CC Rider - MI

I have been speaking with the husband and occupant of a property. His divorcing wife lives separately. When it comes to obtaining both signatures (since both are on title) and since we never leave contracts behind, do I meet with each individually and gather my signatures that way if I can't get them together at the same time?

Adam - I can't disagree with you. I own one house here in Michigan worth about $215k. When I first purchased it and insured it, the cost was about $560 per year. Once I declared it as rental status, I was the proud owner of a $900/yr landlord policy premium, and that's with showing my lease agreement. By all means, if anyone can show us how to lower the overall cost of insuring our rental properties here in MI, we'd like to hear about it. CC

Sold - I struggled with the "comps" question for a while too, but the reason you still need to check comps instead of going with what the seller asks is your eventual sell price has to be grounded in reality such that the T/B can actually get a loan. If the home doesn't appraise for the inflated amount, the deal could fall apart. (In addition to what Michael just wrote.) Anyone else agree or disagree?

To any of our brokers out there - How do lenders evaluate an unmarried couple who want to buy a place together? If they are both willing to sign for the loan, does the lender do the exact same calculations as if they are married? Do they look at a reduced percentage of their gross income (say 75% of their combined) in determining a maximum loan amount? I have encountered some couples, as well as divorced mother with grown child, who want to be buyers, but I don't want to place them in a home a lender won't qualify them for. Any help would be appreciated.

socharming, I'll take a stab..... 1) In short, this doesn't work. Try looking at the numbers from either a sandwich lease or CA perspective where the seller is the buyer, it doesn't add up. 2) As addressed in previous posts, if someone is having difficulty with payments today (or is short on cash) what makes someone think they will be able to handle a LO arrangement? They can't. 3) Next, if they actually do have equity in their home and need cash, why are they not doing a heloc? Because they don't have any equity. 4) It sounds like what the seller really wants is someone to purchase the home outright and rent it to them. As a LO investor, the is not what you are looking for unless you want the place as a long-term hold for your portfolio. 5) Last quick thought, Mike C and others have stated that if you they are going to open their wallet and pay more than say $1k out of pocket up front, they want title to the place - again, probably not what you necessarily want. Of course, someone else may see a viable way that the seller can stay, an investor can profit, and you don't have to formally close on the house, but I don't. CC

Does a property that has already been foreclosed upon by the bank (as opposed to being in pre-foreclosure) give them any more or less motivation to unload it?

Am I missing something with the Pure Option? In various posts, I read how a Pure Option is a way to control the property for a time; it gives you exclusive right to purchase at a known price. But I read posts that imply that holders of Pure Options then act as property managers and offer lease options to prospective tenant/buyers. How is this so? A Pure Option gives you the right to buy, but says nothing about occupying and sub-leasing. That would be a lease-option with the seller. So aside from either exercising yourself or marketing your option to find someone who wants to buy the property outright (no terms) what can you do with the Pure Option?

In case I want to help create a marketable note with a seller, just in general, how far above prevailing rates should you make the note? How much of a discount would we have to take to entice note buyers? What LTV ratio will entice note buyers? What term length for a balloon payment is preferrable? For example, find a buyer willing to pay FMV of 100,000, wants/can only put 5% down and wants owner financing for the rest. If conventional financing is 6% plus PMI, and we structure a 95,000 private note at 8% with a balloon payment in 5 years, then the note would look like: P+I = 697.08 per month for 60 months, balloon payment due 90,316. Would a note buyer pay 90,000 today for an equivalent return of 9.5%? Would a note buyer pay 85,000 today for an equivalent return of 11.25%? You don't want to be tied down to waiting for the note to be paid off, but you also don't want to take advantage of a buyer and sign them up for a 10% mortgage either. So, what are some rules of thumb? CC

I am looking for either another investor to run with this or perhaps some leads to developers that may be interested. I found a small group of older homes on several acres of land who feel their land would be worth purchasing for the purpose of rebuilding as a newer subdivision. The surrounding area is completely built and established. [For those who don't know Macomb County, everywhere you look farm land is being converted to newer brick homes, making existing decent 1950's to 1970's homes look like shacks by comparison.] These owners realize their land has value and are ready to cash in. The only involvement I care to have in this would be to secure a pure option, then sell the option to someone else. Any interest?

Here are a couple points to ponder about the last response / post from John Carlson: 1) First, this smells of a bait-and-switch technique, and you may come off looking a bit like a snake-oil salesman. If you have any intent of making an alternative available to the tenant, present it before they sign the sandwich lease. 2) Since you intentionally didn't set up the deal as a CA, the seller is assuming he will be dealing with you through the length of the contract. Having it assigned over to someone new, may not be what the seller wants. That is, he may be comfortable dealing with you, but not to a stranger. [i'll concede that MC's contracts do include the phrase "or assigns", meaning we are certainly allowed to assign the contract. I feel you should inform the seller up front that you intend to operate that way.] Both 1 and 2 give the feel you've set something up, and are trying to slip away into the darkness with the loot. 3) Last are the terms of the deal. Typically to entice a T/B you offer 50 to 100% rent credits. You now dangle a lower option price and lower rent in front of them. Unless you point out the fact that your contract with the owner doesn't have RC's with it, you give a wrong impression about the deal. And being deceptive isn't going to win you much future business.

Perhaps someone who has actually completed some sandwich deals can answer this question with regards to T/B financing: When the time comes, what is the target appraisal value? Is it the strike price of the option, or is it the strike price less any potential rent credits? In the case above, as Mike (UT) has indicated, appreciation is a concern. If the property must appraise for the full value of the option in order for T/B to obtain financing, care must be taken to not set them up for failure - and in his case he would be safer with a 119k option. I know from reading many posts here that several investors are somewhat care-free about selling an option well-above market value, but offering 50 to 100% rent credits, with the rationale that the bottom line will be the same as a lower strike and minimal to no rent credits. My concern is for the T/B and their ability to arrange financing. I just want to know how the lenders and mortgage brokers view the deals. To put it another way, if in 12 months FMV=$120k, would a T/B have difficulty getting financing with an option for $125k and $8k in rent credits and option money?

I'll take a stab at this, based on what I've read. Generically, a properly structured 1031 like-kind exchange allows owners to defer gains on the sale of property by using the proceeds to purchase a similar type of property. What this means is from primary residence to primary residence, or investment to investment, you can keep deferring your cumulative gains. I believe that owner-deferred gains are just about the default mode in a typical sale of your current home, purchase of your next home. And it may not usually be called a 1031 exchange either, but most owners would want this deferral. As I understand it, to have the gains deferred in your primary residence you must have owned it for the last 2 years, and it must have been your primary for two of the last 5 years. [Perhaps these rules are a special variation of the 1031 exchange rule?? Either way, deferred gains are allowed.] Hopefully Dave can address the exact timeframe during which an owner selling a home needs to purchase the next. Now your question is actually important for a very subtle reason. In our lease purchasing arrangements, the homeowner may purchase his next home two to three years PRIOR to acually selling the first. Perhaps this is why the wording of "within X years" is used so that the sale can occur either before or after the new purchase. I'd like to have a little clarification on that myself whether the window is equal both ways (buy new then sell old / sell old then buy new). Maybe my response muddied the waters more than it helped

Back to the issue of whether rent credits are seller concessions or not, take a look at the thread I started under Tax Strategies called "More Tax and Record Keeping Q's". You can skip ahead to where our in-house Tax Man, Dave T adds his two cents. In both his posts he emphasizes how rent credits are in fact seller concessions, and in my learning this business, I am following the lessons learned in that post. [My comment on a minimum percentage loan was only about loans - pure money in exchange for paper (note), which may not apply to the original post here]

From Adam's response, I'd like to clarify something. He mentions that most banks in the US allow up to 3% seller contribution. From other posts here at the Naked Investor, we learn that rent credits are considered seller concessions. Does this mean we are limited in the amount of rent credits we can offer, or is the 3% limit the maximum of those RC that can be applied as downpayment (any left over to be used to lower the purchase price)? As a separate aside, referring to the opening post, I think in the US IRS Code there is a minimum (published) percentage you must charge in interest when you lend money / create a note. Assuming you are reporting your interest as income, the IRS will impute a percentage and tax you on it if you fail to meet their minimum - this is how I understand it anyway, so I may be a little off base. Any comments?

Excellent ! It's great to have connections like we have here on the board. I'll keep picking away at them. (Easy to do, the missus and I work at the same place.)