Help! Received offer on my residence asking that I carry a 2nd.

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Help! Received offer on my residence asking that I carry a 2nd.

DL Martin
Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes

Need advice. 

I received an offer on my primary residence. The buyer is asking that I carry 10% ($69k) for 5 years at 5%. The offer is a "lowball" offer and we both know that a more realistic sales price is $750k. (He and his wife viewed the house in November, have looked at dozens of other houses, and now they are back to us.)

The house is listed at $800k and I really don't expect to sell it until Spring, Winter being a horrible time to try to sell a house... Come April-May-June, assuming that things heat up again here as they always do in the spring and early summer, I figured we will get $760k to $775k. 

Its a little over 5,000 sq feet on .60 acre in Riverside, CA. (see link at the bottom).

The buyer is high income and solid. However, he has a $350k house in Kansas City (where his last job was) that is killing him on his debt/income ratios. It is rented out, but his tax returns don't yet show the rental income so it is a significant challenge for him. The house is for sale and has been for sale for several months. He is an accidental landlord and wants out of it. 

Here is my question: 

Would I be crazy to counter at $775k and owner carry $148k for 12 months at .01% ???

His payment on the second would be $411. His current offer includes a seller (me) carry of $69,000 at 5% for 5 years (amortized over 30, balloon at end of 5 years) which is $370 per month. 

Included with his offer was the loan approval letter which indicates that he is obtaining a 40 year loan at 4.00%, interest only, and it is a 7/1ARM. It is obvious that he plans to refi out of this interest only loan as soon as he sells the rental house in Kansas City. 

So, what do you guys think? Am I out of my mind to offer a $148k, 12 month loan at 1/10 of 1% in order to get another 25k for the house? (assuming that he is actually willing to pay $750k for the house). There is no way that he is able to buy my house unless I carry at least 10% on a second. 

TIME IS OF THE ESSENCE. PLEASE GIVE YOUR OPINIONS, FORTHWITH !!!

DL

http://www.zillow.com/homedetails/5811-Royale-Pl-R...

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    11y

    How much is he putting down?  Is he getting a 90% loan and you're putting in the last 10%?

    His loan terms don't make sense.  You say 

    But its either an amortized loan, which is implied by the "40 year" or its interest only.  Not both.  Is that really what the letter says?  

    Is he and his lender with your lien being recorded and appearing on the HUD-1?

    As second in line if the first forecloses you stand a good chance of having your lien wiped out.  Or at least significantly reduced.

    Do you really think this is the best you can do?  What's the market like in Riverside?

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  • Aaron Junck
    Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
    11y

    If he is going to owner occupy the home your going to have to have a RMLO approve him and have someone service the loan , thanks to Dodd Frank. This also includes the Balloon payment. (seek legal advice from a real estate attorney).

    Is he putting any money down on this or is it all going to be financed? If he was putting a good chunk of change down I would consider it. If he is trying to do nothing down I personally would not. If he is a high income earner, he should be able to have some $$$ to put down. 

    As far as the interest rate 1 tenth of a percent? No way! Charge him 7% or so that way he does have a reason to refi as soon as he can. 

    The way I see it if he wants a deal then he comes with the $$$$ if he wants terms he pays full face value.

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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y
    Jon Holdman Jon, thanks for the reply. I really appreciate it. (So much that I woke up at 3:30 am to reply!) The buyer is putting down 10% cash. He has funds in the bank and the offer included a copy of his current bank statement. The Union Bank rate lock agreement dated January 14th, 2015 states 4.0%, $552k, 480 months, conventional loan type, payment type: interest only, adjustable rate mortgage terms apply: ARM Type: 7/1 interest only ARM. Index LIBOR margin 2.5%. Lock expires March 7, 2015. Thanks again for your continued input : )
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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y
    A for the market in Riverside, it has been dead for anything above $600k since July 2014. We assumed that we would be waiting till May (annual SoCal Spring irrational exuberance) to sell it, so this offer is unexpected. Thanks again for your continued input : )
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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y
    Yes, the lien will be recorded. I wouldn't mind getting the house back in a year. It would be an inconvenience, but I retired from my 28 year job in October and could "deal with it" should it happen. My best Friend is the managing partner in a huge Real Estate law firm that services foreclosures, so I have that expertise at my disposal should it be required. I built it for $89 sq ft and have a good idea what it would cost to put it back to sellable condition should I get it back. The buyer is a plant manager for a national company with a strong track professional track record. Wife is professional, three small kids are very well behaved. Etc. I believe that they are a good risk. Thanks again for your continued input : )
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  • Jered Sturm
    Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes
    11y
    Tough call DL Martin after reading this my gut feeling says stay away, hold out for a stronger buyer. However there are many factors that you know that I do not. Good luck! Numbers never lie so go with what works on paper, and adjust for the variance as it comes.
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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y

    @Aaron Junck   Aaron, thanks for the reply. Are you saying that I should ask for 7% because that is a fair private money rate? I'm not really interested in the interest on the $148k for 12 months. I'm more interested in escaping this cesspool (CA) and getting back to Cincinnati where I (and my family) belong. lol. 

    How do you feel about the 10% down? ($75k). Is that enough to make you feel that the buyer has sufficient vested interest not to walk away/default?

    I knew that I would need to consult with a RE attorney to have the agreement drawn up, but I think that I may qualify for an exemption from Dodd-Frank because I am a little guy, (seller finances only ONE property in any 12 month period), as long as I complete a Seller Financing Addendum and adhere to Truth In Lending Act disclosures. If I charge .01% for the $148,000, I hope that I avoid the definition of "high cost mortgage" and thus the requirement to verify the borrowers ability to repay. But those are all RE Lawyer questions...I would probably just need to verify that the one year balloon does not appear "predatory." 

    As I stated in the original post, without seller financing, there is no way that the buyer is able to get the Union Bank first mortgage. This is just a stop-gap measure to give him time to sell that Kansas City rental house, clear it from his debt/income ratio, and then refinance into a 30 year fixed. 

    The buyer is coming from the midwest (Kansas City and then Cincinnati before that) and the price to get into a nice home out here (CA) even in Riverside, is devastating. I'm just trying to get to a solution that helps me (and my family) and him (and his family). 

    Thanks for the speedy reply! 

    I will write a counter tomorrow night after I get some more feedback from the Bigger Pockets Brain Trust and after speaking with a RE Lawyer.

    DL

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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y

    @Jered Sturm

    Hey "Jerry" : )  

    You are correct in that we "don't have to do anything" right now. The challenge is in the realization that nobody knows what the market is going to do out here this spring/summer. 

    The area that I live in is referred to as "The IE" (inland empire). Think, flat billed baseball caps, sentences always completed by using the word "Bro", lifted 4x4 pickups that NEVER leave the pavement, tattoos, Harley Davidson, and very, very low IQ's. I almost forgot, smog and constant traffic congestion. 

    The local indicators look good. There is high demand/limited supply in Orange County, the county adjacent to where I live. U S U A L L Y,  as goes Orange County, so goes Riverside County, six months later. So the normal cycle would be that come this Spring, my area will heat up and the house will sell. 

    But at my price point ($800k), I'm guessing that I might be looking at some type of "owner carries a second", no matter what. The exception would be if a buyer sold his lesser house, made a couple hundred thousand, and then put that couple hundred thousand down on my house. But that's not what people out here want to do. They much prefer to sell their house, make $200k, buy my house with 5% down and then blow the remaining $160k on "Hey, baby, I'm bitchin'" boats, sandrails, Razor's, or the aforementioned lifted 4x4 Silverado diesel. Unfortunately, I'm not joking. 

    I'd rather "work with" this guy (a conservative midwestern guy like myself) than "wait" for one of these Californians this Spring. 

    But if it's stupid to do this deal, and smart guys like Jon and Aaron insist that it's stupid, then I won't do it.

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  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    At 690K, I would probably ask him if can bring his offer up.  One thing to remember about a 690K offer is that it is equivalent to a $730K offer with realtors on both sides.  If you can get him to meet you somewhere in the low 700s, I think you can create a win/win deal.  

    The advantage of high interest is that it encourages him to refinance more quickly.  However low interest will make him able to offer a better price, which will probably mean more money for you.

    Do you have a loan on the property?

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  • David DuCille
    Residential Real Estate Agent · Tampa, FL · Member since 2014 · 177 posts · 122 votes
    11y

    2 things jump out to me and neither has much to do with his loan.  

    1. the notion of winter being bad time for sales is simply false in todays market in many areas.  most of the areas where that is true it is climate related.  hard to sell homes with a foot of snow on the ground.    The market drives sales moreso than the seasons.  Rates are super low right now, lenders aren't being as tight with qualifying credit scores, rents are high, it all adds up to homes being able to sell.  You are at a higher price point which always takes longer to sell but when a home is in as great of condition as yours is and it's not selling, it's one thing and one thing only.  Price.  which brings me to #2.

    2. If a realistic sales price is 750k, why did you initially list the property at 949k?  I'm not local to your area but I can't imagine a million dollar home in So Cal NOT having a swimming pool. Seems to me that you were certainly priced way to high initially. Some people falsely think they must price high because everyone will be looking to offer low to begin with, but when you price it right from the get go, you generate the most exposure to your property and increase the chance of multiple offers coming in.

    Finally, not trying to pick a fight but I find your attitude to be a bit offputting.  "The area that I live in is referred to as "The IE" (inland empire). Think, flat billed baseball caps, sentences always completed by using the word "Bro", lifted 4x4 pickups that NEVER leave the pavement, tattoos, Harley Davidson, and very, very low IQ's. I almost forgot, smog and constant traffic congestion."  

    I don't wear baseball caps often but when I do, it just may be with a flat brim.  I say "bro" at the end of sentences sometimes and dare I even say "homie"!!!   No Harley for me but I do have a high end mountain bike.  With all of that said, my IQ is 131.  Not sure how you know these peoples IQ, or their income and if you are so intelligent, why did you choose to move there?  I know plenty of wealthy people that are far from the smartest people I know.  I know plenty of people in baggy jeans and flat brimmed caps on the weekends that wear suits to Wall St on the weekday.    Your home is GORGEOUS.  Everything about those pics says its an amazing house.  The #1 driving factor in selling homes is price and yours is priced too high.  If you listed it at 750k last summer when you first listed it, it would have probably sold by now.  I think this guys offer is very reasonable considering the situation and lets face it, this is a negotiation, he isn't coming with his best offer because he knows you don't have anything else on the table right now.  I think it's more than appropriate for you to counter with what you suggested and make it clear that you are open to doing what you have to do to make the transaction a win win for both parties.   If you can't get a deal done with this guy, you should probably look to relist with a STRONG agent that will AGGRESSIVELY work to market and get your home sold.  I'd be more than happy to refer you to a Keller Williams agent out there that would work aggressively to get your home sold. Inbox me if that is of interest to you.

    You seem to have emotional reason moreso than financial reason to sell your home.  nobody wants to lose money or not get top dollar but sometimes you can't put a price on your happiness and if you really want to get back to the Midwest, there may be a price you need to pay to do that.  Don't rule that out.   

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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y

    @Jesse T.  Hey Jesse, thanks for the reply (I need to go back to bed!). 

    I am offering the buying agent 2%. 

    Anything under $750k is giving the house away. That's $150 sq foot, not counting the 4 car garage which is another 950 square feet. And it's on .6 acre. If I'm going to give it away, I'll wait till April or May to do it. lol.

    I owe $390k on it. 7/1 ARM at 2.99% with five years left at the 2.99% rate. The payment is $1,700 (plus taxes and Insurance).

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  • David DuCille
    Residential Real Estate Agent · Tampa, FL · Member since 2014 · 177 posts · 122 votes
    11y

    If you built it for $89 a sq ft, how is selling for $150/sq giving it away?  It sounds like you aren't that motivated to get back to the midwest. I don't see how waiting until april to sell it for 750k helps you any more than selling it now for $750k.  

    How many showings have you had on this property since putting it up for sale?  Is this the only offer you've received?

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  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    Maybe you want to ask him, if he could pay 750K would he want the house for that.

    If agrees set-up a rent/option for that amount.  Say $3200 is the market rent.  Collect an option fee and cash flow until he exercises the option.  Since he just needs to sell a property you could make the rental period as short as 6 or 9 months.

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  • Aaron Junck
    Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
    11y

    Very interesting... I personally would be willing to do a deal with someone if they have skin in the game. It sounds like he will give you 75k upfront. It would be your call if you feel that is enough security. 

    Is a 1 year balloon long enough for him? What if he doesn't sell his other property in time and can't get you the balance? Are you going to foreclose or give him more time?

    I still personally would charge around 7% for the carry back. 

    The deal doesn't sound too bad if you can agree on a price and terms, with money down.

    By doing this deal will it hinder you from moving forward in your life and personal goals or will it help?

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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y

    @David DuCille  Hi David. Thanks for the well thought out response and input. I really appreciate the input. 

    We initially listed the house at $949k because "things were hot" at that moment but we were about a month too late as it turns out. The realtor (without a doubt the top guy for high end homes in Riverside) suggested $899k but I was stupid and said lets try $949k. He went along with it. 

    We dropped to $899 and then $849 over the course of two months. Had we listed at $800 from the get go, we probably would have gotten it. BUT, in late June, when we originally listed, I was still working (planned retirement for October, 2014) and I have an 11 year old that I had to put in school somewhere. If we had sold the house too soon, then my family had no place to live. Our plan was to sell the house, but not too quickly. 

    Anyway, I retired in late October, (I turned 50 in October) and now we are ready to get out of here (CA). My 11 year old is in school till June, so if we sell before then, she has to finish up the school year at a new school in Cincinnati. If we don't sell before then, she gets to finish up the 6th grade here. (I hate to make her switch schools mid year).

    I hear what you are saying about a correctly priced house selling in CA, despite the fact that it is "winter." Unfortunately, the data, year in and year out, proves otherwise. Very few houses above $600k sell between November-March. In 2014, it all came screeching to a halt above $600k in July. But April-July are usually red-hot for all price points.

    As for the "flat billed caps", "Affliction" Tshirts, skateboarding shoes, and the incessant use of the word "Bro"... I suspect that neither you, nor the baggy jeans wearing Wall Street Types were "educated" in California Public Schools... I don't understand why anyone anywhere would want to emulate the "SoCal lifestyle". Its an illusion. 

    Why did I move to Riverside County? Because I am an idiot. I should have bought a 1,400 square foot house in Huntington Beach instead of building a 5,000 square foot house in The IE. My bad.

    Thanks for the comments on the house. The photos that my Realtor used (taken by his "professional" photographer) were horrible. As soon as my listing ended with him (90 days), I bought a wide angle lens for my camera, took my own photos, and then re-listed with FORSALEBYOWNER.COM. I put the house on the MLS offering 2% to the buyers agent, and then flew to Ohio and completed 120 hours of Ohio Real Estate Salesperson education (Ohio requires that all 120 hours be classroom time. There is no online option).

    I bought and sold three houses in CA without a realtor, as well as purchasing a 4 plex about 15 years ago, again with no Realtor. On this house, I listed with the most highly regarded realtor in town and offered 2.5% to the buying agent, as well as 2.5% to my listing agent...

    I decided to just fly to Ohio, spend 3 weeks and $1,400 to attend the real estate sales person classes, and then just show and sell the house myself. Since we dropped the price to $800k, we have had quite a bit of interest in the house. But again, November, December and now January, has proven to be a tough time of year to sell a house. 

    I really appreciate your input. I'm glad that you think that "I'm on the right track" with regard to bending on terms in order to maximize sale price. 

    DL

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  • David DuCille
    Residential Real Estate Agent · Tampa, FL · Member since 2014 · 177 posts · 122 votes
    11y

    Good stuff DL.  Makes a lot of sense.  Glad you didn't take any offense to my candidness, the written medium isn't always the best way to get things across.  My next suggestion would be if it doesn't work out with this seller, pull the listing for 60 days to sort of let it "reset" itself and come back to the market anew.  

    Hey, you are retired at 50, you must have done a few things right along the way!

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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y
    Originally posted by @David DuCille:

    If you built it for $89 a sq ft, how is selling for $150/sq giving it away?  It sounds like you aren't that motivated to get back to the midwest. I don't see how waiting until april to sell it for 750k helps you any more than selling it now for $750k.  

    How many showings have you had on this property since putting it up for sale?  Is this the only offer you've received?

    $89 square foot for construction costs. The lot was $162k. Plus I acted as the general contractor myself, which has some (but not much) value.  : ) 

    If I get a "regular" offer at $750k, then I pay the buyer's realtor $15,000, pay my closing costs, pay off my loan, and walk away from closing with about $335k. I wouldn't have to carry any paper in that instance. 

    I had five showings in the three months that it was listed with the realtor (with the horrible "professional" photos).

    With the price drop to $800k, and the new photos, we have had another five or six showings, but I have refused to show the house to realtors who could not show "ability to perform" up front. We have a local attorney (trying to use mommy and daddy's money) who has seen the house three times, which prompted the pre-screening requirement that I have implemented.

    I've had other offers. When it was listed with the realtor, for $850k, a "real estate investor" (verified) offered $300k down payment and wanted to wrap my loan for 36 months. Essentially, he wanted a sweet pad to live in for 3 years, wait/hope for appreciation and then sell the house at the end of the 3 years. No W2 income. I had not yet been through the Ohio 120 hour real estate classes and didn't understand that the "due on sale clause" didn't actually mean that the loan was "due on sale".  Had I already completed the real estate sales person courses, I would have negotiated with that guy instead of listening to my realtor who just wrinkled his nose. (in retrospect it was likely because his commission would have been complicated). 

    The current buyer looked at the house back in October, was shocked by CA prices, and offered me $700k. I said "thanks but no thanks" instead of finding out what his challenges were and then negotiating with him. (Again, this was BEFORE I attended the Ohio real estate sales courses). Had I known then, what I know now, I'm sure that we could have worked something out. So instead, the buyer made an offer on another house, and after 45 days in escrow, the seller got a better offer and pulled out. So now the buyer is back to me. 

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  • David DuCille
    Residential Real Estate Agent · Tampa, FL · Member since 2014 · 177 posts · 122 votes
    11y

    definately counter back to him and let us know how it goes.  I do agree with the others that your counter should be at a market value interest rate.  You have plenty of equity in this property.  Have you thought about simply countering the sale price but keep terms the same  i.e. 775k  with you carrying 10% of that for 5 years at 5%  (i'm a little confused with some of the numbers so I realize you may need to carry a bit more to make things work out for his main lender but my point is that with the amount of equity you have in the property, you are still getting a nice check in the bank at closing and will eek out a little incremental money for 5 years which realistically will only be a year or 2 when he sells his other house.  

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  • DL Martin
    OP
    Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes
    11y

    @Jesse T.  Thanks for the response, Jesse. 

    I need significant "skin in the game".  A rental or lease option is just too risky. The kitchen appliances alone would be right at $25k to replace. Plus, I want to get out of here. I really can't have a $750,000 rental house 2,150 miles away from where I am living.

    @Aaron Junck  Thanks for the input. 

    More is always better, but I believe that $75k down payment would cement him into the deal. At least for the 1 year that I would be involved with him. 

    At one year, if he was unable to perform, I would immediately foreclose. My best friend is a lawyer who pioneered the streamlining of the foreclosure industry through technology and systems. No exaggeration. He was even vilified by the New York Times for his leadership position in the foreclosure meltdown. LOL.

    It would definitely move myself and my family forward in our goals and lifestyle. Thus my willingness to do something unconventional like carry a 2nd.

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  • Gordon CuffePro Member
    Investor · Roseville, CA · Member since 2009 · 1k+ posts · 583 votes
    11y

    suggest the buyer go to a mortgage broker who has many lenders to choose from. Maybe another lender can use a rental agreement as income and not the tax return. Banks are usually conservative in underwriting. He then might be able to qualify for a higher loan amount.

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