To Deal or Not To Deal?Posted on October 31, 2014 by
A seller recently called me and asked if I would buy his house. I, being of sound mind and body, said, “Tell me about your house.” It turns out that he is a foreign national and wanted to leave the country as soon as possible. He was very firm on the price and terms. He wanted to sell the house in as-is condition along with the furniture. He was open to me taking over their mortgage payments (subject to).
The terms that the seller wanted included their price ($190,000 with the principle balance at $140,000) which was above fair market value for the neighborhood but included all of the furniture. He wanted $30,000 down. The first mortgage payment was $1040 per month. Utilities were $220 per month. There was no Homeowner’s Association. The seller valued the furniture at $30,000 and the house at $160,000. The house was in excellent condition, no repairs necessary; in fact, it was overbuilt for the neighborhood with professional landscaping, a swimming pool/spa, decks, and a definite “wow factor.” I estimated that the house would rent for $1400 per month.
Of course, I had done my research and knew that he had overpriced the property. I believed that I could get him to take $10,000 down, allow me to take over the payments, and have the payments at $1200 a month for 120 months. This would pay him off owner second at 0%.
My exit strategy was to put a home-owner occupant into the property. Selling all of the furniture would allow me to recoup my down payment.
I spent two hours talking with the seller. My offer was $120,000 cash close in 30 days. The terms offer was $175,000, takeover the monthly payments of the first, and $210 to the seller every month for 120 months. I would put $10,000 down.
The seller countered with $180,000. $30,000 down and $1250 per month. The first mortgage would be paid out of the $1,250 per month, and $210 would go toward the seller second.
I told him that I would market the property for two weeks. It would not go into my portfolio, and I would find a buyer who would bring money to the table. I proposed bringing him an offer with the purchase price $180,000, $30,000 down, $200 a month for 50 months, in other words, or a purchase price of $170,000 cash. If he would accept it, I would make anything above those terms.
With that in mind, I brought Buyer A who was willing to pay $190,000 with $30,000 cash down and $1150 per month for 181 months. The seller would pay all closing costs. We also had a proof of funds that came along with this offer.
Here is where the story gets interesting: the seller said that he had another buyer, Buyer B, who was willing to give $195,000 for the house and furniture and pay for all closing costs. Buyer B would also give $35,000 down, take over payments, and pay $200 per month for 181 months.
The seller decided that he would wait for Buyer B to produce proof of funds. However, after five days, Buyer B could not produce anything.
Structuring the Deal:
I reconsidered things and, given my experience, quickly came up with this structure:
Seller: The seller didn’t care about being responsible for the mortgage payments once he received $40,000 in cash. He did not want to wait around in America for 60 days for the loan approval.
Buyer: Buyer A wanted to build his credit in order to become established in America and get a visa. He wanted the property to be in his name using his credit and was willing to put up $30,000 as earnest money.
The bank that the buyer was using for his mortgage was one of the big five and would require a seasoned title. The only way that we could achieve that would be to use an option for the period of time that the buyer was going to be in the loan process. The title work and title insurance were key to structuring this deal.
- The house would have to appraise for $170,000; I wasn’t sure it would appraise for more than $160,000.
- If the seller left the country with $30,000 cash, it would be difficult to explain to the buyer that the house would not appraise, and that he would then need to come up with another $10,000.
We would have the seller give a limited power of attorney to my company which would allow me to sign on his behalf once he left the country. There would be an option agreement signed, and the $30,000 cash would be given to the seller. At that time, the property would have an option recorded to blemish the title. The second closing would happen when the lender had approved the buyer and the house.
Part 2 Back to the Time Line Complications:
The seller came to me with the realization that Buyer B could not perform. He decided that he would accept Buyer A’s offer of $190,000, $30,000 down, and monthly payments of $1240 per month and buyer to pay all closing costs.
In response, Buyer A, thinking he had the upper hand, changed his offer to $185,000, $30,000 down, monthly payments of $1240 per month, and the seller to pay all closing costs.
The seller was outraged that Buyer A would not stand behind his original offer and that he wanted to now renegotiate to a lower price.
Buyer A was outraged that the seller would lie (another buyer) in order to boost the price.
The seller did not sell and the buyer did not buy!
Lesson 1: Determine whether or not you have a good deal and know your exit strategy before getting involved.
- If you’re buying a house to live in, then you can pay a lot more for it because you’re going to get other benefits out of it.
- If you’re using a property to create wealth and cash flow, you need to stick to your guns in order to be able to obtain that goal.
Lesson 2: Don’t take it personally! Be aware that sellers and buyers use negotiation tactics that may cause frustration and anger.
If you’re able to walk into a deal and make money from it, then that’s a very good deal.
If you are looking at deals that are upside down and that have thin margins for profit with great cash flow, then you will need a stockpile of money to weather any storm. You will need a team of professionals to guide you through the nightmare of paperwork and negotiations. Your team of professionals will need to know the current lending practices and requirements, the amount of the down payment required of the buyer, and how long the process will take.
You Need a Mentor!
As you can see from this story, there are risks in any deal, but especially ones with this many details. This is where a mentor/coach can help you. Think about all of the time this might have taken you if you did not know what to do and had to research it all on your own.
The most important requirement of any mentor or coach is for him to be playing the game every day. This is exactly what I do, so it is exactly what I can help you with.
Let me be your coach! Join me and other successful investors at my Creative Deal Structuring Subgroup or call or email me using my contact information below. Let me coach you to learn the market and find your niche!