Typical Situation

[CC Rider - MI 0]

What are some ways to work with a seller who is open to a lease purchase idea, but insists he needs all the equity from his current house as downpayment for his next? Should I push him to keep his current mortgage and obtain a separate second one on the new place (at high 90's % LTV)? Or suggest refinance his first to extract some of the equity as downpayment on the new, and again have two separate mortgages? Or are these situations somewhat un-doable if the seller doesn't have the income or credit to qualify for 2 concurrent mortgages? Most sellers I know are in this situation - they need the proceeds from the first home to get into their next. What solutions do you typically propose?

 

Thanks for the help.

[MichaelC 160]

CC, I always recommend a refi whenever I hear a homeowner tell me they need cash for their new home. I further explain that with rates so low they can probably lower their monthly payments at the same time they are pulling cash out of the property. Then, we will take over those payments, I explain, and they have in essence obtained a loan that I am paying off for them.

If a homeowner refuses, if they are not at all interested in my ideas or solutions to their situation, that tells me they aren't motivated and I'm not doing business with them. Not a big deal, really. I don't mind hearing "No" if it's early in the process.

[Mark in St. Louis 0]

CC, alongside Michael's comments I'd like to make another.

 

If it turns out they are open to doing a "cash-out" refi to pull their equity out, suggest that they do it as a 5/25 or as a 3 or 5 year ARM.

 

Both of those get you a lower rate and without any adjustment for 3 or 5 years. That should be enough time to let you get someone in and purchased before the balloon or ARM adjustment happens.

[jseamless 0]

Just too piggy back on what has been said. I really like selling interest only loans. They allow you to get into more house than you can afford. You can keep control of your cash flow with the smaller note. There are so many great investments out there, but some people insist there home is the best investment they will ever make. Your house is a liability not an asset because it always cost money to maintain and what happens if you don't pay your taxes? That is right; they will take that sucker faster than you know it. Sorry for the early morning rant but this is good coffee man!

 

If you must invest in your home this is the product for you because the extra money you are saving you can apply it all to principal. Where as, if you had a traditional 30 yr mortgage your payment is all interest anyway for the first five years.

 

Check out some numbers on how to harness the power of your mortgage...

 

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1.25%

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5/6 LIBOR

5.25%

$1,932.71

 

 

7/6 LIBOR

5.75%

$2,042.50

 

 

30-yr Fixed

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[MichaelC 160]

Sorry for the early morning rant but this is good coffee man!

Yeah, nothing like a dose of Colombia's finest to kick it up a notch .

[Mark in St. Louis 0]

Sorry for the stupid question but what is LIBOR?

[Andrew Ikeda 0]

Mark in St. Louis,

 

Not a stupid question!

 

LIBOR stands for London Interbank Offered Rate. Think of it as some kind of prime rate that is connected to and related to international exchange rates.

 

For everyone else; to throw in my two cents, also ask whether or not the loan is a 'hard' or 'soft' prepay. A soft allows you to sell but not refi, a hard doesn't allow you to do either. Be careful so that you dont get stuck in a loan that doesn't allow for a way out.

 

Hope this helps!!

 

Andrew

[gregzilla 0]

For my newbieness, can some explain to me a few of the mortgage terms that are being thrown around?

 

Performance mortgage?

 

5/25 or as a 3 or 5 year ARM?

 

Balloon or ARM adjustment?

 

Interest only loans?

 

 

 

Thanks,

Greg

[Mark in St. Louis 0]

Greg,

 

Balloons

Typically a 30 year mortgage (from an amortization standpoint), that have a 5 or 7 year balloon date (most typical). The rate is usually lower than a straight 30 year mortgage. The lower the balloon term, the lower the rate.

 

On a 5/25 the loan would be due in full 5 years from the origination date.

On a 7/23 the loan would be due in full 7 years from the origination date.

 

ARM's

ARMS are adjustable rate mortgages. The rate is usually fixed for some period of time and then can make adjustments...usually on an annual basis. The adjustment is usually calculated on a money index (usually the PRIME lending rate) plus some percentage.

 

For example....a 3/1 ARM means that the rate is fixed for 3 years, and then is readjusted on an annual basis. Lets say it has an initial 4% rate. That stays the same for 3 years, and then each year it is adjusted using PRIME + 2.5%. Most ARMS are amortized on a 30 year basis.

 

Interest Only Loan

This one is pretty self-explanatory. There is typically no amortization at all...therefore no principal reduction. If the interest rate is a simple 5% on a loan balance of $100,000 your monthly payment would be $416.67. That entire payment is interest. So, if the loan term were 5 years long and you paid all the way to the end of the loan term, you would have paid $25,000 in interest and your loan balance would still be $100,000.

[MichaelC 160]

....and while we're at it, a Performance Mortgage is a mortgage given to secure performance of an obligation. In other words, with such a document in place, should a homeowner default under the terms of the agreement with you, you now have the right to begin foreclosure proceedings against the owner. Just as if a lender would foreclose for non-payment.

[gregzilla 0]

Let me make sure I have this correct...

 

So, if you do a deal with a seller and sign all the contracts, you could also require them to sign a performance mortgage? And by doing so, you'll have the right to foreclose on their property if they don't "perform" on any of the contracts that were signed?

 

If I'm understanding this correctly, this would be a very powerful thing for you (as the investor) to have the seller do.

 

Is something that would be standard procedure? Do sellers always willingly go along with this?

 

Thanks,

Greg

[MichaelC 160]

Let me make sure I have this correct...

 

So, if you do a deal with a seller and sign all the contracts, you could also require them to sign a performance mortgage? And by doing so, you'll have the right to foreclose on their property if they don't "perform" on any of the contracts that were signed?

Yes, you understand it correctly.

If I'm understanding this correctly, this would be a very powerful thing for you (as the investor) to have the seller do.

Indeed it is.

Is something that would be standard procedure? Do sellers always willingly go along with this?

Standard procedure? No. Not every seller will agree to sign such a document. As always, it comes down to motivation levels. How serious a predicatment is the seller in? How much do they need your solution to their problem? When you can use it, the performance mortgage offers a terrific level of protection for someone in our position as investors.

[gregzilla 0]

Standard procedure? No. Not every seller will agree to sign such a document. As always, it comes down to motivation levels. How serious a predicatment is the seller in? How much do they need your solution to their problem? When you can use it, the performance mortgage offers a terrific level of protection for someone in our position as investors.

 

So is it something that you try to setup with every seller? I assume it's not a deal-killer if they don't agree to sign it. Are there times when you definately want to have it signed (based on the terms of the deal, the property, the sellers attitude, etc...)?

 

Greg

[-Tony- 0]

This goes well with my last week I explain the will sign a lease w/option and there are some other documents that will have to be signed at the and held in escrow. I pitch it as a way they don't have to come back to my area just to close. I found: 1. if you make it sound typical they don't question it. 2. if you Pitch it as a benefit they take it as that. My lawyer will be setting it up for me next week.

 

EDIT

 

oh yeah, I have been dealing with a lot of people relocating out of state....

[MichaelC 160]

So is it something that you try to setup with every seller?

No, at least I don't consider it routine on every deal.

I assume it's not a deal-killer if they don't agree to sign it. Are there times when you definately want to have it signed (based on the terms of the deal, the property, the sellers attitude, etc...)?

Precisely, Greg. Depending upon my "feel" for the homeowner, I will make a decision as to whether or not I want that extra level of protection. My experience has been that most of the homeowners view me as that nice guy who came along and helped them with their problem when they needed someone to do just that. So, the likelihood of their turning around and sticking it to me is unlikely.

Notice I said "unlikely", not impossible. I'm not naive about this business or human behavior. But, being careful and taking each deal on a case by case basis has proven to work fine for me. If I have my suspicions or doubts I'll go with a Performance Mortgage. If the homeowner refuses to sign then I would refuse the deal. Remember, we make our living with motivated sellers. We lose our shirts as motivated buyers.