Help!! is this legal ?!? What are your thoughts?

Question

So I have this lead who owes 283k on a vacant home thats comped with a conservative ARV of 350K. needs about 25k in cosmetic repairs (over estimating it to be safe). 4,300 sq ft, 4 bd 4.5 bath, in ground pool, hot tub, fancy stuff but some leak caused mold on the ground floor, some professional quoted him 5k to clean up.

The point is he wants 290k and the margins are too small to wholesale. naturally i think how can i get this to work via seller financing since the % equity is relatively small.

The problem is that I have not done this before and dont know if the end investor who purchases it is allowed to sell the property to a retail buyer after fixing it up and with that money pay off the seller financing from the lead i have.

Imaginary down payment numbers of 10k for the seller, 20k for the buyer.

Thoughts? Does anyone have experience with this?

Jon Holdman · Answer

So, maybe this is worth $325K as-is.  After sales transaction costs, the seller would net about $299K.  That's enough to pay off the loan and pocket a little cash.  Why doesn't he do that?

If you buy it for $290K, the seller would net perhaps $285K after costs, which just covers his costs.   If you tack on, say, $5K for you're fee and add on $25K for rehab, your buyer is at $320K.  After fixup, the rehabber would net $322K, for a $2K loss.  And that ignores any other costs for the rehabber.  There's no deal here, even with owner financing.

Ned Carey · Answer

I couldn't agree with Jon more. Owner financing doesn't make a bad deal good.

Glenn Espinosa · Answer

There is no deal. Commissions alone is $21k. Subtract closing costs and the arbitrary -$10k+ because you're gonna spend more on rehab and sell for less and you're far in the red.

Move on.

Simon Campbell · Answer

I believe this would still be considered seller financing because through the buyer's prospective, the land contract will show that the $283k is being paid to the seller - not the seller's bank.

The seller then takes the payment and applies it to their original financing. Once the balloon becomes due, the seller's loan is paid off in full and the buyer gets financing.

This often happens with land contracts. The sticky part is that many mortgages institute a payment in full upon demand when they hear that the property is under land contract.

Adrian Tilley · Answer

Allen Herrera
"if a rehabber came in on this with 10k down, 283k financed by the seller (the same amount he owes the bank) so purchased at 293k"

I'm new at this, so someone correct me if I'm wrong, but I don't think this is "seller financing".  You are basically buying the property subject to the current financing.

Simon Campbell · Answer

Yes, a buyer who finances their purchase through a land contract can pay off the land contract early and resell the property. That is, IF, the contract allows the buyer to do so.

Some financial considerations that you have missed here are the holding costs.  If you are sinking $25k in renovation, this is going to take time and time costs money. How long will the renovation take and then how long will it take to resell it?  Let's be conservative and say you can swing this in 4 months (more likely 6).

No doubt the seller is going to require a higher interest rate than what he is paying, so for the sake of argument, lets calculate a rate of 6%.  This will make your monthly payment on a 30 year amortization at just under $1,700 per month with most going towards interest.  That will total $6,800 in 4 months.  Tack on homeowners insurance, property taxes, permits (if needed), advertising/marketing (since you need to sell it yourself). Let's say that adds up to another $2,500.

Plus once you sell the property yourself, you will still need to pay for title insurance and transfer tax. So figure 3% closing costs of a $350k ARV or $10,500.

All tolled, if you can sell the property in 4 months, you will need to figure in an additional $19,800 of expenses bringing your profit down to $12,200.  Calculating your total cash investment of $54,800 to make $12,200 if all goes smooth will give you a cash on cash return of 22%. But in repair projects (especially those involving mold), it rarely goes smooth.

Allen Herrera · Answer

Thank you guys for your time and energy, I've known from the start it wasn't a deal but talking through scenarios helps build my pool of knowledge.

before I completely forget about this and move on let me try explaining my idea one last time.

Could some money be made if...
if a rehabber  came in on this with 10k down, 283k financed by the seller (the same amount he owes the bank) so purchased at 293k

the investor puts 25k in pairs, then sells the property for 350k.

leaving 32k minus closing costs, holding costs, ect. as profit

as far as cash on cash, is this still that bad of a deal/ idea?? 40k ish cash spent for a 20k ish cash profit ~ about~ 50% return ? or am i crazy?

is someone allowed to purchase via seller financing/ agreement for sale then sell it themselves to a retail buyer????

(just realized 6% Realtor commission on 350k would destroy earnings after writing this- still gonna post to hear your thoughts)

Phil Z. · Answer

How sure are you about $25k in repairs on a house that size? It sounds like your not even sure where the leak is or the extent of the damages.  Chances are the mold company could remove a lot of drywall and finish work and you will have to make the repairs to put it all back.

Help!! is this legal ?!? What are your thoughts?

Most Popular Reply