Chris Heekin
Active 2 years, 10 months agoForum Replies Created
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Did your attorney indicate that this applies to loans only? Or all equity participation strategies?
What does this do to performance leases? What about purchasing with owner financing with an equity participation or performance clause?
What if the private money partner purchases the home, and we take back an option and lease?
Frustrating to not be able to read the regulations and get the information myself.
Leah,
To work out a sale price and terms with owner financing, you have to think in these terms: The sale price can be fair market value as long as you can afford the terms.
On the terms, don’t even think about interest rate. Market rates have nothing to do with this calculation. Since your intent is to eventually rent out the home, you’ll need to do some market research to determine what market rent range is right now. Figure out what the middle of the market rent is, and subtract $50-$100/month from that.
Then, find out what the current taxes and insurance payments are. Back those out of the equation. Take 10% off the market rent to allow for vacancy, another 10% for repairs, and 10% for management. That’s the absolute MOST you would want to pay.
Then, tell the seller that if you do all this, if you’ll keep the house rented, keep the taxes and insurance paid, handle the vacancy and repairs, do all the required management, don’t you deserve SOMETHING for your efforts? Take another 10% off the market rent for profit, and that’s the best you can do.
Carefully explain all this to the owners; it’s easy to justify. Now, they’ll either take the deal or they won’t. If they take the deal, you can figure out your 30-year mortgage payment from that figure, the sale price, and a financial calculator.
If they need more money than that (need being defined as enough to cover their mortgage payment – anything more than that is a want), you’ve got two choices, and it all depends on your own financial situation.
Choice number one is easy: walk away from the deal, but keep asking the owners every few months or so.
Choice number two is a judgement call on your part. If you can comfortably afford to have the difference between what they need and what the property will generate, offer them this deal: You’ll pay their terms, but only if you get back $2 for every $1 you pay in equity. Example: You determine the property will generate $1000/month that you can pay the seller safely, but the seller needs $1100/month to cover his mortgage payment. Tell them you’ll pay the $1100, BUT, in addition to the equity generating from the $1000 portion of your profit, you want $200 in equity each month because of the extra payment.
Of course, in choice 2, you have to look at their financial situation, and make sure you don’t run into a situation at the end of your payments to them, that you’re supposed to be done making payments to them, but they’re still making payments to the bank. Don’t put yourself in that situation!
At Dyches’s seminar this weekend, Terrell Sheen pointed out something I will put into the contract next time I work with a townhouse.
The suggestion: if there is ever a community assessment, adding on to the normal annual HOA fee, the cashflow to the homeowner should be adjusted until the assessment is paid off.
I guess there’s always a way to make the next deal even better!
Jackie,
What are some of the best ways you’ve found to market specifically for master leases? I’ve done three so far by calling on homemade For-Rent signs and asking if they would like to sell, and on For Sale signs asking if they would rent to me, but I’d like to get a bit more aggressive this year by adding additional ways of reaching out to owners.
I’m struggling with that question right now Jackie.
I can certainly attest to the truth of Jack’s article above. I got started in the business in 2005, buying one house at a time with bank loans that I signed personally. The cashflow was marginal, but that was ok – house prices always go up, and rents will raise $50/month, so in two or three years we’ll be entirely OK.
Ummm, yeah. At least, that was the thinking. In 2007 when the markets crashed and the housing market really started to tank, I was stuck with 5 houses making $600 total above PITI. Not only that, but I was also a very poor manager. My repeated tenant screening mistakes cost us thousands and thousands of dollars.
When I really realized the predicament I was in, I was terrified. I spent a lot of sleepless nights haunted by the situation. I had put my family in a situation where I had invested a lot of time and energy into potentially bankrupting us. Because of this stress level, I often snapped at my wife and kids, making my not very good of a husband and father either.
I knew my situation HAD to change, or my family was going down, and I was the cause. I took a few critical steps that I didn’t realize at the time, but that were critical to turning my situation around. First, I took a Dyches Boddiford advanced strategies seminar. I’ll be honest, I got almost nothing out of the presentation itself — I wasn’t ready for it at that stage. The one thing I did benefit from, was meeting Danny and Ann Williams. That led me to a local investment group Danny leads, where I learned strategies that made all the difference. I learned how to make risk-free equity-sharing deals with private investors (half-pie deals, as Danny calls them). I learned from Danny about Cashflow Depot and the Extreme Success group, where I learned about Highest Bidder Sales. And finally, I was led to take a David Tilney seminar, where I FINALLY learned to screen tenants and manage property correctly.
Fast forward a few years. I picked up three half-pie deals with different investors. I picked up three lucrative (and almost risk-free) sandwich leases. I bought my first every home with owner financing (and no personal liability). Last (but CERTAINLY not least), Jackie pretty much held my hand through a luxury home Highest Bidder Sale that, with the help of Latron Thorne, put $20,000 in my pocket at a point in time where I wouldn’t have survived without it.
Now, I am in such a better situation with my real estate business that it’s night and day. We’ve got a 50% margin cash flow above and beyond PITI (compared to 15% a few years ago). Cash flow, cash flow, cash flow – and all of it either 100% risk free, or at least far safer than signing personally on a note!
As I’m finding, this presents its own set of challenges. The very real panic is gone, and that drive to succeed (conviction) in order to protect my family has lost its driving reason. Now, we’re in a very comfortable situation with the business – perhaps too comfortable. If we’re going to take this business further, I really need to discover (and soon) what is my new driving reason for succeeding and growing.
Jackie,
I might be calculating profit slightly differently than you, let me know if you would still consider this skinny…
$850 market rent
-$125 taxes
-$40 insurance
-$25 HOA fee (TOTALLY guessing on this number, I’m unfamiliar with townhouse fees. If this number changes, so would my offer on monthly payments)
-$85 (10% budgeted for vacancy)
-$85 (10% budgeted for repairs)
-$85 (management fee — I’m the manager, but I build this in for my time)
-$40 (profit. When I pitch this to sellers, I tell them “If I’m going to pay the taxes, and the insurance, and maintain the property, and guarantee the payments, don’t I deserve something for my efforts?”)
= $365 left in the deal to make payments to the seller.So my $125 profit that I’m calculating from above is from the management plus profit.
In reading your reply, I’m definitely starting to see why many folks don’t like townhomes. I do like your idea of tying up the property with an option and offering it with seller financing, though – I will probably go this route instead. This way, if I can’t find a buyer, I’m not on the hook. Thanks for the insight!
Jackie, I whole-heartedly agree that David Tilney’s Hassle-Free Property Management course is fully worth taking. I took the course about a year and a half ago, and the procedures and mindset I learned at his course helped me turn around my entire business.
I was not doing very well at all prior to taking the course, and couldn’t have survived another year of poor management (by me). Not only did I manage my existing properties much better, but I also negotiated several sandwich leases in 2011.
It’s truly amazing the difference GOOD management can make.
Jackie,
They certainly have dropped, in some cases substantially! You’re right, in many areas the foreclosures are dominating the market so heavily that houses that sold for $120,000 are now going for $50,000-$60,000 through HUD – and that’s IF it’s in top notch condition.
I can’t speak for Dyches – I’ll actually have the opportunity to ask him about it tonight at Danny’s meeting tonight. But I really, really don’t care about equity. If prices drop even further, yippee…. I stopped caring about equity two years ago. I’m in it for cash flow, cash flow, cash flow. And while prices have dropped 50% or more in some cases, rents have only dropped 10% or 20% at most. I’ve only had to drop the rent on one of my properties, and that one was way over the market average to begin with.
Eighteen months ago when I shifted focus away from equity, and towards cash flow and profit margin, I had $600 total cash flow above PITI on five properties mortgaged in my name. Had a lot of equity, but no room for anything bad to happen. Since starting to work with private investors on income sharing and profit sharing terms, I’m now up to $1600 cash flow above PITI on eight properties. More importantly, eighteen months ago my profit margin (ONLY counting PITI as my fixed expenses, not even accounting for vacancy and repair) was 15%. Today it’s 40%, and I’m sleeping much easier.
To be honest, I’m starting to back off the idea of selling the payment stream on this house. I just feel so FREE getting away from having fixed payments whether my houses are occupied or not, that the more I think about it, I do NOT want to go back there again!
The first mortgage is for $60,000.
Ongoing income: No interest rate – just 60% of the net income on the property. So if there’s an expense, effectively the mortgage holder pays 60% of the expense.
Final disposition of the property: the mortgage holder gets his $60,000 back first. Then, the higher return for the investor applies: either 60% of the net profit, OR, 8% simple interest per year on his $60,000. HOWEVER – if this doesn’t leave me enough to get $12,000 back, then he gets the first $60,000, I get up to $12,000, and he gets whatever is left.
The note is for 30 years, with a call available after 5 years. If the note is called, I have 180 days to come up with the cash.
Gregg,
I guess I should have given a few more details…
The tenant: is on a lease purchase situation. If it sells to this buyer, then I will get at least $12,000 on the back end, making paying off the principal on an interest-only note no problem. And if it doesn’t sell to this buyer, I have no urgency to sell built into my note with the underlying investor.
The potential buyer of this payment stream: I have two different people identified as wanting to invest, who have already mentioned that they would be interested in 12% interest-only payments, but neither have enough funds to put up for a first mortgage position on another house. The $12,000 amount really is in either one of their comfort zones.
My question more revolves around: what’s the best way to structure this? As a second mortgage on the property? I’ve never sold payments before, let alone partial payments, so I’m not sure if its as simple as just creating a note and mortgage.
