Seller financing with note holder or wholesale?

8 Replies

I posted a few weeks ago about doing a Sub2 offer on a duplex in trouble.

Rather than throwing offers back and forth and guessing who were the real decision makers, I asked to sit face-to-face with the listing agent. He explained that he was the note holder and had listed the property after the deed holder missed payments, was deported to Mexico, and a fire on one of the homes left it uninhabitable. He termed it a "short-sale." I'm not positive the legalities of it all, but he seems to be in the position of influence now as the property is empty after he evicted the tenants.

Sub2 isn't an option now. He states he just wants out. He's been burned so bad and the property has been damaged that it is an energy drain. On the other hand, he seems determined to get a reasonable price and states he won't do seller financing at all.

State of property: 2 homes, 1 parcel, originally permitted by the county and listed as such, city hasn't made an official determination. Property built before city existed. $125 and a few days and the city would make a determination.

Front house 2 bd, 1 bath, 8-900 square feet. Rents average $8-850 for that area and size. 

Rear home has solid base structure, roof burned on 20% of roofline. Needs furnace, electrical, new kitchen, new bath. It is a shell, but a solid brick/cement shell. 3 bd, 1 bath. Rents would be $950-1100 after repair.

MLS listed for $150k, agent/note holder said he'd take less. His note was recorded against property in 2011 for $150k.

Salt Lake is a ridiculously hout market, yet the property is sitting on MLS a couple of months. He has had cash offer, but too low to consider at this point. He seems stubborn, but also a bit worn out.

Here is my current plan:

Ask for seller financing, offer a down of 5% that would cover his expenses (back water bill, small lien from deed/owner).

EST ARV $225-$250k (I'm at $225, agent is at $250)

70% is 157,500

Agent estimates repairs of $30k

Offer $130k on seller financing for 3 years with balloon at %5.5

Payment (w/o taxes and insurance) $768

Paint and carpet needed in front home, but could be rented $850

I'm nearly break even on monthly expenses til the back is finished, then positive $700-$900 gross

In 3 years or less I could refinance based on equity and rental income.

Deal or No Deal? Or attempt to find an investor to work with?

He said no to seller financing initially, but I wonder if the "no" might change as he gets more desperate to unload. Maybe he would say no again, but with regular contact he might see I'm serious enough to make this happen.

Greetings @Ben Visser !!

This deal meets the two things that I absolutely salivate over when talking to sellers: equity and motivation!!!! But (big but) this seller seems fed up with property but is holding out for profits. At the end of the day it's nothing you can do to MAKE him sell you the property. Furthermore, it does not matter what his calculated ARV is and it does not matter what he paid in 2011 for it. You should only be concerned with your numbers, your numbers today. Run your numbers and run them again and run them again. It looks like you calculated your offer based off of the following formula: .70 x ARV - Repairs. Well you forgot closing costs. Also consider will permits have to be pulled for repairs because of the fire? What will it take to get a use and occupancy permit? This could cause you extra time and money. Thus, using that formula alone may lead you to overpay for property. Your cash flow calculations seem to be off too. Rent minus piti is not the end. Do not forget vacancy, cap ex, management, reserves.

Making an offer......... I would present two offers to seller at same time. The first one being a straight cash offer. Much lower than your 130k. I am not sure what it should be. That will depend on you revisiting the comps and repair numbers, and including the closing costs. If you don't have the cash to purchase, your exit strategy will be partnering or wholesaling so be sure to include your wholesale fee. The second offer will be the seller financed offer and it will be a little higher than the cash offer. You may have to increase your down payment. I would spread the terms out to at least 5 years, but shoot for 10-15. This will make your monthly payments lower but you can still put the balloon in there for 3-5 years. Consider increasing interest rate to 8-10%. Be sure to highlight the interest earned over the term of the loan in dollars.

Present both offers to seller. Give him a few days to consider. If he rejects, you say "Mr. Seller what will you do if you do not sell the house?" This will help you gauge his motivation a little more. Follow up with him and keep him on a follow up pattern, contacting him at least once a month.

Hope this helps.

Keep us updated!

Sincerely,

Eric H.

You may be chasing your tail. Sounds like a good possibility exists that title is clouded, in which case no title insurer will touch it. Has the note holder foreclosed on the property and obtained title? Or is he just selling his note? Is title insurable? Has a bankruptcy been filed? Was foreclosure judicisl or non judicial? If non judicial, does evidence exist that a proper foreclosure auction was conducted? Was property insured? Who received proceeds of insurance payout?. What are the outstanding liens, claims and encumbrances on the property?

My concerns may be totally unjustified in this case, but for some reason the way it is described here raises my antenna. I have seen many deals where the "seller" does not have the ownership interest to provide a clean warranty deed.

@Eric H. Thank you for all the info. I do think giving him a couple of options increases a chance of a "yes."

I do need to do more research on other costs such as how to figure the costs of ownership/holding (CAP, vacancy, etc). That is an area where I'm lacking knowledge. Most of the figures are rough. Gross rents I would estimate to be $1800 after repair, $850 while only able to rent the front home.

I'd have to research title a little more, but to clarify what I know he owns the home, but sold it under seller financing back in 2011, so, in some regards, what is owed is based on whatever terms he set on his own note. There should be some flexibility then.

As far as the technical side, let me see if I understand the math. So, I could set an amortization schedule of say 30 years, 9% interest, but a balloon payment in 36 month. That would give me a monthly payment that is more feasible and he gets 9% interest on his note with the balance paid in 36 months (refinancing to pay him off)? Is that the right concept?

On the wholesale side, from what I understand from the podcasts and some research, I would make the cash offer due in ___ days with the right to assign title. Make the offer at roughly 50% value and then decided what I want to have for a fee (sales price to investor at 60-70% value). Is the norm ARV or pre repair value on those percentages? Then, I hot marketing and find an investor wanting to buy. Is that the right sequence?

@Don Konipol Yes, there is some major gray areas on where he legally stands. He seems assured it will be no issue, so I will simply hold him to that in the sales contract. In his last counter (I put in a full offer under conventional financing as a way to get him talking) he has things lined up with a title company to navigate the issues. At this point it I think the deal is only good if the right protections are in place in case he can't produce a clear title.

I'll probably post my offer here so more experience can verify I've dotted my "i's."

Thank you for all the advice so far.

My first reaction was the same as @Don Konipol , doubting he has clear title, this quickly. A quick search of the public records should tell you how it was sold (title conveyed to buyer, land contract, etc.) and what, if any, proper proceedings have occurred to put the "note holder" on title. Just the agent referring to this as a short sale, makes me think title as conveyed, and that will require either a formal foreclosure, or some cooperation from the title holder-DIL or signing the deed as the current owner for a short sale. Of course there may be other attachéd liens too.

Note holder is secured creditor, not record owner. 

If he doesn't own property (yet) it's pretty weird ethically that he'd try to market the property. 

The thing that might make sense is to purchase the mortgage and foreclose.

I would determine what the property is worth to you and figure in the hassle factor of foreclosing on the mortgage, cost of foreclosure, getting possession, making repairs and ongoing holding costs of taxes, insurance (if even available), cost of your capital and your margin (profit). 

My instincts are telling me this agent is a bit rogue do I wouldn't trust him too far. If you buy the note, get title insurance (or title endorsement) and pick the the escrow provider.

You'll learn a lot from this transaction and if nay lead to other similar deals in future. 

However, make no bones about it: you are solving his problem and that's worth something.

Oh, and as to the deal, either offer another assets of yours or a contract for sale of note, essentially "note for a note."

If it were me, I'd buy the note with contract of sale for no out of pocket cash to noteholder and push all possible risks onto them, using my skills to foreclose, clear title, capitalize, repair and prepaid for retail resale.

To sweeten pot, offer listing to him if he's halfway competent agent (have my doubts). 

@Ben Visser are you planning to rehab the fire damaged property yourself? Have you done that before? It is not your typical rehab and usually costs much more, so factor that into your offer.

Do you know if there was insurance that paid for the damage? They could have paid close to what the ARV was, so keep that in mind as well to determine motivation.

@Ben Visser

So, I could set an amortization schedule of say 30 years, 9% interest, but a balloon payment in 36 month. That would give me a monthly payment that is more feasible and he gets 9% interest on his note with the balance paid in 36 months (refinancing to pay him off)? Is that the right concept?

YES. That sounds right. PM me for an amortization schedule. You can also google it and find one rather easy

On the wholesale side, from what I understand from the podcasts and some research, I would make the cash offer due in ___ days with the right to assign title.

Yes your contract should have an expiration date or a tentative closing date. All contracts are assignable unless stated otherwise in the contract. You do not necessarily have to put "Buyer: Ben Visser and/or assigns". I do anyways though. Always check with a local attorney regarding contracts.

Make the offer at roughly 50% value and then decided what I want to have for a fee (sales price to investor at 60-70% value). Is the norm ARV or pre repair value on those percentages? Then, I hot marketing and find an investor wanting to buy. Is that the right sequence?

The offer will based off of your numbers. Find some good comps (.25 mile radius, similar bed/bath, similar layout, sold in the past six months max, year built should be as close as possible). The "70% rule" that you are referring to is based off of ARV. It's more of a "rule of thumb" or "test" than a bonafide way to make an offer. It's a quick way to analyze properties when you are looking at multiple properties. If it passes that test, then it deserves your time and attention to perform a more detailed analysis. Do not forget to include the holding costs for the end buyer and closing costs both ways. And then your fee on top of all that.

But before you get ahead of yourself, I recommend considering the other posters' comments regarding the "note holder's" interest in the property.

Hope this helps!

Sincerely,

E. Harris