1st Deal - Owner Financing - HELP!

[lucasgirl]

Hi all,  I've been reading just about everything on this site, plus books by Bronchick, Carlton Sheets course etc. but I'm about to make my first deal and a little scared  :
The owner wants to sell and get into an assisted living place, wife is in nursing home, he is pretty well financially set so far, owes nothing on the house.  He replied to my "I buy houses" ad, I met with him, went through the house, 3+ bdrm, new roof, city heat, sewer etc, all appliances stay, heated 2+ stall garage, nice neighborhood etc.  - nice Anderson windows, newly insulated.  I asked him what he was hoping to get, he said it's appraised for 67,000.  (I checked on the state accessor site and that is the amount it's assessed at) - asked him if he needed the full amount or would he consider terms.  Said he would definitely consider terms because the nursing home takes everything anyway.  
So, here is what I'm thinking about offering:  $63,000, $5,000 down, $200/mth for 36 mths and then a balloon.  I'm going to list it as a L/O for $79,800 with $5,000 down, 550/mth for 12 mths and then a balloon.  Does this make sense????  I'm suppose to meet with him this Friday, Feb 4th.   Thanks for any help you can give me.

[NoMoneyDown]

First thing ... Never take a seller's word for the price of their house.  Run comps, get your own appraiser, etc.  He may be right, or he maybe wrong.  Next, don't take the seller's word about the condition of the house (he may not even know about things that could be wrong).  If you are unsure, get an inspector.  Don't jump into the deal because it is your first one.  Make sure all the numbers are correct first.  Your due diligence upfront could save you in the long term.

Regards,
Steve

[thenotedetective]

[b Lucas Girl, Sounds like a potential deal for you here.

    Good for you.

    I like the way you have it structured except you can not put a balloon in when you do a lease option, since they do not own the home yet. You could sell it to them as a L/0 for 12 months and then they would have to get financed to pay the option price, or you can do another 12 months with them, or they would have to move out. You could then do it all over again.

     Buy the home for 63k with 3k down. Seller finances you for the 60k @ 6% for 360 months with a 3 year balloon. Your payment would be 359.73 per month to the seller.

     You can then sell either with owner financing, or in your example the lease option. You can sell for 74k, with 4k down - non refundable deposit. If the rents are going for 700.00 a month in that area, rent it for the 725.00 a month for those 12 months. A nice cash flow. You made 1k up front, and now you have a cash flow of 365.27 per month!

     On the back end, when the buyer gets financed, you get another 10k. You owe the seller about 60k and the buyer owes you 70! You take the difference.

     Profit on the deal is:

     1k up front

     365.27 x 12 = 4,383.24 cash flow

     10k on back end.

     total = 15,383.24.

     Not too bad and I hope it works for you.

     Warmly,
Richard P. Belliveau   aka  THENOTEDETECTIVE

[Bud Branstetter]

I would be talking to the seller about what is is going to do with any proceeds if something happened to him.  The reason is that if he has no assets he can qualify for the government to pay for him to be in the old peoples home.   If he has assets then the government wants him to spend it down.  

If he were to set up the sale and note taken back in a note trust then he could gift a portion of the trust to his heirs with the provision of something like a life estate.  The heir will own it but he can spend it without counting as an asset.

Depending on how much advantage you want to take of the seller you could propose to pay 36 payments of $550 a month for the 36 months then the remainder of $39,200 at year five.   You can adjust the monthly to suit your needs.  The idea is an interest free loan.

On the sale end a L/0 with the option that expires becomes the same thing as a balloon payment.  If the can't make it they lose out.

You might not be able to get 7% down on a straight lease option. If you find someone with that much there are ways to get them to put it up.

[lucasgirl]

Thanks everyone for your responses.  "Nomoneydown" - I checked with the assessors office and the "assessed value is $67,000".  I had my RE agent do a drive by and he says the appraisal would be high 70's low 80's.  Bud, your mentioned the spend down thing - yes, that is what he is having trouble with, he "gifts" $4,000 to his kids each month to try to spend down.  I'm interested in how to present the Trust option to him because I think that would really help lock the deal for him.  Where can I get more info on that?   I'm planing on meeting with him tomorrow but I might stall if I can learn more about the Trust thing.  Would it be a good idea for us to both talk with an attorney to set the deal????   Thanks again, I really appreciate all of your feedback.  They say the first deal is the scariest!!!  

[Roger J]

lucasgirl,

Don't make this more complicated than it needs to be.  Don't, I repeat, DON'T go trying to discuss something with this seller (like a trust) that you yourself do not yet understand.  Doing so will likely only screw up this deal and the last thing I'd want to see is your first deal head into the courtroom because you tried something that you didn't understand.

In other words, use the KISS principle (Keep It Simple Stupid).  If he is okay with holding the note, then let him finance the deal for you.  Simple.  As you become more experienced in REI, then you can try to increase your methods of buying real estate.

Roger J