Example Deals: 100% Owner Financed Deal In Florida Analyzed -Does It Make Sense?
How do you determine if a 100% owner financed deal makes sense?
This video will show you what to look for and what to avoid.
Owner financing almost always makes more sense than using your money or your credit, but not all owner financed deals are created equal.
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Read Transcript for “Example Deals: 100% Owner Financed Deal In Florida Analyzed -Does It Make Sense?”
Here’s an example deal where I’ll show you how to structure it and still come out ahead, using either Subject To or a land contract.
“I have a deal that has some good features to it but I’m broke and have bad credit. I need this deal to get some cash flow coming in and start replacing my income and allow my wife to be home with the kids. I’ve located a grouping of duplexes that the seller is willing to sell with 100% owner financing for $109,000 for each building. They’re rented and in good shape. I contacted a local realtor that I found on Craigslist and she drove by and said that they looked good and that his rents are normal. If I can get my own financing, he’ll give me a 20% discount for not having to carry the note. I cannot go to traditional lenders because my FICO is 596.” – C.R. Harpe, Florida
Joe: These days, if you want to get an investment loan, you’re going to need a 720 and show income to support those properties even without their rent. It’s very difficult to get an investment loan these days.
“I found a private lender but most won’t touch anything under $1,000,000. The only one that I found that will handle smaller acquisitions will do 65% loan to value on the appraisals or purchase price, whichever is lower.”
Joe: This is hard money he’s talking about here. I would stay away from hard money, unless you know for sure that you have a buyer and that you’ll be able to get out of that deal quickly. Hard money – I can’t say hard money is never profitable – I’ve used it and I’ve made a profit from it, but it eats into your profits so much. There are so many other ways to finance a deal than using hard money.
Joe: This is one thing that I should reiterate – you don’t need cash to buy properties if you find the right properties and go after the right types of deals. What so many of you are doing are looking at properties that are not going to be available that way. This one looks like it might be possible to do it on terms without cash or hard money because the guy said he would finance it 100%. So let me finish the letter here.
“The county has the building assessed at $121,000. For the three that I would like to buy, the total comes to $363,000, so I would need to get $265,000 to the seller. That’s not quite the 65% loan purchase price.”
Joe: He’s talking about the 65% loan to value that he could use for hard money – don’t do it that way. First of all, if you try to show that you’re paying a certain price for a property, and if you’re trying to show that you’re paying more for it than you are, and then getting the down payment funneled back to you through the seller, that’s loan fraud. You’ll get yourself in trouble; you’ll get yourself put in jail – so don’t do that.
Joe: Make sure the lender understands exactly what you’re doing and that all of it is revealed. We’ve done some very creative stuff in the past with rebates and things like that, and all of that’s legitimate as long as the lender’s aware of it and accepts it. I’m not just talking about the loan broker being aware of it but also that it’s in the loan documents and it’s obvious that that’s what’s happening.
Joe: The broker and the actual lender are two different entities, and in a lot of cases, the broker will just tell you, ‘Just do this this way and that way and the lender will accept it.’ When in fact, what he’s saying is that that way the lender won’t know about it and he’ll get his fee and you’ll get the deal done, but you will have committed loan fraud. That’s happening less these days simply because investment loans are fewer and farer between than they have ever been.
“How can I structure this to get no out of pocket costs and still pick up the property? He has 17 of these to sell total. He wants to do 6 at a time and here are the details. Don’t share the address or the city as it’s so small that others can find it easily.”
Joe: He didn’t give me the information for how much they rent for. He doesn’t need to know just the amount that they rented for. He also needs to know what the history of the rent is. You’ll want to look at the Schedule E of the owner of this property. Ask him to just send over the Schedule E of that property so that you can see what he reported to the IRS.
Joe: Typically, he’s not going to report more than what he made. So if you can see the Schedule E you can tell that he made _x_ amount of dollars over the last year. If you average that out, then you can figure how much you can expect to make with this with this particular manager in place. Can you keep that manager in place? Is that manager a good manager? Can you talk to that manager and find out a little bit about the properties from him?
Joe: What kind of condition is the property in? How long have the tenants been in there? How often do they turn over? All of these things are going to be important if you’re going to buy these properties as investment properties. If you are, and he’s willing to do 100% financing, can you do them using the hierarchy of zero down structures that I taught you in one of the earlier videos?
Joe: In this case, we’re talking about doing a “Subject To” deal. Does he have a loan on these properties? We don’t know if he has a loan on these properties; we need to find that out. If you’re paying $363,000 for these properties, how much in loans does he have? If he has a total of $200,000 in loans on them and he wants the rest of his equity to get the $363,000, and if he wants the full assessed value and you’re willing to give that to him, and the numbers make sense because it has enough income to cover the payment on that – let’s say he owes $200,000 on regular notes and he wants to get to another $163,000 in notes – you could do a multi-mortgage on this, and have him deed you the property.
Joe: You could make payments on the existing loan for that $200,000 and then you could make a payment on another loan that equals $163,000 for these three properties to him personally to where he has a mortgage on all three properties so that if you default he can take all three properties back from you and protect his equity.
Joe: There are lots of ways to do this. The next way you can do it is on a land contract from him. He could just say, ‘Okay, 363. Do a balloon payment after 5 years, _x_ amount interest rate.’ Let’s say your payments on it are $3,000 a month and the income on it is $3,600 a month and the payment covers taxes and insurance and of course, you have to figure in your property management – do you still have enough money to break even and make these deals work in the long term? And if you do, and they’re good selling investment properties, do you keep them yourself at that point or do you want to try to make another chunk of money and maybe sell them for $5,000 more to an investor who gives you $5,000 for each duplex so that you make $15,000 on the deal and then turn it around and sell it that way?
Joe: Then, if the investor only has $5,000 on each of these deals and they break even and again, remember what we talked about in depreciation on long term investment and how properties go up in value and you can take deductions even if you’re breaking even, it’s going to make sense if they pay off over a period of time.
Joe: What you want to try to go for when you’re making this offer to this guy is to get as long a term on these loans as you can. I don’t think I’d do it for 5 years – I’d want to try 15, and I’d prefer 30 years – I’d want to be able to pay these off over a long period of time so that I know they’re advertising. And if there’s enough money to make them pay off sooner than that, then obviously you want to pay them off sooner than that so that they start cash flowing for you personally. I hope that helps.