Rehabbers - Strategy for title seasoning problems

[cparobbins]

Rehabbers – Creative strategy to overcome title seasoning problems

Many times rehabbers are “stuck” holding a mortgage or holding onto the property as a rental because the title has not been seasoned long enough for a bank to finance an end Buyer.

Rehabbers can overcome this issue if they are willing to think outside of the box and work with a little creative financing. They can structure their sale to their end buyer as a seller financed transaction (underlying liens, etc., are not a problem). At the closing table, they sell (or assign) that seller financed mortgage to an investor (a note buyer) for the cash. From those funds, all underlying liens (if any) are paid off and the balance is paid directly to the rehabber (the seller). It is a type of simultaneous closing that has become a great tool for the savvy rehabber. The catch is (and yes, of course, there is always a catch) is that all seller financed notes are purchased at a discount depending upon the buyer’s credit, the note structure, etc., so the rehabber must be willing to give up a bit of his profit (usually anywhere from 5-10% of the mortgage balance) in order to cash out of the deal. By finding the right Buyer and structuring the note properly, the discount can be minimized to usually work for the rehabber and not hurt his profit margin too heavily.

This type of deal only works AFTER the rehabber owns the property and the repairs have been done. Investors will not put money into the deal for the repairs. The appraisal must be in as-is condition. Many times a list of the repairs and copies of the receipts are required as well.

However, this can work quite well for a property flip where no repairs are required. In that situation, we can actually work a triple simultaneous closing where 1) property is put under contract between the original seller and the flipper; 2) the property is put under contract (for a higher price) between the flipper and an end Buyer; and 3) the deal is structured as seller financed and the mortgage is purchased at closing to fund the original seller and any underlying liens. The only “catch” here is that the final sales price in the second sale must truly reflect the value of the property. There can be no inflation of prices. We usually ask for a detailed explanation of how and why the property was acquired cheaply and then re-sold so quickly for a higher price. If the deal is just and makes sense and the value is supported, this deal can be done.

Hope that gets the creative juices flowing!

Warmly,

Michele Robbins, CPA

[tedjr]

Thanks for the heads up. This sounds like advertising and Tim will probably delete? I have a condo that I am rehabbing and is almost ready for resell. I will only net about $12,000 profit and if I give away 5% to 10% of the note I could be paying you to take the deal. All the hard work and risk. I would have to really want to sell to badly to give that much away with already the high commission costs and hard money costs and the slow sales market.  I already am having a hard enough time as it is.

Is there a way to structure the owner financed note where you get your yield without the discount?  What yield are you going for? Also most of my buyers will be low end low credit low income buyers. How will that affect the equation. I may be stuck holding and doing a lease option or owner financing because of the seasoning crap.

Hepl  !!!!!

Good luck and thank you,
Ted P. Stokely Jr
11505 Sw Oaks
Austin, Texas  78737
512-301-9171 home
512-587-6177 mobile

[cparobbins]

Ted,
I should have taken out the fact that we do these types of deals so that my posting is viewed more as an article instead of advertising. That was the intent... at any rate.

The discount on the mortgage is definately dependent upon the buyer's credit and the note structure. Sooo..... you could minimize the discount by increasing the interest rate to meet the investor (note buyer's) yeild requirement - but there would probably still be a minimum discount of $3,000 - $5,000 on each deal. On a $300k sized deal, that's not a big hit. On a $50k deal, it certainly is!

I understand your concern that the discount will eat away much of your profit. In that case, this strategy would not work. It is just a tool to have in your back pocket. If you have a nice spread on a deal... then, it may well be worth the extra discount to have your cash now. For some it will ..... for some it won't.

Warmly,

Michele Robbins, CPA