I've never flipped a cash flow deal to another investor because it has always seemed to me to be an unnecessary extra step. But I'm wondering if it might be an option when dealing with sellers who are less motivated than I need them to be for my typical deals.
Just to throw out some numbers, I'm thinking the average deal would be something like this:
$500,000 | Value
$450,000 | Purchase Price
$90,000 | Down Payment
$360,000 | Balance owing
3.19% | 5-year Fixed
$1,739 | Payment
$9,000-$11,000 | Closing costs
$550,000 | Sale Price
$16,500 | Buyer's down payment
$533,500 | Balance owing
5.19% | 5-year Fixed
$3,161 | Payment (taxes extra)
$16,500 | Buyer's down payment
$164,762 | Difference between mortgage balances at the end of 5 years
$85,320 | Total cash flow
-$11,000 | Closing costs
-$27,500 | Assignment fee
$228,082 | Total profit over 5 years
50% annualized COC; 10% annualized ROI
Apologies if any of my numbers are off, I wrote this up quickly before heading out.
VERY VERY common model in the US.. its called wraps..
My dad had a company in the middle 70s called California Wrap LLC ... he / we did literally hundreds of them.
and that spawned this document you should check out.
"all inclusive deed of trust " give that one a read..
the risk comes if your the one with the underlying mortgage and your buyer defaults..
the buyer is in title and your need to foreclose them off... this takes time and money.
you need to keep paying on the underlying mortgage other wise your credit is shot or you could lose your 90k you put down.
for VERY cashed up investors this works.. for those trying to do this with minimal cash.. it can back fire big time.
there was a group of investors who got this model in Oregon through a guru pitch deal.. did about 30 of them..
within 18 months half had gone bad and they had no way to cure.. i stepped in and cured a good number of them but boy were they in hot water.. in this case it was owner finance from the original seller .. Sub too.. now the seller does not have title.. the middle man trying to make the delta has no way to cure.. and the low downpayment new buyer defaults and is squatting since its not a credit issue for them and it takes a year or more to unravel..
@Jay Hinrichs LOL only one reply and it's from someone who does/has done it, not someone who wants it! Slightly telling. Thanks Jay.
The way I've always done it is just to keep all of the buyer's down payment in reserve in case they default. That usually would be enough to cover the payments while I foreclose. Although I've yet to have to foreclose. As @Roy N. pointed out, Canada has an incredibly low default rate. The highest ever recorded in Toronto was in 1992 at 0.65%. It's currently at 0.13%.
If your talking Canada then I totally agree.. I have lent hard money in Canada over the years and always got paid back plus some of mine was perfect timing vis of vi dollar/loonie and I made a big hit of the exchange rate delta..
In the US this can and is quite popular with the no money set and leads to major problems.