Flipping/Rehabbing - Title Seasoning for end buyer

[cparobbins 0]

Trying to flip a property can turn ugly when your end buyer cannot get financing because their lending institution requires title seasoning. Your options are to 1) find another lender; 2) find another buyer, 3) try to ‘assign’ your Contract for your profit; or 4) find a creative strategy to get your deal closed. This article is about the last option – using creative financing to overcome traditional lending institutional guideline problems including, but not limited to the title seasoning issues.

 

Everyone has probably heard about the strategy of creating a seller financed note to structure a deal and then selling the note at the closing table to a note investor to fund the deal. If you have not heard of this strategy, read up on it! It is a great tool to have in your back pocket when traditional financing is not possible – or not desired – for one reason or another. You can read about this on any note investor discussion board or on our website at http://www.notefunding.com under “Creative Strategy to Buy/Sell Property.” Assuming you are already aware of this strategy… you should also know that this is a great tool to use when FLIPPING a property – If – and only if - you have enough profit in the deal to cover the note discount. More about that later.

 

When I use the term ‘flipping’, I am referring to simultaneously buying a property at a discount (i.e., pre-foreclosure, distressed seller, etc.) and then selling it at it’s true fair market value to an ‘end buyer’. In this article I am not talking about rehabbing properties. The same seller financing strategy can work (more easily, actually) with rehabbed properties, but for this discussion I am referring to strait FLIPS.

 

This example deal is set up as follows: Assume you can purchase a property for $70,000 because the seller is 2 months behind and knows he will go into foreclosure if he doesn’t act quickly. You then set up a Buyer to purchase the property from you for its true market value of $100,000. This end buyer can put down 5% in cash at closing and has reasonable credit (600+). You can either purchase the property outright and do a 2nd closing later – or set it up as a simultaneous closing and transfer the title twice at closing. Either way, your end buyer’s bank may not fund your deal because of this ‘flip’. If that happens, you can structure your deal as Seller Financed- even if there are underlying mortgages! Your title company / closing agent or note buyer will prepare the note and mortgage for you for the closing. The note buyer on this deal might want an additional 5% 2nd position note to be ‘held’ by the seller. That would leave a 90% first lien. The interest rate might be between 8 and 9% depending upon the Buyer’s credit. The note buyer should buy the note for between 85% and 90% of the MORTGAGE balance ($90,000 x .87 = 78,300, for example) depending upon the property and the situation. So the flipper (that’s YOU) would have $78,300 from the note buyer PLUS $5,000 cash down payment from the Buyer – for a total cash amount of $83,300 PLUS the $5,000 2nd position lien. The underlying payoff of $70,000 would be made to the original seller at closing and the balance of $13,300 plus the $5,000 note is all yours. Not bad for a deal that you didn’t spend a dime on! While the discount on this ‘flip’ might seem a bit steep at first, keep in mind that the only alternative is to hold the note. The time value of money tells us that cash now is worth more than cash payments streaming in over time.

 

Rehabbed properties and properties without title seasoning problems can also be set up this way. These properties are currently being set up at 95%LTV (Loan to Value) – EVEN INVESTMENT RESIDENTIAL PROPERTIES! The discount on the note is usually about $6,000 -$7,000 if set up properly from the beginning. The buyer is really getting a deal here. Where can you buy investment property with 5% down?

 

I hope you find this article informative and helpful. I hope it gets the creative juices flowing!

 

Michele Robbins, CPA

Note Funding Resources, LLC

Office (410) 827-5788

Fax (443) 782-0775

http://www.notefunding.com

info@notefunding.com

[Guest Guest]

Where can you buy investment property with 5% down?

5% down on investment property is easy to find.

[lacashman 0]

5% down on investment property is easy to find.

Guess I was not logged in when I made that post.

 

Anyway I do want to thank you for spelling out exactly how working with notes work. So many people post how great doing this with notes is but don't want to give details. So I comend you for having the nerve to post details.

 

That said I can usually find a better deal using alt "A" or subprime lenders than using a note buyer.

 

Lets take your example of the seller selling a $90,000 note for $78,300 or a discount of $11,700. And they still have to carry a note for $5,000 to be paid over time.

 

Why not rent them the property for six months with an option to purchase? Lets see what that will do for the investor.

 

They buy the property for $70,000 and carry a mortgage for 8 months. 6 months seasoning then two months for the paperwork.

 

$70,000 purchase price

$2,500 for closing cost on the buy.

$4,000 for 8 payments at 9% interest. This could be higher or lower but 9% sould be a fair number.

$5,300 income for 7 months rent.

$4,000 closing cost on the sell to help the buyer.

 

Total expenses $75,200

Sell for $100,000

Cash received $24,800 at closing.

 

Your way $13,300 in cash 6 months earlier than my example and a note for $5,000 paid over time with interest.

 

Everyone has a different situation so my example may not be the best way for everyone but I like the bigger payoff.

[cparobbins 0]

I like your example! We also have a home buying business (my husband's baby) that we do lease options, wholesaling, retailing, etc., so I really, really, really do see the whole picture here. Our website for that is MDhousebuyer.com, by the way.

 

The only thing about your example and my example that doesn't compare is the fact that my example was about a FLIP. The article stated that in the beginning. The fact that it was a flip was a precursor to the strategy. In other words a pre-foreclosure, a divorce, etc., for some reason the seller needs out and possibly needs some cash! The deal is a FLIP and my strategy works great for that. My example allowed you to get control of the property and FLIP it without using any of your own funds and do it FAST. That doesn't work with your example (with all due respect). In my example, the seller can't wait 6 months for you to lease option it from him - for whatever reason. If the seller doesn't need the cash and will give you terms... well then SURE.... take the property, rent it out, then sell it for full retail after you get your seasoning and forget the discount on the note or the subprime lenders.

 

I don't know of any regular lenders that will allow you to buy an investment property with only 5% cash down. I don't doubt you know them... I just don't. Maybe that is a 'state' thing. There just aren't any around here. I'm not saying that there aren't any where you are.... if you say so, I'm sure there are - but I would bet that for the most part, that type of regular financing is very hard to come by for most people - especially those not as experienced as you are.

 

But I love the discussion! I love the strategy you propose of lease optioning it and then selling outright yourself. It wouldn't work for the deal I had in mind... but it will work for others, of course. Same deal with the strategy in my article. It's a great avenue for some deals and for other deals there are other things that make more sense. Either way.... this forum is great for just these types of discussion. Thanks so much for contributing too.

 

Michele Robbins, CPA

Note Funding Resources, LLC

Office (410) 827-5788

Fax (443) 782-0775

http://www.notefunding.com

info@notefunding.com

[lacashman 0]

I don't know of any regular lenders that will allow you to buy an investment property with only 5% cash down. I don't doubt you know them... I just don't. Maybe that is a 'state' thing. There just aren't any around here.

I know plenty that lend with 5% down on NOO in all states.

 

I know two lenders who lend nationwide on NOO with no down payment but they are not at all flexible. Yes 0 down on investment property, but most people do not qualify.

 

With 0 or 5% down rates are not the same as you see in the paper. With 5% down rates are not to bad.

 

As for a FLIP you can find lenders who don't require seasoning. Easy to find? NO but they can be found. Best of all they are more flexible than most note buyers I have talked to.

 

But in my example the investor was getting a loan to buy the house. So there is no waiting to cash out the seller.

 

Now one advantage that I have been told about Note buyers is documenting income. Perhaps you can tell me if this is true. Take a person with great credit but for some reason can't document the needed income. On a conventional loan going no doc will lower LTV and increase the rate. So my question is do your note buyers look for documentation?

[cparobbins 0]

I will buy notes secured by a borrower with stated income if there score is 600+. I will do no income qualifying (i.e., they need not even 'state' the income on the 1003) at 650 and over. We will do 8% interest on these FLIPS and the rehab note structures regardless of it being stated income or if it is an investment property.

 

Hope that helps. Call me sometime if you think I can help out with a deal or if you just want to brainstorm.

 

Warmly,

 

Michele

[lacashman 0]

That's not bad terms of stated/ No Doc, 5% down NOO loans.