Why would an investor choose this financing?

Question

I'm looking for feedback from other active investors who want to use leverage to buy real estate, but do not qualify for conventional financing.  Recently, I have been bombarded with opportunities to buy properties with private financing in place.  I would never purchase under these particular parameters and want opinions of other investors who may think I am missing the good points to a deal like this.  Here are the details:

Multiple properties available priced between $50k and $75k.  (most are below today's market value by 10-15%.)

- 50% down payment
 - 7% INTEREST ONLY
 - 5 year balloon payment
 - 3% loan fee plus closing costs
 - taxes & insurance are not escrowed

Rent ratios run 1.2% - 1.4%

I am not a fan of the 7% interest only portion of the deal and at these costs, I believe I could actually purchase the property outright, earn the return over 5 years and be in a position to purchase another with cash.  Does it make sense to put 50% down on a property and borrower at interest only with a 5 year balloon?

Joel Owens · Answer

Sounds like crap to me. Looks like someone thought of WHAT THEY wanted buyers to buy instead WHAT BUYERS are willing to purchase.

They will be out of business soon trying to sell that.

I can see some people with cash but bad credit paying 20 to 30% down because banks won't touch them but 50% is crazy.

Chris Clothier · Answer

I would be interested to see if anyone on here thought this was a good deal.  This company touts this as something revolutionary and promotes it specifically to foreign investors.  They promote it in a couple of magazines and online spaces as well and every couple of days I get an email as I am sure they are sending everyone on how great the program is (complete with balloons and confetti)!

I can not figure one good reason to partake, for any investor, but I think Joel hit it right on the head.  I believe the owner of the company is in a position where he needs to sell properties, does not have buyers who can qualify for loans and is looking for another way to get cash back and carry the notes himself.

Jarod S. · Answer

Here are the terms an investor is advertising in my area:

%20 down - no balloon - %12 interest (NOT interest only) - 30 yr fixed term - no loan fees besides closing costs - taxes and insurance escrowed - rent ratios 1.9 - 2.3%

They are listed at market price, i am trying to get the int rate down and work on the purchase price a bit.  Good for someone who is unable to qualify for traditional financing.  I may bite if hes willing to negotiate.

James Martin · Answer

I can't see where there would be any leverage if I'm buying properties for what it is worth under these guidlines unless I was buying for shop talk. Now, I have borrowed under similar circumstances (9%rate, 12month interest only purchase & rehab, 3points front 1point on back) But it was for different properties that I got at a great deal that I was able to retail. I would not use either for a buy and hold!

Why would an investor choose this financing?

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