Limiting Liability

[<Steve> 82]

Hey Jonathan-

 

So the "Performance L/O" is away that will work for the investor. Cool deal!

[jhanson8 0]

How's everyone's business going in the run up to Xmas? I've got motivated sellers coming out of my ears, 10 years doing LOs and I've never seen it like this before!

Same here! I've got sellers like crazy but all my buyers suck and my business has almost come to a standstill. I haven't come close to a deal since October. I know things are supposed to slow down around this time, but c'mon... I guess the serious buyers, the ones who understand basic economics and finance, have all closed down for the winter. The last two buyers I spoke with could only afford rent payments at 70% of market and $1-2k upfront. They were both interested in foreclosed homes because they heard "you can get one for really cheap." These people really believe that they're qualified to own a home? Here's hoping things pick back up in January.

[<Steve> 82]

Steve and I were discussing possible ways to limit or eliminate the liability of making payments on vacant SLOs. Turns out a seller that I have a deal lined up with for January had the answer. They will take part of the option consideration, and in exchange they'll take responsibility for any vacancy or repairs. Nice! So I'll keep a few bucks upfront, all the cash flow, and the back end and not have to lose a wink of sleep worrying about my T/B skipping out in the middle of the night.

Been thinking, for now I am not going to reinvent the wheel. In a SLO being responsible for the rent during the lease term is a great advantage for the seller. The t/b is resposible for repairs, and I have a $dollar limit with the seller for repairs I may need to do. We have a cancelation clause in the agreement that works well. I think I will disclose to the seller that I will pay one months rent should their property go vacant. It typically only takes 4 to 6 weeks to place a t/b anyway. If they don't want to cancel after a month, I can continue to market the property and not be responsible for continued rent payments until another t/b is placed. I will just have to use that charm technique learned from the manual.

 

This way I can keep all the front end profit as typically there are no problems with tenant/buyers. If there is, I am only liable for one month vacancy. I still like the percentage idea too.

[Doug Pretorius (ON) 9]

I'm currently in negotiations on 3 homes that look like they will all be the hybrid assignment I mentioned here. All of these are cases where the seller wants more or less what the house is worth, so there isn't any equity to make the risk of a true SLO worth it, there's no huge payday at the end of the rainbow either. So I may as well assign it and be out of the deal. There is some upfront cash (all of these sellers want a piece of that too) so the real profit center in these particular deals is the cash flow, which I'll capture through the assignment/promissory note route.

[<Steve> 82]

Nothing wrong with that Doug. I wonder if you can set it up where you can assign the promissory note for a fee to another investor and pick up another pay day? Or wait a couple of months and see if the t/b would be interested in buying the note at a discount for a lump sum.

[Jason (AL) 1]

Nothing wrong with that Doug. I wonder if you can set it up where you can assign the promissory note for a fee to another investor and pick up another pay day?

Of course it's possible.

On the other hand, how is the investor

secured with said note? If there's little

to no security, then you'd have to heavily discount your note

 

Or wait a couple of months and see if the t/b would be interested in buying the note at a discount for a lump sum.

This would be my preferred option.

There's no better buyer of a note than the person paying on it.

[<Steve> 82]

Of course it's possible.

On the other hand, how is the investor

secured with said note? If there's little

to no security, then you'd have to heavily discount your note

Good point Jason. Have the t/b secure the note with their car, or a boat would be nice or maybe a diamond ring. . .

[baron14 1]

It's the Steve's!

 

SteveK, like <Steve> said, hang in there. If it's slow where you are now around the holidays it should pick up around mid-January.

 

<Steve> nothing special, just plain old dialing for dollars. I still don't much care for 'cold' calling but I'm pretty good at it now and comfortable with it when I actually get around to it LOL! The possible deal I mentioned above was a no 6 weeks ago, now it's a probably.

 

Oh believe me, I'm searching for a way to get all the money and not have any responsibility Another simple way to do it although you'd be giving up the back end profit as well (not a problem if it's a marginal deal to begin with) is to do an assignment and carry back a note for the cash flow.

 

Example:

Your deal with seller...

Price: $200k

Rent: $1,500

Term: 2 Years

 

Let's say the house isn't worth much more than $200k but you can rent it out for $2k. A normal CA would have that cash flow (or part of it) go to the seller and you take say $8k. But why not keep that cash flow for yourself? Assign the deal for $20k...payable $8k upfront and $500/month for 24 months, all of it credited to the purchase price.

 

That would be kinda half way between a CA and a SLO on the profit scale, and you would have zero liability for vacancy or repairs. That's what I'm going to do on my next deal just to see how it works out. Lots of deals to be had here where the seller wants or needs too much for a SLO to be worth it.

 

 

 

Hey Doug,

 

How are you? I was wondering, with the assignment/note, do you put some sort of memo of option at the court house to cloud the option or hold the option in escrow for the T/B untill all payments have been paid in full to you?

 

Otherwise, how would you collect your payments if the T/B stop paying you monthly payments on the note?

 

Thanks, baron

[Bogart55 0]

That's a good question Baron.

 

I wouldn't think you could cloud the title, because most likely, neither you are the t/b are on title with a CA.

 

Doug ... how would you secure your interest in that?

[randian 0]

Your deal with seller...

Price: $200k

Rent: $1,500

Term: 2 Years

 

Let's say the house isn't worth much more than $200k but you can rent it out for $2k. A normal CA would have that cash flow (or part of it) go to the seller and you take say $8k. But why not keep that cash flow for yourself? Assign the deal for $20k...payable $8k upfront and $500/month for 24 months, all of it credited to the purchase price.

If the property really is only worth about $200k, you're either selling it for 10% over market (if the net to seller is $200k), or your deal with the seller should really be $180k net. Which is it?

 

Does the note substitute for rent credit, or are you giving rent credits on top of that?

 

Chances are they're going to buy or abandon before 24 months is up, in which case they're certain to stop paying on the note. I doubt it's worth the time and expense to pursue them.

 

The cash flow is nice though. One a month for a year and you have $6k/month semi-passive income.

 

Rents seem to be a lot higher in Canada. A $200k house here would rent for more like $12-1300. I couldn't take $500/month out of the cash flow without offering an insultingly low rent to the seller.

 

In a standard CA the seller gives up equity in the form of rent credits, but they're getting full market rent in compensation. This deal offers less than market rent plus the equivalent of rent credits. Seems like a harder sell. Is it? I'd like to presume sellers don't know there are alternatives to what I'm offering, so they'll assume what I'm offering is "just the way it is", but I am always surprised how sophisticated many of them are.