Seller Financing Wholesale SFR in Missouri

14 Replies

So I got a potential deal that works because the owner is willing to seller financing.  The property is located in Springfield, Missouri.  I was originally approaching the deal as a straight cash deal and I would wholesale it, but the numbers don't work to cover her mortgage.  But she is willing to seller finance it as long as her monthly payments are taken over.  Here is what she is willing to do:

Monthly Payments: $850/m

Purchase Price: $88,000

Term: 72 months

Rents for homes a bit smaller in Springfield are going for $1,000/m and they're not rent to own.  I was thinking this deal might work as a sandwich lease option with a tenant/buyer at:

Monthly Payments: $1,200/m 

Sell Price: $92,995

Option Fee: $10,000

Term: 36 months


Proft (36 months): Rent: $12,600 / Sell: $4,995 / Option: $10,000 = $27,595

Profit (72 months): Rent: $25,200 / Sell: $4995 / Option: $20,000 (2 Renters) = $50,195

I was also thinking this deal might work as a "lease option" wholesale since I live in Colorado and it's out of state for me.  I would simply turn the deal over (minus the renter) for an assignment fee.  That other investor could then find the renter and charge them an upfront option fee that recoups my assignment fee upfront and gives them some additional money up front.

Let me know what you guys think!

Thanks,

Austin-

Hey @Austin Faux ! Looks like a good deal, but note two things:

  • Assuming you plan to credit the full option payment toward the purchase, you're double-counting the $10K in your profit. After 36 months, once tenant/buyer (T/B) is ready to close, their purchase price will be $82,995, not $92,995. In fact, if you spend the $10K long before closing, you'll actually have to come out of pocket $5K to close, so be careful.
  • If you do get two T/Bs in succession, you should plan for at least a light rehab (paint, carpet) between them. After three years, the home will likely need it.

I agree with you, though: As an out-of-state operator, I would definitely wholesale this to a local investor. Your ability to create owner financing generates massive value out of thin air. Everyone can't do that, so investors will pay those wholesalers who can! Good luck!

That rent is really steep for Springfield, unless its a really nice house, in which case I would be interested in buying outright. If you care to PM me and I'll give you my phone number and we could talk about it.

Originally posted by @Jason Miller :

That rent is really steep for Springfield, unless its a really nice house, in which case I would be interested in buying outright. If you care to PM me and I'll give you my phone number and we could talk about it.

Jason as far as rent I was going off a quick scan through Craigslist for Springfield.  I found some rents as cheap as $450/m but I did see people asking for $1000/m for houses.  My thinking is "Rent to Own" is kind of rare so you are usually able to get away with upping the rent a bit, hence $1,200/m.  But really it's whatever works as long as you can cover her monthly mortgage and leave some profit on the side month in and month out.

Thanks!

Austin,

Jason M is correct. $1000/month for rent here in Springfield, while not uncommon, is very much dependent on the size and location of the house. $1200/month? Chances are very slim and you better be in the right neighborhood.

Is $850 her monthly payment or what she wants/month if she seller-finances? $850/month for $88,000 (or less) seems high for a mortgage payment, even with taxes, insurance and PMI included.

If you could post the zip code, sq. footage and bed/ba, that would help us locals determine more realistic numbers for you.

@John Ching @Jason Miller  

The Zip Code is 65807 Sqft. 1700. 4/2

She sent me copy of her Statement and she still owes: $88,620.20


Principal: $142.42

Interest: $479.26

Escrow (taxes and insurance): $212.38

Total Monthly Payment: $834.06 

This is what I offered her:

I pay $600/m and she pays $234.06/m into an escrow account, and that account pays the mortgage each month.  I also have the option to buy the property within 72 months and for the remaining amount left on the mortgage at the time of purchase.  The main reason I did the $600/m is because of you're guys comments on $1,200/m rent being hard to setup.  If that's the case I would try and shoot for: $850m rent w/$10,000 up front Option Fee that doesn't go towards the final payment on the property and sell for $89,995.  


Proft (36 months): Rent: $9,000 / (Buy at: $83,260) Sell: $6,7355 / Option: $10,000 = $25,735

Profit (72 months): Rent: $18,000 / (Buy at: $74,051) Sell: $15,944 / Option: $20,000 (2 Renters) = $53,944

She's getting raked on her mortgage payment. Refi'd into a 30-fix at 4.0% today would yield a monthly payment of $420/month. 65807 is a mixed zip code but overall has some nice areas. $850-$1000/month is certainly doable for a 4-bedroom. But it better be in really nice condition and have a 2-car garage if you expect that upper range. 

I would need at least cross-streets in order to nail the value better for you. Seller-financing does make this a more attractive deal, but I'm not sure if there is a "deal" here yet as I haven't seen the home.

John and Jason are correct Tim.

I'm also seeing arbitrary figures, as if you just plug in a number and assume it will rent and appreciate, if the place is worth 88-90, just bumping up a price to "rent to own" is predatory. So is the rent. 

Next, rent to own will need to be Dodd-Frank compliant, I'm sure it won't be as I don't know a RMLO in town that will originate that. 

Next, if it's the white 2 story on S. Broadway, they must be desperate at that price but it won't rent over 850.00. If it's on Sexton, you might do go getting 800. 

If your option to purchase is based on a reduced sale price, you don't have an option, you have a sale contract. :)

I guess I just never have been that enthusiastic about setting up deals like that. I'd rather own the house outright and flip it or rent it. Its just my preference though, the fewer people involved the less likely problems arise and the more control I have on the deal. But I do know a lot of people like to do this.

Originally posted by @Bill Gulley :

John and Jason are correct Tim.

I'm also seeing arbitrary figures, as if you just plug in a number and assume it will rent and appreciate, if the place is worth 88-90, just bumping up a price to "rent to own" is predatory. So is the rent. 

Next, rent to own will need to be Dodd-Frank compliant, I'm sure it won't be as I don't know a RMLO in town that will originate that. 

Next, if it's the white 2 story on S. Broadway, they must be desperate at that price but it won't rent over 850.00. If it's on Sexton, you might do go getting 800. 

If your option to purchase is based on a reduced sale price, you don't have an option, you have a sale contract. :)

None of my numbers are based on appreciation, but you are correct in that they're educated guesses.  I have been talking to realtors down in Springfield asking them about rents, and sold prices in the area, etc.  Plus I've been talking to multiple attorneys down in Springfield about the legalities, contracts and how to set this up.  Either way I was planning on getting 30-60 days for due dillegence and to see if I can find a "rent to own" tenant otherwise I'll walk.  Obviously that isn't the ideal situation for any of us.  

Austin, of the two attorney firms I sent you, Craig is up on banking and finance as well as real estate. He has represented the Board of Realtors before. He's a pitbull in court and not afraid of administrative law with the REC from what I've been told. I know him from high school too. 

There is another good firm in town that is in banking and finance, well several if you include investment types. All are high dollar firms, I doubt you want to go there on a house deal.

When you get to most RE types here, it's very possible (probable IMO) that they are not up on financing where a buyer in a RTO is credited with rents or in reducing a sale price which is credited from your payments, which is financing.

To paint you a picture of this town, the World Headquarters of the Assemblies of God is here and we have the only Congressman elected in this century who only has a high school diploma and his other education was passing a RE broker's test. It is the buckle of the bible belt, very conservative which pans out to be very landlord friendly. 7 colleges and a State University, not everyone is a hillbilly.  But, not that landlord friendly as there are lawyers who make great money nailing bad landlords! 

Rent to own is seen as predatory if a tenant fails to buy, and most likely they will fail to buy. 

Buying a property and simply adding 10K to a property, without increasing the value can also be predatory dealing, exceeding market value and using a financing arrangement is predatory financing. We have "old ways" lawyers here, most likely they will be wrong as some see being predatory is the American way. Well, not anymore since we are now taking about federal law.

To accomplish what you want to do you need to buy it subject to the mortgage. You have a due on sale risk. You would with any lease over 3 years as well or in taking an option to buy.

Then, you own it. You can sell and option at an agreed price, that is basically around market value. You make your money on the buy side, not the selling side. Do not credit any rents toward the purchase, that way you are not financing. With an owner occupied tenant, don't finance the option price either, that is financing when the option is applied to the sale price. 

Springfield is a rental town, only half the homes in town are owner occupied. Tenants are almost as bad as a tourist passing through town, they will move across the street for a few bucks difference a night!

The reason I've gone into detail here is because of your charitable side, I don't think you are intentionally trying to be predatory, but it's a lack of education in following guru ploys is what I see. No offense, but rent to own is not a good strategy. Good luck :)

@Austin Faux , have "sold prices in the area" been summarized here? Is it a great deal on those merits? Otherwise, scary stuff for most of us simple folk. Cheers...

@Bill Gulley Thanks for the details that was super helpful.  Yeah I'm just trying to find a win/win solution here.  She doesn't want to short sale and she can't make her payments, so the only thing I see is to help her make her payments.  The only way I can think to do that is doing a sandwich lease option.  

I made the offer as I described above and put it in a Letter of Intent.  Nothing to sign, and I'm going to call her tonight.  I'll let you know what she says, but I'm leaning towards withdrawing my offer, yet at the same time I kinda want to have a learning experience.  Overall I need to increase my lead gen so I don't have to rely on one offer.....lol

Super super helpful though and I appreciate you taking the time to write all that out.

@Austin Faux

And everyone!

The world of lease-options is changing as you know it! 

As I've mentioned before, government agencies act in concert to influence operations.

You have Dodd-Frank and the SAFE Act. Much stricter lending and loan servicing compliance, time lines for disclosures, etc.

You have settlement disclosure changes going into effect next month.

We now have stronger predatory dealing and lending laws at the state and federal levels.

The IRS will now be looking at "Economic Benefit" and "Intent of the Parties" to define disguised sales. 

You have the Financial Accounting and Standards Board and the International Accounting Standards Board changing the requirements to recognize income which will effect how real estate transactions (including options) will be accounted for, public comment ended last April. This applies to all public and private entities, if you do business in your name you won't be effected.

You have the CFPB cracking down on consumer commerce, that includes your tenants and optionees. 

HUD determines fair market rents by the Metropolitan Statistical Area (MSA) from there;

You have the IRS looking at the fair market value from an income approach and rent credits as well as option prices to establish "Economic Benefit".

For investors and operators compliance and legal requirements comes from different angles. 

In all my years, I have never seen as many changes being implemented from so many different angles since the balloon popped.

Sorry to break the news folks, but how you use to do things in options and installment contract is dead on arrival. There is an orchestrated attempt by government, professional organizations and quasi-government agencies (secondary market) that is and will be squeezing investors and operators. The bad news is, rent to own and option contracts are in the cross-hairs.

My suggestion is to burn your guru books and take notes as the the theories of more creative transactions and start over. :(

:)     

   

Bill, 

I need to sit down to a dinner with you! You have a wealth of knowledge and are local, it can't get much better! Thanks for passing along this info and your commentary.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here