead. A lot of sellers will carry back a note if you offer them 100% over FMV. Let the seller try to sell her $600/mo rental houses for $120K each and see how far she gets. Let her figure that out and keep communication open if she decides to sell.

    I'd bet money that the seller won't sell before she dies. I've talked to people like your seller hundreds of time. Long time landlords don't sell because they are tired. They sell when they have to or when they have a plan for the money. However, they do love talking about the idea of selling, especially if it will keep you on the phone or get you to visit with them.

    Well said. To simplify, my solution would have been to walk away, it isn't a deal and is a waste of time being so far from reality. It isn't close enough for me to have even considered. Is that the alternative you were looking for? Even a well polished turd is still a turd. Good luck to you and remember my advice to sleep on it before acting on it.

    1Reply
  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    13y

    Solution: "Sorry, I talked to my wife, she said she'd divorce me if I agreed to those terms!" After talking to her for a couple of days here are the terms that I can agree too (Make sure they are cash flow positive!).

    I for one cannot imagine a situation where I'd be okay with spending money now for a property that has already been owned for a bunch of year and will require quite a bit of rehab over the next 30 years

    (Move out costs 1/yr x 30yrs could be upwards of 60k! A new roof, new furnace, etc. The Future costs abdicate the value of todays dollars and the payoff in the future! Your opportunity cost is would probably come out negative!)

    You probably want $$ now to keep buying your future! Cash Flow!

    0Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    13y

    Good cop/bad cop = good spouse/bad spouse...it definitely works Troy Fisher! :)

    0Reply
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