Seller Financing in Burbank, CA and should I add central air?

17 Replies

My family currently lives in Burbank, California and I am planning on moving them back to Gilbert, Arizona next year. We live in a house that is around 100 years old that has no central air. We have a few window units that work decently but the house still doesn’t heat or cool evenly.

We received a quote to add an AC and heating unit for about 10k. My question is if we add a new unit, will it increase my homes value by 10k or will I lose money by adding one?

Also, we bought the property in 2017 for about 800k and got an 80% loan on it for a fixed rate of 4.25%. The house is a 2 bedroom, 2 bathroom home (1360 square feet) and it has a studio apartment in the back around 300 square feet that we rent out for $1500 a month. Rather than selling the property outright when we move, I have considered doing seller financing for probably around 920k with 10% down at 6.25% and wrapping the mortgage until the new buyer can refinance.

So this post has 2 questions:

1. Will the home likely appraise for 10k more if I put in a new HVAC unit?

2. Besides the due on sale clause, do you see any other issues with doing seller financing by creating a wrap around mortgage in California?

I don't believe you will get the full $10k back - but I would list is as an option to who you are selling it to.  Can't hurt to throw in a sweetener.

Regarding your second point - I don't see an issue unless you are afraid of the due on sale. Considered doing a master lease option?

When an appraiser is comparing your home to others that have sold in the area, things like new HVAC and updated pipes and wiring typically don't increase the value of a home. It's not something a buyer can really "See" (like updated kitchens and baths).

For resale value, your money will probably be better spent on other upgrades.

As far as the HVAC, It depends on when you are selling the property.  

If it's in the heat of summer, then A/C starts to become a priority, especially in the valley where we're seeing 110 degree days what seems like more and more often.  

If you're selling at the beginning of spring when everything is beautiful on a 70 degree day, then it doesn't matter so much.

@Shiloh Lundahl You have a cute home and that rate you got is very good, but as far as the 10K, you will not get that back when selling it. I eat at a restaurant from time to time called Pinocchios, not sure if you had a chance to eat there it's on Magnolia. 

-Rudy

@Shiloh Lundahl like many others here have mentioned it will be difficult to get the full $10,000 back in the appraisal.  You will get a certain amount and if all of the homes in the area and neighborhood have AC then it will be easier to sale but otherwise it's not absolutely necessary.

Check the Dodd-Frank Act to make sure you don't fall into under the definition of a "loan originator".

Thanks everyone for your comments thus far.  I would also like to get the opinion of others in the LA market: @Julie Phan , @Michael Yap , @Christopher L. , @Nick Costello , @Jonathan Feliciano , @Sulaiman Harooni , @Mark Shuter , @Brian Gibbons , @Danny Cerecedes , @Ciprian L. , @Aaron Cullen , @Matt R. , @Vinci S. @Wei Cho , @Will Barnard

@Shiloh Lundahl

Re Wrap AITDs and alienation clauses - due on sale in California

Due-on hazards

A lender holding a trust deed that contains a due-on clause can call the loan balance due on the transfer of almost any interest in the property. The due-on clause is called an alienation clause, and the call is referred to as an acceleration of the note balance.

The due-on clause is triggered by:

any conveyance of ownership, including land sales contracts;

origination (except home equity loans) or foreclosure of junior trust deeds on the property; or

the creation of a lease for more than three years, or any lease with an option to buy. [12 Code of Federal Regulations §591.2(b)]

The carryback AITD transaction, of course, involves both a sale (the grant deed) and a further encumbrance (the trust deed).

Thus, an AITD transaction triggers the due-on clause in any underlying trust deed, allowing the lender to:

call or recast the loan unless written consent to the sale has been given; or

fail to act on the right to call after notice of the transaction, called a waiver.

Thus, when current market interest rates are high and the AITD is most beneficial to both the buyer and the seller, a senior trust deed lender is likely to call the underlying loan due on the sale. Alternatively, the lender might demand the loan be recast at current market rates, including modified payments to retain the same amortization period and fees for doing so, or the lender may do nothing at all.

Now consider an AITD buyer who (obviously) takes title subject to the underlying loan. The buyer does not assume the seller's obligation to pay the loan at the time of sale. No lender consent to the carryback sale is sought or obtained by the seller.

Under the terms of the AITD, the seller agrees to hold the buyer harmless from all obligations which exist on the underlying loan. [See first tuesday Forms 442 and 443]

Thus, the buyer is held harmless (by the seller) against any activities of the underlying lender, unless:

the buyer interferes by triggering the due-on clause through further encumbrance, long-term lease, resale, waste, etc; or

a pass-through provision shifts the due-on-sale burden to the buyer, as with late charges, prepayment penalties or future advances.

The seller's primary duty is to make all the payments due on the underlying loan, as long as the AITD remains of record and the buyer is not in default.

If the buyer fails to make payments on the AITD note, the seller is under no legal obligation to forward his own funds to the underlying lender, or to protect the property from a foreclosure by the first trust deed lender.

Even without the obligation to keep the first trust deed current, the AITD seller may feel compelled by the buyer’s default to advance funds to keep the underlying trust deed current, or else risk the alternative and allow his trust deed to be wiped out by the underlying lender’s foreclosure.

Should the underlying lender call the loan based on the AITD transaction, the seller may be forced to use his own funds or borrow against other assets (or collateralize the AITD) to pay off the lender. Thus, the buyer must agree in advance to cooperate with the seller should the first trust deed be called due and it becomes necessary to refinance the real estate to fund a payoff of the first trust deed.

If possible, prior arrangements should be made with senior lenders to prevent due-on enforcement during the term of the AITD, sometimes called a reverse assumption.

1. Will the home likely appraise for 10k more if I put in a new HVAC unit?  Yes! I think you would get your $10K back. I would definitely do the AC soon so you can survive the coming summer. My last place had wall units that worked great but they were extremely loud, my newer place has central AC and is much quieter, you wont regret it! Let me know when/if  you sell, I might be interested.

When we moved from Redding, CA where it goes to well over 100 in summers, and went to southern CA, I couldn't believe it when we rented a in a very nice complex owned by the Irvine Company in Newport Beach, and there was no air. I didn't even think to look, assuming all of CA had air conditioning. It was miserable in afternoons. I think air is definitely a big selling point. I know when we did spec houses, having air was a huge benefit to selling. 

Most houses in Burbank have central AC, so it is expected. If it is not there, it is a drawback. Kind of like a buyer expects a decent roof, plumbing, electric, etc.

I will have to disagree with most others above, putting in the HVAC system in Burbank is a must if you want top dollar and I believe with the right marketing, you will absolutely get your money back. It gets well over 100 in Burbank, CA in the summer and without AC, you will lose many of your buyers or have to settle for a lower price. In our competitive market (which is still a seller's market), having such amenities are expected. There could be other things you could do to add value to your home prior to selling as well. An experienced eye could help bring that out for you.

As to seller financing, you likely don't need to go down that road and create the potential issues with it. Sell for cash to new loan and take your money and reinvest it elsewhere.

Hi Shilou long time no talk! First off sorry for the delayed response. Bummer to see you and the family heading back to AZ....good thing for you would be no more commuting.

My thoughts on your questions:

1. HVAC- I'm in agreement with Will...Central Heat and Air is a must in SoCal! Wall units work but definitely not like a new system. I know when I'm showing my clients properties aside from the big ticket items (kitchen, bathroom, pool etc) HVAC is high on the list. As far as a dollar for dollar return on an appraisal probably not but from an offer standpoint I think you would easily recoup your investment.

2. Seller Financing- not to sure about this. I think you need to way your options between financing at the $920K at the 6.25% rate or just selling at a higher price than the $920K. Not sure where exactly you’re at in Burbank but depending on the comps and the fact that the property has rental income makes it a super desirable property. I can email you comps if you like to get an idea? Hope that helps!!

I remember you talking about your HVAC way back. I think I mentioned to you that my neighbor is a HVAC guy and he put in my system. Not sure how many estimates you got but I can share his info.

Let’s try and grab lunch again?

Shiloh,

On A/C, you might have to look past the "net addition to appraised value" textbook stuff and focus on all the buyers who won't be able to get past the no a/c story, or worse, will factor in larger costs for a/c and the fact they can't finance it up front into their loan.  Get the A/C.

On the wrap around, there are all kinds of technical issues, but here's a quick shortcut:    You don't need to do it.  With plenty of dirt-cheap interest rates and loans available, don't even open yourself up to the distraction and endless conversations about it.

You've got a great house in a super area.  You are able to get a/c in, let buyer get their own loan, and focus on getting top dollar.     

One day, if you're stuck with unsold houses in central California in a downturn, tune back into Bigger Pockets and gear up for creative strategies!

Joffrey Long

Trust Deed Investor, Hard Money Lender

@Will Barnard , @Danny Cerecedes , and @Joffrey Long thanks for your input on the AC.  

Regarding seller financing, here is why I am considering doing seller financing, let me know your thoughts:

My Purchase price 800k

Down payment 160k

Amount on loan today about 612k

Current market value today 880k

Regular Sale

If I sell it next year (assuming there is no down turn) for 900k then here is my probable profit:

900k X .95 (taking out realtor fees) = 855k - 5k estimated for concessions or repairs = 850k - 600k (amount left on loan) = 250k - 160k (Down Payment) = 90k profit - long term capital gains tax in California. So maybe a profit of 70k. I could then take the 160k and the 70k and put the 230k into another investment or pay off existing financing debt.

Seller Finance

Again, assuming there is not a down turn, I sell the house for 920k (I sell it for above market value because the new buyer really wants the home without needing to get a bank loan and is willing to pay a premium for it.  They put 90k down (close to 10%) and I create a mortgage for them for 830k for 30 years at 6.25%.  Their monthly mortgage payment is $5110 a month plus taxes and insurance so the total is around $5900 a month, but they can also rent out the guest house in the back for probably around $1600 a month lowering their total monthly payment to around $4300 a month.

I can pay someone just to list it on the MLS and I can have another investor help me through the seller finance paperwork for probably around 5k. I will provide the new buyers with the inspection report that I got in 2017 when I bought the property and let them know what we have already fixed and let them know that it would be their responsibility to fix anything they want to get fixed, or in other words we wouldn't be fixing anything with the property before we sold it on seller financing.

Here is the probable profit: 920k  = 915k.  I get 90k - 5k (listing and legal docs) = 85k up front from their down payment.  Monthly mortgage payment is $5110 (what they pay me for principle and interest) - $3116 (for what I pay for principle and interest) = $1994 in cash flow monthly.   

If the mortgage were to go the full 30 years my profit would be (1994 x 27 x 12) + (5110 x 3 x 12) = 646056 + 183960 = 830,016 in profit over 30 years.

So I could get the 230k in one year and be done with it, or I could get 90k in one year and start to cash flow around 2k a month until they refinance the loan.  

Let's say the new buyer were to refinance it in just a year.  Here are my profits: 85k upfront + 23,928 of monthly cash flow (1994 x 12) over a year, and 72k when they close on the refinance (820k for his mortgage balance - 588k for my mortgage balance - 160k for my down payment).  So my total profit would be $180,928 over a year after we sold it on seller financing.  After taxes it would probably be around $155k profit.  

So the question is would it be better to get the 230k in one year and reinvest it or would it be better to get 85k in a year and leave the difference of 145k in the investment to cash flow 2k a month at a 33% return until they eventually refinance the property?

Originally posted by @Shiloh Lundahl

Regarding seller financing, here is why I am considering doing seller financing, let me know your thoughts:

My Purchase price 800k

Down payment 160k

Amount on loan today about 612k

Current market value today 880k

Regular Sale

If I sell it next year (assuming there is no down turn) for 900k then here is my probable profit:

900k X .95 (taking out realtor fees) = 855k - 5k estimated for concessions or repairs = 850k - 600k (amount left on loan) = 250k - 160k (Down Payment) = 90k profit - long term capital gains tax in California. So maybe a profit of 70k.  I could then take the 160k and the 70k and put the 230k into another investment or pay off existing financing debt.

Seller Finance

Again, assuming there is not a down turn, I sell the house for 920k (I sell it for above market value because the new buyer really wants the home without needing to get a bank loan and is willing to pay a premium for it.  They put 90k down (close to 10%) and I create a mortgage for them for 830k for 30 years at 6.25%.  Their monthly mortgage payment is $5110 a month plus taxes and insurance so the total is around $5900 a month, but they can also rent out the guest house in the back for probably around $1600 a month lowering their total monthly payment to around $4300 a month.

I can pay someone just to list it on the MLS and I can have another investor help me through the seller finance paperwork for probably around 5k. I will provide the new buyers with the inspection report that I got in 2017 when I bought the property and let them know what we have already fixed and let them know that it would be their responsibility to fix anything they want to get fixed, or in other words we wouldn't be fixing anything with the property before we sold it on seller financing.

Here is the probable profit: 920k  = 915k.  I get 90k - 5k (listing and legal docs) = 85k up front from their down payment.  Monthly mortgage payment is $5110 (what they pay me for principle and interest) - $3116 (for what I pay for principle and interest) = $1994 in cash flow monthly.   

If the mortgage were to go the full 30 years my profit would be (1994 x 27 x 12) + (5110 x 3 x 12) = 646056 + 183960 = 830,016 in profit over 30 years.

So I could get the 230k in one year and be done with it, or I could get 90k in one year and start to cash flow around 2k a month until they refinance the loan.  

Let's say the new buyer were to refinance it in just a year.  Here are my profits: 85k upfront + 23,928 of monthly cash flow (1994 x 12) over a year, and 72k when they close on the refinance (820k for his mortgage balance - 588k for my mortgage balance - 160k for my down payment).  So my total profit would be $180,928 over a year after we sold it on seller financing.  After taxes it would probably be around $155k profit.  

So the question is would it be better to get the 230k in one year and reinvest it or would it be better to get 85k in a year and leave the difference of 145k in the investment to cash flow 2k a month at a 33% return until they eventually refinance the property?

In a perfect world, this plan looks good on paper but you are missing a few key elements. Where does this buyer come from who is willing to pay $20k+ over value that has $90k cash to put down? Most buyers out there looking are represented by an agent and as such, you will need to pay that agent 2.5% of the sales price for bringing that buyer to the table. Just paying a flat rate $5k for MLS listing and paperwork will likely not bring a buyer as described without said costs.

Secondly, your agent who lists the property for you will not be able to (legally) generate loan docs on your behalf without having a broker's license. A real estate sales license does not enable that licensee in CA to create or facilitate loan docs.

Lastly, what if the buyer fails to perform, causes damage to the home, and you end up going over a year without monthly payments (which in CA can easily take place, ask me how I know!). Now you are out an entire year of payments, plus repairs, plus legal fees to evict and foreclose. You open yourself up to an incredible amount of liability and risk going this route. This is not to discourage you from owner financing as it is certainly a viable strategy but your numbers and specific situation here do not appear to have the elements to get this done while mitigating said risks and costs above.