All Forum Posts by: Chad Benedict

@Chris Swindell I applaud you for wanting to help your mom and trying to make this happen. If you were buying this house to live in yourself, I might say it's a good deal, but as an investment I don't think you can make the numbers work. Upfront I agree with @Paul Choate and think you're better off just selling it outright and being done with it, even if you get less money.

You mentioned your mother would have a hard time selling this through traditional channels. Why is that? If you don't think the property would sell for $40,000 going through the traditional route, then you definitely shouldn't pay $40,000 for it off market, no matter how good the terms are.

But let's take the current offer you have and look at your options. You buy the house from your mother at its supposed market value of $40,000 with $0 down and 5% interest amortized over 10 years. Your monthly payment is $425. Since you're not planning to live in the house, you can either rent it out, sell it on a wrap, or sell it on a lease option. I'm going to rule out lease option as they often don't work and are a pain, and can be legally tricky sometimes.

If you rent it out for $675, you have to budget for expenses in addition to your PITI. I would budget 10-15% of rent for repairs and capital expenditures, another 10% for management, and another 8-10% for vacancy. These are all necessary. And since you don't live in the area, it's going to be a pain to manage all of this from afar, even if you can find a good property manager (which is a big if). Or you could use the lease to make the tenants do their own repairs, but that can be hit or miss. So let's say you budget 30% of rent for all of this, which comes to about $200 a month. Add that to your $425 principal and interest payment, plus the $75 you budgeted for taxes and insurance, and now your cashflow is negative $25 per month. There's simply no way to make this cashflow as a rental property with a 10 year, $40,000 fully amortized note at 5%. If you had a 30 year mortgage, or at least a 30 year amortization with a balloon, it might work, but I still think it's too tight. And without a downpayment and buying it at full price, you have no equity cushion in case something goes wrong. You could easily end up selling the house at a loss in 5-10 years, as Paul mentioned. If you could buy the house for $30,000, or buy it for $35,000 and put $5,000 down, it could potentially cashflow. You can run different scenarios all day, but the only way to make it work is to either buy the house for less money or extend the note over a longer period of time.

Or, you can sell the house on a wrap, which you proposed as your plan. Wraparound mortgages are perfectly legal in most states, although not without risk. But in this case, since you're buying from your mom and you can include in that contract and deed explicit permission for a wrap, it's not a big deal.

However, anyone who's going to buy a $40,000 house isn't going to be able to afford $700 per month, and if they can afford it, they can likely go to a bank and get a traditional loan. I'm not sure where you got that number from. Let's say you are able to find a buyer who can't get bank financing and is willing to pay a higher interest rate to buy off market and have a junior lien (and if you're unfamiliar with the area or how this works, you may have a hard time finding those people, especially without a realtor). You sell the house to them for $42,000 with $2,000 down as you said. You then finance them $40,000 at 9% interest for 10 years. That puts their monthly payment at about $500, and they're paying for your taxes and insurance, so you're barely eking out a little cashflow over your $425 monthly payment. But most buyers want a 30 year note, or at least a 15 year note. In order to get $700 per month on a 10 year note like you proposed, you'd have to charge around 17% interest, which is essentially illegal (I won't go into usury laws or possible Dodd-Frank stuff here). Around 9-10% on seller finance is standard, so consider that your high end. But I would also want at least a 10% down payment, since if they stop paying and you have to foreclose, you could easily spend more than that in lost rent and legal fees, plus any damages to the house. Keep in mind a larger down payment also means a reduced note amount and reduced cash flow. You would also still have almost no equity in the house.

Anyway, I could keep playing with numbers, but you get the point. If you lived near the house and could help manage it, it might be different, but I think the numbers are tight any way you look at it, unless your mom is willing to sell it at a cheaper price. Keep in mind she may get the same money selling to you at a cheaper price rather than going through a realtor. I'd probably just sell it and get rid of it. Whatever you do, make sure you use a good attorney in Oklahoma who specializes in real estate and understands investor transactions.

Or, and I'm tried of typing now so I won't go into great detail, you could possibly do a Joint Venture with your mom where she (with you as a partner) sells the house to someone else on owner financing, gets a down payment, and then finances the rest at around 9% for 15 years, but you agree that you will find the buyer and manage the payment collections, dealing with the buyer, possible foreclosure, etc., in return for X% of the cashflow. Still some risks and legal complications. Just a thought.

Good luck!

Chad

(Disclaimer: None of this is meant as legal, professional, or financial advice.)

You may be able to just do a double close on the same day, where you actually close on the first property and then immediately resell it to your end buyer. You'll need the funds for closing but can use transactional funding from a lender, which usually costs about 1% of the purchase price. As long as your buyer performs and buys it immediately, it's not a big deal. Only snag is if FIRPTA or whatever requires some time period before you can resell it. On that I have no idea. (None of this is legal advice.)

Good luck!

Also if you're worried about not being able to rent it to students in a given year, you might see what regular 4/5 bedroom houses are renting for in the neighborhood just to have a back up plan. If you can't find students for $300 per bedroom, you might still be able to rent the whole thing for $1,000 a month or so to a family or someone who works at the college if they like living in the area. Cash flow won't be as a great, but it could still work financially, although you might need to make a few improvements. Anyway, just be sure to look at all of your options!

Chad

@Cowan Bucks

Most sellers sign an exclusive listing agreement with their agent for between 60-120 days, and then there may also be a period of time (1-2 weeks) after that that the seller might still be liable for the agent's commission if they sell the property themselves, depending on the agreement signed. After that, it's no problem to buy from them off market. I'd take @Donald Zaroda's advice and just stay in touch with them periodically as they look to sell.

Best of luck!

Chad

It depends. This happens to me occasionally with my direct mail. I will mail to someone whose house is listed with a realtor (unbeknownst to me), and the owner will call me. But because I'm a licensed realtor myself, I'm actually not supposed to negotiate with the owner directly. I'll have an initial conversation with them and explain that because they're represented, I would need to talk with their realtor if they were serious, but most of the time they want far more money than I can pay -- which is why they listed with a realtor in the first place. I end up dropping most of those leads after the initial phone call.

Because you're not a realtor, there's no reason why you can't negotiate with the owner directly if s/he calls you. (Obvious disclaimer: this is not legal or financial advice, and I don't know the real estate laws of your state.) But you need to make sure the seller understands that if they have signed an exclusive agreement with their realtor, they'll still have to pay them commission, and it's likely that they'll have them review the contract as well.

Most realtors would probably advise against a homeowner selling to a wholesaler as most realtors don't even understand what wholesaling is, and they think they can get more money continuing to market it to retail buyers. But if you can get it for a good deal and can explain to them how you can help them, it could work. You might have to pay more earnest money and have a shorter option period, but there are people who have successfully wholesaled properties on the MLS.

The biggest challenge will be actually getting the property at a good deal. If it's listed on the MLS at $100K, you can't shop it around to investors at $90K; they'll just ignore you. The numbers all still have to work just like they would with a normal wholesale.

A word of caution: only market the property after you have it under contract, and make sure the buyers you're contacting know that you have it under contract. There are a lot of sketchy wholesalers out there who try to wholesale MLS properties that they don't even have under contract, which is ridiculous (and illegal). Just explain to your buyers, "This property is listed on the MLS for $100K, but I have a signed contract to purchase it for less than that, and I'm wholesaling it to you for only $70K." If it's a good deal and the numbers work, then you can proceed similar to any other wholesale transaction where realtors aren't involved.

In general it can be done, but it's rare and there are more hoops to jump through working with realtors. In my experience in our hot market here in Dallas, it's possible to still occasionally find deals on the MLS if you're buying it as an investment for yourself, but it's very difficult to find MLS deals with enough room to wholesale and make any money.

Good luck!

Chad

Any language you plan to use should come from a real estate attorney and not something you found online. Pay a couple of hundred dollars upfront and it could potentially save you thousands down the road.

Without knowing exactly what type of clause you're looking for or plan to use, I generally urge people to avoid those types of "back out" clauses or "pending partner approval" nonsense. Those are phrases peddled by gurus and it's questionable whether the language is even enforceable depending on what state you live in. Plus it just looks fishy to your seller, because it is.

Be honest with your sellers about what you're doing. Your state likely already has an approved real estate contract that includes some type of regular option period or due diligence period built into it where, for some monetary consideration, you have the right to cancel the contract within a specified time period. There's no need to add an additional clause. Just use that option period to find your buyer and assign the contract.

However, if you don't cancel within that period and then you don't purchase the house, or your buyer backs out, you'll likely lose your earnest money, but that's a chance you take and it's important because it means you have skin in the game. If you're really concerned, you could ask your attorney to draft language along the lines of "seller's sole remedy in case of buyer's default is to retain the earnest money" -- which means you still lose your earnest money but they can't sue you to force you to buy the property. There's a difference between protecting yourself from excessive legal liability versus adding escape clauses that allow you to exit the contract at any time, scot free, with all of your money. That's not really fair to the seller and could actually create additional legal headaches for you.

None of this is meant to be legal or financial advice. Consult your own attorney about everything.

Best of luck!

Chad 

If it's a good flip and the numbers work, it doesn't really matter where it is as long as there is demand for housing. But keep in mind that your ability to flip it and resell quickly depends on many factors, including the type and quality of the rehab you do, the school district, the neighborhood and the street the house is on, the neighbors themselves and what condition their houses are in, whether the house is what people are looking for etc, etc. For example, a 4 bed, 2.5 bath house on a nice street in Arlington will sell faster than a 3 bed, 1 bath house on a less desirable street in Plano even if it has a good rehab. Lots of factors to consider, just make sure you get to know the neighborhood. If you're unsure, find a realtor to help you and let them know you'll use them when you finally sell the flip.

Good luck!

@Matt Santos

Without wading into the debate over whether you need your license or whether you should even get into wholesaling at all (this has been discussed ad nauseam in the BP forums, just search for it and you'll finding plenty of threads), I can offer advice if you do decide to get your license. You should find a flat-fee broker and not a commission-based broker. There are likely several of these in your area; just google and you can find some. They simply charge a flat fee per transaction and don't take a cut of the realtor commission or assignment fee if it's a wholesale deal. They don't provide the same level of service to realtors as other brokers do, but you don't need the other bells and whistles. With my broker I pay $65 a month just to hang my license there, and then I pay a flat transaction/E&O fee of $330 for every closing I have, doesn't matter if my assignment fee is $1,000 or $10,000. (I think it's normally $280 for regular realtors, but because I'm a principal in the transaction, it's slightly higher because there is more risk.) Plus I pay quarterly membership fees for access to the MLS, etc. It can get expensive, but you can see the appeal these brokers have to normal relators who make large commissions and get to keep their entire commission.

The fees and setup obviously differ from broker to broker and state to state. There are other brokers in my area that charge less expensive fees, but I like my broker so I'm fine with them. If you do get your license, and if you do wholesale a deal where you're just getting an assignment fee and no commissions and you're not representing either side, you'll still almost always have to pay a broker's fee/E&O fee of some sort to mitigate your broker's risk in the transaction. As mentioned above, if you do have your license, you actually have more liability when you're a principal in a transaction than if you don't have your license. It can be managed easily, you just have to be completely honest and disclose everything to all parties upfront.

Best of luck whatever you decide to do!

Chad

I agree with @Rick H. solved their problems.

I recommend Scott Horne at Horne & Associates. He probably knows more about seller financing and creative financing than anyone else in Dallas.