All Forum Posts by: Dory Peters

Although I'm not as highly active in the NYC metro market (at least for residential--I'm most interested in parking lots there), I have contacts there that have told me about some deals that cash-flow positively in Brooklyn (especially 6 or more unit buildings). I might have heard similar claims for some areas in queens too, and I think I heard about some stuff in NJ around Edison.

I personally have been somewhat leery to invest in any residential or multi-family commercial properties, because I heard some serious horror stories about various rent-control issues. Nevertheless, I checked out a deal on a 6-unit building in Brooklyn that cash-flowed positively roughly 7 months ago.

Yes, it's possible to sell your property with seller financing even if you have 1 or more mortgages in place. The buyer will have to purchase the property subject to the other liens (mortgages, mechanics liens, etc) that are already in place.

Although it's possible that such a sale could trigger your lender's due on sale (DOS) clause, it's highly unlikely for the DOS to get triggered as long as the mortgage keeps getting paid.

Originally posted by Mr_Investor:

I see so many people worry about the DOS clause and IMHO lenders these days aren't going to call the loan due do to the fact that they probably have too many NPA's in their books and they surely don't need 1 more.

I agree. I also have a few mentors who did some research on this over a period of 1-2 years (a while back), and they found that the only times the DOS was exercised was when the mortgage stopped being paid, the taxes stopped being paid, or the insurance got canceled. Stated another way, the DOS usually only gets exercised when a lender feels that their position is less secure (due to the aforementioned reasons).

Solid,

If structured properly, all lenders should be fine with an interest buy-down.

Assuming the seller has a mortgage, and assuming the seller's interest rate (A) is higher than the rate (B) for which a buyer could qualify now, then the way to structure it properly is to do the following: 1) calculate the amount of interest paid at rate A over the duration (t) of the buy-down period; 2) calculate the amount of interest paid at rate B over t; 3) take the difference; and 4) set up an escrow service account to handle making the monthly partial interest payments over t. Hopefully, you'll see thist the lender doesn't need to know anything about the buyer incentive (ie the interest buy-down), because their mortgage will continued to be paid in full and on time. Stated another way, that buyer incentive is only an arrangement between the buyer and seller. (Keep in mind, we were talking about seller financing; the lender would learn about the arrangement via the HUD-1 provided the buyer went with conventional financing instead.)

MikeOH,

Go Bucks!! And you're so right. I've seen several sellers--including banks--soften their position over time.

I agree with Nick, and I'll take it step further. One of my mentors taught me (and several others) that if we didn't feel embarrassed with our offer price, then we didn't ask for a deep enough discount. After having made several offers at the correct prices (as determined by your analysis), you'll develop a thicker skin, and you'll feel more comfortable about making the right offers.

Also, expect to get lots of rejections. This is a numbers game. If you're submitting multiple offers, and more than 1 out of 20 (this doesn't have to be exact) get accepted, then you're leaving too much cash on the table.

There are some other reasons to sell.

First, one may only depreciate a residential property over 27.5 years, and one may only depreciate a commercial property over 39 years.
One may no longer claim depreciation after that time is up. Yet, if one sells one's property before that time is up, then the depreciation will be recaptured upon that sale. So, one could use a 1031 exchange to sell one's property, defer the taxes from that sale, buy a new property, and restart the clock.

http://www.finweb.com/taxes/real-estate-depreciation-and-tax-sheltering.html
http://www.invest-2win.com/depreciation.html

Second, one might want to sell a smaller property to extract the capital to acquire a larger property.

Third, the owner intends to move out of the area, and doesn't want to be a remote landlord.

Fourth, divorce . . . need I say more?

Anyway, the list of reasons is endless, and for every reason that one could supply for why it's right to sell, I'm sure that someone here could counter with an equally valid reason for holding it. For me, only the first 2 reasons are valid, and I'd prefer in the latter case to use that smaller property as cross-collateral for another deal.

Originally posted by Ralph Scott:

Can you split into 3 separate SFH's? May be worth more if they were individual homes.

Interesting point. That one completely slipped my mind.

Also, if it's not possible to do the split, then perhaps you might be able to do a TIC (of course, you'll want to run that past your real-estate attorney beforehand).

First, open a binder (for 1-2 years) with the title company that you plan to use. It's cheaper than a double close, and you don't have to perform both closings on the same day.

Second, if the seller isn't a bank, then you could use either a double option or sandwich lease option to control and sell the property, and to work around the seasoning issues. In either case, make sure to record your option with the seller, so that you'll cloud the title. Also, make sure that the duration of your option (12-18 months for a lease-option, or no longer than 6 months otherwise) with the seller is longer than the duration of your option (3-4 months in both cases) with your end-buyer. When your end-buyer is ready to exercise his/her option, then you can also exercise yours, and handle both closings. Although there are several other ways to handle the buy/sell, I won't belabor my point.

Third, if the seller is a bank (ie the target property is a (pre-)foreclosure, REO, or short-sale), then you'll probably have to buy the target property with conventional or private money. Nevertheless, you could still use an option or lease-option for the sell-side of your deal. Also, make sure that you properly structure the sell-side transaction so that you'll not have to come out of pocket for your holding costs--especially if you opt to buy the target property with private money.

Fourth, ask your end-buyer to ask his/her lender for their underwriting criteria to do a rate-and-terms refinance (for the FHA and other loan products). You may find that it will be easier for your end-buyer to purchase the property from you using a wrap with a 1-year balloon, and to refinance you out of the deal 3-12 months later.

Based upon the information that you provided, I suspect your mortgage is more than $5.3K (assuming you don't have an interest-only ARM).

I obtained my rent data from zilpy.com. If your interest rate on either loan is greater than 6%, then you'll either need to refinance before selling or you'll need to buy-down the interest rate at least to 6% (or less). Additionally, even if you intend to sell your property at an 8% cap rate, you'd have to sell with nearly 100% owner financing to recoup anything close to 800K or more. However, if instead you opt to sell without seller financing, then you'll most likely have to sell this as a short-sale if your property doesn't appraise for at least 800K.

Instead of selling, you might try to use part of your equity (if you have any) as cross-collateral to help fund your next deal. However, I suspect you proabably don't have a lot of equity left (if any).

You might consider doing some wholesaling to increase your cash position. Afterwards, then you could work towards acquiring your own properties.

Your ability to do this will depend on a few things.

First, it will depend on what type of commercial property you intend to purchase. Right now, many commercial lenders are very skittish about lending on certain kinds of properties. Multi-family (or apartments) is the most popular, medical offices are second, and I'm sure you can guess that retail properties, strip centers, and malls are the least favorite.

Second, it will depend on your numbers. Lenders are looking for good numbers, and solid rental histories.

Third, some lenders will require you to have some skin in the game, so they won't do a no-money down deal with you--unless you brought an equity partner into or syndicated your deal. Other lenders will be fine with the seller carry and without you contributing any equity to the deal. Yet, there are also others who might be interested funding your deal at 100% LTV as a joint-venture (provided the numbers work)--but be prepared to give up at least 30% or more of your deal for that arrangement.

Do you know how much the seller is willing to carry? Have you shopped your deal around with several lenders, mortgage brokers, etc? If not, then get busy.