Newbie needs help with first deal

[virtual]

Got my first response from my mailing which was sent 2-3 months ago.  Unfortunately they waited till the last minute.  Their house is up for sale in 2 weeks.  They have filed bankruptcy twice, so I don't think I can ask for extension from bank.  

Since they have quite a bit of equity, they are asking close to ARV.  I thought a lease option would be too late to put together, since the sale is in 2 weeks.  As a new investor,   I thought wholesaling the property would be the best thing.  I was told it was a VA loan.  Is there a difference or anything I should need to know.  

I was going to offer ARV x 70% - repairs (although the house cosmetically seems fine) I have a signed authorization to release form, should I even try to short sale so I can offer seller more money?  Is there time for this?

I appreciate any feedback.  I was getting discourage for a while cuz I've been door knocking (which is harder than i thought), and sending out mailing but no response till now.  Hopefully I don't loose the deal from lack of knowledge.  

[tedjr]

Howdy Virtual:

Since there is a lot of equity a short sale is almost impossible. The house is also in good condition. In a short sale the seller gets zero for the equity and the bank or Va would take a loss. The lender will not take a loss if the seller is getting money.  Put yourself in the lenders shoes for a second. Would you take a hit if the seller is getting money.

If the seller is not willing to discount you have no deal. Hard to wholesale since another investor will not pay you anything if there is not meat on the bone.

Would there be any cash flow if you were to buy it as a rental. You would want to get it at 80 to 85% ARV  to have a good rental deal if it will cash flow.

[virtual]

thanks tedjr for the response.

If I can get the seller to sell at 80-85% ARV, is this when I would get a hardmoney lender to lend me the money to purchase the property?.. (then find tenants)  I was told not to start of as a landlord if I'm just starting out.  

I forgot to mention earlier the property was listed with a realtor since May and have a 6 month contract.  Can I purchase the property even though she has a contract with the realtor or does she need to get out of it first?  If yes, is it easy to get out of a realtor contract?

[tedjr]

Howdy Virtual:

Hard money is short term high rates. You would not want to buy a keeper using hard money especially at 80 to 85% ARV. With good credit and little rehab you can get 100% investor loans at a much lower rate and a lot less points.

You can start wherever you want to start. Who said you can not start with rentals is selling you something. It is a good idea to have some knowledge and money but you can get started with a duplex for $50K that rents for a grand a month and do just great without  much knowledge or capital.  

[virtual]

Any feedback on the realtor contract?  

[tedjr]

Howdy Virtual:

If they signed an exclusive right to sell it may be hard for the seller to get out of the agreement  just to sell to you. If it is an exclusive agency agreement then they have the right to sell to you provided you did not learn of the property for sale thru the Realtor. You should do the honest thing and wait for the listing to expire. I did cancel one agreement with a Realtor when they had not even shown it and I had showed the property to an investor prior to the listing. You need to be ethical and honest dealing with Realtors. They may be open to a commission split or a reduction in their fees if it is a hardship for the seller for instance.

[virtual]

I did know about the property and sent my first letter before it was listed.  The seller is not happy with the realtor, maybe she can try one her end first to cancel her agreement with the Realtor.  If that doesn't work, I'll contact the realtor.

New question... when they say signing the deed over to you.
Is this done during the time I leave a deposit and a contract with the homeowner?  It seems I've come across a lot of investors preaching to have them sign the deed over to you when you're at the sellers house.  Would a seller really do this even before they have a deposit or contract in place?
I thought the deed gets signed over during closing time?

[tedjr]

Howdy Virtual:

When signing the deed over you have sold the property. There will be no deposit or contract after that point. In a deal like this the seller wants no money and you as the buyer have agreed to bring the payments current plus maybe some UHaul money once the house is vacant. Another note here. Do not give the seller the earnest money deposit if you do enter a contract with them. Give the money to an attorney or title company for safe keeping. I would want a title report and  reinstatement number from the lender and a vacant house before giving the seller a dime even if I got the deed in my hand. A deed is not worth much if they do not own the house or owe more than it is worth or even will not vacate. I have given sellers equity in the form of free rent but this is not recommended by most investors. Hard to kick out if they never pay after the free rent period.

[virtual]

Thanks Tedjr for all your input... I really appreciate you helping newbies like me.  

I'd like to make my offer today and leave a small deposit.  Spoke to a real estate lawyer yesterday about getting a contract so I can fill in the blanks.  The lawyer said, since the homeowner has a lawyer, I can leave a deposit (Do I make the check to the homeowner or their lawyer?) subject to contract agreement.  Huh?  Do I write "subject to contract agreement" on the check? Or I have the homeowner sign a paper that they received a deposit from me and the amount we agreed on?  Is there a form do you know of for this?  I would like my lawyer's title company to handle the transaction.  So, do I give all the deposit to my lawyer?  I'm a little unsure of this process, can someone explain?

My lawyer said, once I leave the deposit to let him know the amount we agreed upon and the terms and he'll draw up the paperwork.  Does this mean a contract won't be signed until closing?  Is this how it works?  I thought I should have contracts on me (with blanks that I can fill in).

As I mentioned, I would like to assign the contract.  Shouldn't I have a contract in place before I advertise this property?  Or is my deposit sufficient enough to go ahead and find my buyer?  Once I find my buyer won't he want to see my contract with the homeowner to see the terms I have made with them?

Sorry for all these questions.  I want to leave a deposit in a couple of hours during my lunch break.  I still have a 9-5 until I can get cash flow.  

[tedjr]

Howdy Virtual:

Need contract signed before trying to resell. Blank forms are available at title companies and lawyers office and Realtors and online at your states real estate commission. The Texas link is TREC.com. Deposit check should be made out to title company that the buyer and seller agree upon or your attorney but not the seller or their attorney.

The earnest money is subject to the contract. If you walk you get it back as long as you are within the contractual agreement. For example you hire an inspector within the allowed time and decide the place has mold or whatever you can put in writing that you want to withdraw and receive the earnest money back.

I think you attorney meant he would draw up the closing papers. A deposit is not enough to bind you are the seller. You need a sales contract. You may also hire him to draw up the sales contract if you need.  

[virtual]

Didn't go too well...  

I offerred the homeowner
ARV ($288K) x 70% - repairs ($10K) - assignment fee ($10K) = $181,600
and she thought I was crazy.  I guess because she only owes approx $116K.  She told me she'll accept $270,000.  When I met with her she seems very motivated to sell.  Am I using a wrong exit strategy on this one?  Market value can be from $288K-$292K.  Most likely she'll accept $250-$260K (I'm assuming).

My lawyer said, if I have a signed contract agreement with the homeowner, he can delay the sheriff sale date.  Hope this is true even though the homeowner filed bankruptcy twice. I still have to get the homeowner to accept my offer in less than two weeks.

Can you let me know if there's other options here or am I just wasting my time?

[tedjr]

Howdy Virtual:

Even at $250K you are a long way from being able to make any money. Not all sellers will sell for what you want to pay. Walk away unless you see another strategy to pay more. If you can find a buyer at $275K as is and close in two weeks then get it under contract and flip it. This may be possible in a hot market. Stuff is cooling off almost everywhere and nothing is a sure bet especially if you pay too much. Do not get so excited about doing a deal that you end up paying too much and lose money. My first deal after getting started again was like that and my dad lost $15K after making payments on a vacant house almost a year. I learned a hell of a lot and wish I had lost that money as I would have learned the lesson even  better. I still worked hard as hell for nothing, a lot of sweat and really hard physical labor for nothing. I can set and home eating tacos and drink Guinness and watch the Cowboys win football games and lose money every month and be a whole lot happier.

I do not believe this will be a good rental property and if it were you want to pay around 80 to 85% of the ARV less fix up which would be  around $235K tops including closing costs. I do not believe it will rent for $3K per month which is even low for a great cash flow deal. Find something else .

[bobcooltx]

I just wanted to chime in and say that Ted is right on.  When wholesaling you always have to keep in mind what a rehabber will have to spend to rehab and sell a house.  Using the deal evaluator spreadsheet, I came up with these numbers based on your assumption that she would take $250k:

$250,000   Purchase price of rehab         
$10,000   cost of repairs         
$10,000   assignment fee         
$9,993   14%   of loan/12 x   3   # of mos held (HML loan)
$13,000   5%   Point(s) for loan origination fee      
$2,500   Other purchase fees=appraisal, title cost, termite report, comps,etc         
$2,880   Holding cost= # mos x  (taxes, insurance, utilities, etc.)         
$2,500   Hedge factor         
$14,400   Sale fees, ads (increase % if using realtor!)         
$315,273   Total cost of project         
            
$288,000   ARV (After Repair Value) Low end         
            
$37,500   (15% goal minimum profit that most rehabbers look for)   
-$27,273   Profit         
-11%   Current % Profit         


This is definitely not a good deal for you.  Even if she accepted a $200k offer, then you would still be under the minimum 15% profit required to be attractive to a rehabber.  I suggest you print or write out your numbers (if you haven't done it yet) and leave it with her.  As the date draws closer to the sheriff's sale, she may have a change of heart.

Don't forget to remind her how bad a foreclosure will be on her credit record.  Don't be a doomsayer, but make sure she knows that she'll get zero dollars  _and_ a foreclosure on her record if she doesn't sell the house.  You are helping her get out of this jam but you also have to buy this house below market to make it attractive to a rehabber.  I wouldn't offer her anything over $195,000.

Plus, if you haven't done a title search yet, who knows if there are other liens on the house?  It pays to do your homework...