Advice on Owner Financing Deals?

[QueensKiddd]

To start off, let me explain a little about my background. I'm an equity trader at a hedge fund. I've done very well in the last couple of years, and I'm looking to put some of my cash to work in alternative investments.

I've been negotiating with banks over the past 6 months, and I've been able to get in some great offers on short sale properties in Palm Beach, Florida. My goal is to purchase these properties (mostly condos) directly from banks at well below market value by offering 100% cash for them. Since condo mortgages are extremely difficult to obtain in Florida, I was thinking I could take these properties and immediately flip them at/or above the current market value by offering my own financing option to buyers.

As an example: Lets say I purchase a water front luxury condominium for $150,000, while the current market value is conservatively $200,000. I then immediately put the condo back up for sale at $200,000 by offering perspective buyers a 5% fixed rate 30 year mortgage. All I will require from a buyer is that they pay me a minimum 10% deposit.

I think this would be a win-win situation. I'd be selling the property for higher than what I paid for it, and I'd also be collecting interest on the market value of it.

I'm still trying to figure out if this is a good idea to pursue. If anybody has any advice, suggestions, or comments for me I'd really appreciate it. Thanks.

 

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[GlobalWealth]

In theory, your idea is not too bad. But I don't like the numbers. Would you really feel comfortable loaning out your money to someone who couldn't get his/her own financing at 5% for 30 years?

That's a very low ROI with a very high risk.

I could see doing a 'lease-to-own' situation where you credit some amount of their monthly rent towards their downpayment, ie. $1000 monthly rent and they get $100 towards downpayment.

This would give them a feeling of ownership without you giving up the asset. They could also take some time to come up with the financing.

Another option would be to offer the condo at $200k with 20% down, 5 year balloon mortgage at 8% amortized over 15 years. Less risk, more cash.

 

[QueensKiddd]

GlobalWealth, I really appreciate your comments. I was only using those numbers as an example. I'm still trying to figure out what numbers to actually use, and what type of deal I should offer buyers.

Is it really a risk to loan money to a buyer? I figured if the person couldn't pay, I'd keep their down payment, and get the property back in my possession. Maybe I'm looking at it in the wrong way, or there's more to it that I'm not seeing. Please elaborate on the risks if you can.

The reason why I didn't want to bother with renting the place, or even doing a rent to own type deal, is because I don't want to be involved with tenants. I've heard plenty of horror stories about tenants who destroy properties, and cause tons of other problems. I'm mainly trying to get the properties at below market prices, and then immediately flip them.

I think your last idea is great. I definitely agree with you that it would be less risk and more cash. 20% down, 5 year balloon mortgage at 8% amortized over 15 years, sounds great! My only concern is, will I be able to find a buyer who will agree to those terms?

 

[Guest3722A]

In this market I'd go 10% amortized with a 2 or 3 year balloon! run it like a hm lender except the hm guy would be at 12-16% interest only with 1-2 yr balloon.

-this might be tad bit too hard core tho for residential!

 

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[QueensKiddd]

I guess the numbers in my example were really way too soft LOL

Topheara, I'd love to pull off a deal like that. The question is, will I be able to find a buyer willing to accept those terms?

What would be the best way to find buyers?

 

[Guest3722A]

The key is that 'interest only' thing because this means the guy's payment would be easy for him to handle. That's your sell point. On top of this it's all profit to you because principal doesn't get paid until he finds conventional financing.

so, if you can get that payment tempting, you're in. Basically you're buying him affordable time for a dream home. It's a win win, just make sure he has verifiable work income if you plan to have him get conventional financing because they're gonna want an adequate work history.

-to answer your question, get a good fl realtor. The guy who goes under cat man du on this site may be able to help you there

 

[QueensKiddd]

Thanks for the advice. I'll start looking for buyers as soon as I can close on some properties.

What do you recommend as the best structure for providing the financing? Would you recommend a "contract for deed" type deal where I hold the deed until the final balloon payment is made? or would you recommend an outright sale of the property where the buyer takes control of the deed, and I'm only financing it?

 

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[Guest3722A]

Your first step I think would be to get a solid understanding of residential law in Florida. My background is commercial and I've been giving info based on commercial. Commercial is more like the wild west with fewer regs because it's basically all business with no consumers to protect.

But the area I would be looking into would be bridge lending based on the info I gave: Bridge loan - Wikipedia, the free encyclopedia

If residential regs stop this approach, I'd try to figure a way to make it a business transaction. .... that's how i'd try to roll it

Anyway, I got a stock question for you... what's up with the crazy spread on JKS? At times it's over .25! Is this a liquidity thing? I thought spreads like that weren't allowed anymore.. Or is my info wrong? :huh2:

 

[QueensKiddd]

I'll check out bridge lending.

It's funny you mention JKS cause I actually took a quick trade in it earlier this morning. I bought it for a daytrade at $25.82 at 9:40 AM, and sold it at $26.69 at 9:47 AM. Those are the trades I love to take lol

The reason the spread is wide on JKS is because there isn't any liquidity. Its a very low interest stock. If you have access to a Level II window, you can see the size of the bids and offers on both sides. Usually they only have a few hundred shares at every price level, which shows that there isn't much interest in the stock. The book is extremely thin, which keeps the spread wide. Another reason is because the stock is pretty low volume. Its average volume in the past 3 months is only around 150k shares. Normally the spread on JKS will be between 5 and 10 cents. It can widen to 25 cents or more if a lot of volume suddenly comes in on one side, and the bids or offers can't keep up.

The positive to a stock like JKS is you can get a big pop if its going your way. Its very easy to manipulate and move a stock that has a thin book. The negative is that it can hurt you pretty bad if it goes against you because you can't get out very easily. I guess its a double edge sword

 

[Guest3722A]

Keep an eye on it of you're looking for another trade. It looks like it put in it's base and may be getting ready to pop again...

What stinks for me is all of the day trade regulation that's out there seeing that I'm undercapitalized, and I used up my 3 day trades already last week, I have to sit on my hands and can't take advantage of possible opportunities. If I did, the regs would send me to my bedroom for 3 months.

 

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[Red]

I guess the numbers in my example were really way too soft LOL

Topheara, I'd love to pull off a deal like that. The question is, will I be able to find a buyer willing to accept those terms?

What would be the best way to find buyers?

You're touching on a part of this whole equation that, thus far, seems to be missing in your research...

Is your market out there in FL trending up or down in regards to condos in the zip codes you're contemplating? And if you're getting your answers to that question from the newspaper or online, I'd be willing to bet you my next commission check it's not accurate. Have you talked to someone in that industry down there for the real scoop? Someone with their hand on the pulse of the condos in the area?

If you're not aware of the trends, the price you pay today that's "well below market" could be the current market value in 6 months.

Who is your target buyer? Vacation/2nd home buyers? Retirees? Single young professionals? Young families just starting out? (I'm guessing it's not the latter)

How long does one of these properties typically sit on the market before buying?

Why is it hard to get these condos financed down there? Are they not FHA approved projects? Are they VA approved? What part of the purchases in that area are from cash buyers vs. financed buyers?

How are you going to market to your buyers? In AZ, over 90% of homes are sold because they are in our MLS system. This equates to real estate agent fees out of your pocket if you go this route.

These are all very important factors in the decision making and come into play BEFORE you even start worrying about the numbers on the selling/owner financing side.

 

[andviv]

Something else to consider, condo fees are outrageous in many parts of FL. Hurricane insurance (well, wind damage insurance) is expensive if the construction is too old, and then elevator and swimming pool maintenance is expensive if it is too new and has too many amenities.

Make sure that is considered when you go after these properties, as those will be holding costs for you to keep in mind when estimating the numbers.

Something else to keep in mind, you could sell the note after a couple of years in case you need cash, so that is one exit strategy to remember, but make sure to know what type of discount you need to offer to a potential cash buyer.

 

[GlobalWealth]

GlobalWealth, I really appreciate your comments. I was only using those numbers as an example. I'm still trying to figure out what numbers to actually use, and what type of deal I should offer buyers.

Is it really a risk to loan money to a buyer? I figured if the person couldn't pay, I'd keep their down payment, and get the property back in my possession. Maybe I'm looking at it in the wrong way, or there's more to it that I'm not seeing. Please elaborate on the risks if you can.

The reason why I didn't want to bother with renting the place, or even doing a rent to own type deal, is because I don't want to be involved with tenants. I've heard plenty of horror stories about tenants who destroy properties, and cause tons of other problems. I'm mainly trying to get the properties at below market prices, and then immediately flip them.

I think your last idea is great. I definitely agree with you that it would be less risk and more cash. 20% down, 5 year balloon mortgage at 8% amortized over 15 years, sounds great! My only concern is, will I be able to find a buyer who will agree to those terms?

Taking back property due to nonpayment is a real pain in the a$$. If you are collecting a large enough downpayment, then the hassle is worth the risk, but probably not with only 10% down (just my opinion).

 

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[QueensKiddd]

Keep an eye on it of you're looking for another trade. It looks like it put in it's base and may be getting ready to pop again...

What stinks for me is all of the day trade regulation that's out there seeing that I'm undercapitalized, and I used up my 3 day trades already last week, I have to sit on my hands and can't take advantage of possible opportunities. If I did, the regs would send me to my bedroom for 3 months.

There are ways around the regulation. I don't know how serious you are about day trading, but if you trade on a regular basis, there are a lot of day trading desks you can contact. These places allow you to put up a very small deposit, and they provide you with massive amounts of buying power. I literally know of guys who put up a $5000 deposit, and were allowed to use over a Million in buying power. Not to mention, you can save a ton on commissions. Some of these firms will charge you less than $1.00 per 1000 shares you trade, and you will receive full rebates from the different exchanges. If you need help, I can give you the name and number of a firm where they don't require any securities licenses. You can simply call them and open an account.

 

[rcardin]

Contract for deed is an executory contract. It can require 30-60 minimum notice before you can evict or foreclose the property. Been there done that. You said you don't want tenants but that is realy all your buyers are. In my experience you will spend just as much on rehab when your tenants move out as you would if you just rented it.

Depending on your buyer if something goes wrong they may or may not fix it. When I finally got possession of my property that the buyer had lived in for over 3 years the oven was broken and the dishwasher was gone. The whole vanity in the downstairs bathroom was gone due to a water leak they never fixed. Tile floors were ruined and broken. Carpet was gone along with all of the doors. Every room had a hole in the wall.

The tax benefits go to the buyer which means you will pay interest income and lose the 1099int. This ended up screwing me on taxes. We went from getting an 1800.00 return to owing 800 in one year.

This is just my experience in the owner finance properties. your mileage may vary

 

[QueensKiddd]

I appreciate all of the questions and comments being asked here. There are a lot of things I obviously need to think about. I'm still fairly new to the real estate market.

Red, from what I've researched, the market I'm looking at has been fairly stable. It took a big hit down when the housing bubble collapsed, but since then its been relatively stable. I have a friend who lives in the area, as well as a short sale agent who I'm always in contact with regarding the area. I'm constantly looking at the average/median/high/low sales prices per square foot for the developments I'm interested in. I've made sure to put in offers well below the current market value. As long as the market remains stable at a minimum, I should not have any problems.

I was initially thinking of renting the properties out. The majority of the tenants in the area are young single professionals. However, since I'm a full time trader, and I don't want to spend time dealing with tenants, I decided to go the route of flipping the properties. I figured if I provide financing where financing isn't available, it would make the deal sweeter for perspective buyers.

Depending on how willing sellers are to negotiate, I've noticed most properties are sold within 90 to 120 days. Once again, those properties do not have financing available. I think I have a huge leg up on other listings because I'm able to provide financing where it generally is not available.

As far as I know, there is no financing for the majority of condo developments throughout Florida. Nobody is willing to underwrite the loans, especially since a large portion of the condo market is being held by investors and/or banks. Here's an interesting article to look at:
http://http://www.tcpalm.com/news/2009/jan/26/new-rules-raise-bar-condo-mortgages-fla/

I was planning to market the properties through a real estate agent in Florida who I've had friends work with. He markets the properties across the web. He's also a premium member of Trulia and Zillow. Not to mention he's highly active in syndicating the listings across other sites.


Andviv, I made sure to research the HOA fees, property taxes, and other expenses prior to putting in my offers. I'm also starting to factor in Real Estate Commissions if I were to sell.


Globalwealth, I agree with your opinion, 10% is low for the risk. I'm going to definitely look for a higher payment up front.

 

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[QueensKiddd]

Contract for deed is an executory contract. It can require 30-60 minimum notice before you can evict or foreclose the property. Been there done that. You said you don't want tenants but that is realy all your buyers are. In my experience you will spend just as much on rehab when your tenants move out as you would if you just rented it.

Depending on your buyer if something goes wrong they may or may not fix it. When I finally got possession of my property that the buyer had lived in for over 3 years the oven was broken and the dishwasher was gone. The whole vanity in the downstairs bathroom was gone due to a water leak they never fixed. Tile floors were ruined and broken. Carpet was gone along with all of the doors. Every room had a hole in the wall.

The tax benefits go to the buyer which means you will pay interest income and lose the 1099int. This ended up screwing me on taxes. We went from getting an 1800.00 return to owing 800 in one year.

This is just my experience in the owner finance properties. your mileage may vary

I agree with you that dealing with tenants can be a problem. I also agree that my buyers will be as good as tenants. I'm learning a lot from the members on this site. I'm confident that if I structure the deal right, I'll be risking very little.

I'm going to make sure that I take at least 20% or more up front. I'll be looking to collect interest only payments for 5 to 7 years, before taking a balloon payment. If a buyer decides to walk away after that, I'll have their 20% down payment, as well as all of the interest they paid me.

 

[Guest3722A]

There are ways around the regulation. I don't know how serious you are about day trading, but if you trade on a regular basis, there are a lot of day trading desks you can contact. These places allow you to put up a very small deposit, and they provide you with massive amounts of buying power. I literally know of guys who put up a $5000 deposit, and were allowed to use over a Million in buying power. Not to mention, you can save a ton on commissions. Some of these firms will charge you less than $1.00 per 1000 shares you trade, and you will receive full rebates from the different exchanges. If you need help, I can give you the name and number of a firm where they don't require any securities licenses. You can simply call them and open an account.

I live and breathe trading and have set up my life so that I have living expenses for a year and my trading capital. Originally I had 2 years of living because I had investor backing but they were too controlling and wasted time so I had to let them go, and go on my own.

To give you a quick background, I was one of the guys who started trading in '97 when the internet opened up and changed the industry. From there my life took quite a few turns and I left trading for a few years. I began trading again last year March, and believe it or not, I was one of the few who called the bottom. (used a quarterly candle on the S&P)

My plan was to sign up with Echo, but they want the 7 and I went through a bankruptcy with my business which brought up red flags with Echo and gave me more walls to jump over.

I am very interested in the firm you're suggesting and greatly appreciate it!! I'm assuming it's a CBSX, which is why they don't want the 7...right? I have heard horror stories though about some of these shops, but I also know there are good ones out there. Please pm the contact info.

Also,

Would it be fair to assume it's an arcade that allows remote?

and,

As far as rebates go, this is if I add liquidity with limits but if I take liquidity, would I still get em?

Anyway, thanks again and I appreciate the help! This is my chosen path!

:cheers: :cheers: :cheers: :cheers: :cheers: :cheers:

 

[QueensKiddd]

I live and breathe trading and have set up my life so that I have living expenses for a year and my trading capital. Originally I had 2 years of living because I had investor backing but they were too controlling and wasted time so I had to let them go, and go on my own.

To give you a quick background, I was one of the guys who started trading in '97 when the internet opened up and changed the industry. From there my life took quite a few turns and I left trading for a few years. I began trading again last year March, and believe it or not, I was one of the few who called the bottom. (used a quarterly candle on the S&P)

My plan was to sign up with Echo, but they want the 7 and I went through a bankruptcy with my business which brought up red flags with Echo and gave me more walls to jump over.

I am very interested in the firm you're suggesting and greatly appreciate it!! I'm assuming it's a CBSX, which is why they don't want the 7...right? I have heard horror stories though about some of these shops, but I also know there are good ones out there. Please pm the contact info.

Also,

Would it be fair to assume it's an arcade that allows remote?

and,

As far as rebates go, this is if I add liquidity with limits but if I take liquidity, would I still get em?

Anyway, thanks again and I appreciate the help! This is my chosen path!

:cheers: :cheers: :cheers: :cheers: :cheers: :cheers:

Looks like you and me are in the same business. I'll PM you rather than talk about it on this thread.

 

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[Guest3722A]

QueensKiddd,

You are awesome brother!!

I'll send you a pm sometime tomorrow cuz it's gonna be detailed and will take me a bit. But I am very interested in what you had to say.

REP!!!!!!!! again.......... if it'll allow me to

....nope wouldnt let me