Help a newbie w/ an owner contract

[kellycuster 0]

I am thrilled at the opportunity to buy my next-door neighbor's house to develop as a B&B complex w/ my own house (I hired a grant coach a few years ago to help my dreams come true--this is the year to start!). The interfering daughter thinks the mom agreed to a too low price (which is BTW $5000 over the appraisal, tho prior to a $3000 clean up of the basement). Bottom line, creative financing will be better for both parties, ie, more money for them, more benefits for me at little extra cost. I'm trying to educate myself quickly. Any big warnings? Suggestions on how to quickly learn how to write the contract?

 

I would like to take over their mortgage/taxes/insurance payments, and in addition to the difference b/n the mortgage owed and our previously agreed-on price, I pay them 1)the money I would have spent on closing costs, 2)the LMI (lender's monthly insurance) I would otherwise be paying, and--here's where it's highly confidential:-)--3)the Earned Income Credit I will lose when I fill out my taxes for the income I need to qualify for a loan. In all, this should bring them an additional $11,000, some upfront, some over the 15 years left on the loan. In return, my daughter still qualifies for social services and I get to fly under the radar a while longer--hopefully until my ill family members finish getting better or dying and I'm working full time again or my B&B is performing well. Also, I'll be stepping into year 15 of a 30 year loan, which isn't too bad.

 

My concerns:

-It is an ARM that is due for refinancing if that's the correct word in 3 years; currently costing 6%. (I can only qualify for 5%, as far as my local banks, anyway.) I don't yet know the terms of their mortgage, such as cap rate etc. I don't even know what it costs to refi their ARM, and hope to find out soon.

-She bought 15 yrs ago for $85,000, so I spose the loan is for $75K; again, waiting for details. The mom offered it to me at $65K (the appraiser who valued it at $60K referred a lot to "deferred maintenance"). The daughter wants more money; so even if I paid $5K more, my loan would only be for $60K plus closing costs (prolly over 30 years) since I have $10K to invest. Is the 15 years left on their higher mortgage @6% adjustable a better deal for me, when I can get 5% fixed on a lower amount?

-What is a good estimate of typical closing costs, and LMI?

 

The daughter is being incomprehensibly antagonistic instead of cooperative in her thinking, and she risks shooting her mother in the foot, because I will walk away from a hostile person who can't be reasoned with. What I would really like is to figure out the deal that's best for everyone. The seller is my neighbor (the daughter never was), and I want her to get the most out of this too. Anything else I should think of, to construct a deal w/ everyone's best interest in mind?

 

BTW, for me to qualify for even 5% in this market, I would be refinancing my debt-free home which is assessed at about $100K (but would probably be appraised higher due to improvements).

 

Last question--are any of the online mortgage loans worth exploring? They like to wave really sexy interests rates in your face, but I don't know if it's a bait-and-switch kinda thing.

 

When the brother (who was also my neighbor) finishes smoothing out the "family dynamics" occurring right now due to the sister, I'd like to have a clear presentation so we can move forward. I feel pressured to learn too much too quickly.

 

Thank you in advance!

[pilot76180 51]

I know somebody, who knows somebody, who knows somebody, that can take care of the daughter...

That's all I can say....

[kellycuster 0]

I know somebody, who knows somebody, who knows somebody, that can take care of the daughter...

That's all I can say....

 

 

Hee hee. Thanks anyway. That could slow the deal down even more.

[pilot76180 51]

There are a number of dynamics at play here, but here are just a few key points.

You don't want to mess with your paid off home to buy a business. Having that paid off home for you and your daughter is golden!

If you get your paid off home into the equation, and this whole deal goes south at some point, now you have a $65k house that you might lose and a mtg on your home.

In order to qualify for the loan, you will likely lose out on services for your daughter, which means more out of pocket for you, so if you can do this under the radar you need to.

The ARM that comes up in 3 years might not be such a big deal, but you never know what will happen in 3 years.

The loan amount is so small that I wouldn't concern myself with that just yet.

I think first let the brother smooth things over. I would back off until then, and then approach it again in a presentable and understandable fashion to the family, as I take it the kids are trying to watch out for their elderly parents.

In regards to closing costs, for the buyer you can estimate around 3-3.5% assuming 1% origination and prepays.

[MichaelC 160]

Hello, Kelly, and welcome to The Naked Investor.

First thing that jumped out at me was this: "Suggestions on how to quickly learn how to write the contract?" I don't suggest you write the contract. This does not appear to be your run of the mill deal. Assumption of the existing note, seller financing, multiple family members, etc. That all screams out for an attorney in your corner to protect your interests. I do not advocate an attorney everytime you do a deal, believe me. But there are times when the cost of using one is a wise investment. This appears to be one of those times.

Next, the daughter appears to be a pain in the ass. And it's usually the one's who know the least that have the most to say. I suspect her greed in this matter is going to be a factor in your getting this deal done. Is she even on title? Hopefully, the brother/son will put her in her place and keep the deal progressing as you would like it to.

 

I feel pressured to learn too much too quickly.

Be careful! You don't want to be the motivated buyer. Who else is looking at this property? Are houses selling quickly in the area?

[kellycuster 0]

Thanks for your thoughtful input, I really appreciate it. A person goes a little crazy trying to think things through in a vacuum (that would be my head ).

 

Pilot, if I buy at the right price, it's very low risk, as I can rent out up to 4 bedrooms right now to students, so I stand to be in the black pretty easily, even w/o fulfillment of my grand dream. I would rather do the alternative finance method, but I can already tell what's coming. B**** daughter, if she considers it, will treat me like a buyer who has no downpayment and can't qualify for a loan, and want to try to bleed me like a stuck pig. I will explain to her that the point of that proposal was to get money for her mother, not to disproportionately take money from me. She doesn't understand the concept of win/win whatsoever. She is a lawyer, BTW, AND her freaking sister. Not to bash lawyers, I know they ain't all bad. But this adversarial attitude might tend to be attracted to or made by the study of law...

 

Yesterday, to my surprise, her freaking sister, who also acts nice on the surface, while inserting the same back-handed insults as the other one, is at the house from out of state painting and trimming shrubbery before getting another appraisal. No communication to me, I had to go over there and ask. (I, ahem, suspected they weren't fixing it up for my benefit.) I was so upset by my conversation with her, their lack of common courtesy or having any fond interest in seeing their mother's home go to me...it just shocks me. Plus, they're stupid. If they have to put it on the market for who knows how long and hire a broker, they'll spend who knows how much money, to try to equal a fair deal with me now. If this were just an investment property, I would not be so emotional. There is only one house next door (I'm on the corner), and I have made jokes to myself about getting it for the 11 years I've lived here.

 

So MichaelC, your comments are well taken. I am the too motivated buyer, and they will use that to bleed me like a stuck pig. So besides trying to educate myself, I am remembering my father's oft-repeated advice: you have to be ready to walk away from the rug/car/house, but make it easy for them to call you back, by being nice, telling them what a great rug/car/house that is, and it sure is worth their price, what a shame that all you can offer is ____, good luck and handshake. I practically grew up on the story of his acquisition of the living room rug. I am exercising every ounce of my self control by not telling these women what I think of them, and breathing deep, internally letting go of the one and only house next door so I can walk away with a smile when they pull out the pig-stickers. Where are they gonna manifest other buyers in this market? I need to chill out.

 

Ahh, thanks for letting me vent my story.

 

Another thing. When the 1st b-word daughter entered the conversation, she unwittingly opened the door to a discussion of alternative routes by making a totally goofy proposal--that I lease for 5-10 years, make improvements if I like and give the house back when the real estate market is better, in exchange for the privilege of "farming" their (shady) back yard. (I am a gardener.) She had a complicated payment structure that made my brain tilt. In nice words I said that was an unbelievably ridiculous idea, but here's a good one, and over the course of a day or 2 I figured out how to give the mom $11,000 more than the price she'd asked me for, through my rent-to-own proposal. Anyways, the point of this paragraph--the daughter/sister said there were "very complicated rights issues" with such arrangements, as far as when the buyer has earned how much equity versus the seller. I said I thought if I defaulted at any point, they'd get the house back, so it was low risk for them. She said no, that would be taking advantage of me and she couldn't do that. (HA! And HA! I say again!) However, a consequence would be that I could not make my own decisions about the property for 12 years. What?! I metaphorically rubbed my ears. That's a non-starter, I told her, and that's when she tossed me and the (verbal) agreement with her mother off the cliff. ----The point of THIS lengthy paragraph is, any input on the "complicated rights issues"?

 

I should use this time to shop for loans in case we go that route (if we go anywhere). Should I shop online? Are those online banks legit?

 

Oh, and I will have a lawyer write up the rent-to-own contract if that happens.

 

Sorry for the long posts, full of interpersonal relations. Guess that's part of learning how to do real estate, too.

[MichaelC 160]

Kelly, I'm not surprised to read that the two wicked sisters are attorneys. They live to show how superior they are to all us common folk.

If it were me, I wouldn't go near this deal. Your father's advice is right on: back away politely and with complete detachment. At this time they are convinced they are smarter than you, the marketplace, and everyone else. So for now at least their attitude is "my way or the highway". The only thing that will smack some sense into these two arrogant jerks is time. Time is the great motivator. When they are running off every other potential buyer, (if there even are any), at some point they will come to realize, maybe when the mother or the brother takes control, that maybe your idea wasn't so bad after all. Like dad said, patience is your friend.

As far as getting your financing lined up, yes, now is the time to shop and have your cash at the ready should the deal come your way again. I'd start locally rather than going online. Way too many scammers. Better dealing with someone face to face, someone who knows the local market. Look for a local mortgage broker, maybe someone who comes recommended through the local REIC.

Best wishes with it all.

[pilot76180 51]

MC's right. No matter what you do in this deal the daughter's won't like it. No contract you bring is going to be good because they didn't draft it, and even then they wouldn't like it.

In my line of work, I've turned down sellers, just like MC or anyone else here has, because the seller's didn't make us feel warm and fuzzy. Screw that.. Too much other stuff to work on.

Although you have very good intentions, what you have here is trying to work a square peg in a round hole....

[kellycuster 0]

Thank you so much guys for your time and your advice.

 

She finally divulged the new asking price--$114,000 firm. I am walking away. Sigh.

 

I'm deeply grateful to you for being willing to talk me through this.

 

I'm looking forward to spending more time on this site, and checking out the educational materials. It would be nice to pursue my long ago dream of RE investment (the non emotional kind).

[MichaelC 160]

So, it appraised at $60K and the two wicked witches want $114K?? Relax, Kelly. It'll still be on the market six months from now. You can expect a call then, at which time you will offer less than your offer last week. In the meantime, forget about it and look ahead to bigger and better things.

[kellycuster 0]

Yes, I am amazed. The property is cleaned up, and an agent wants to list it @$120,000. Which is not the same as a new appraisal, of course. I politely suggested they note in the broker agreement that I am a pre existing potential buyer. Hopefully in 6 mos or even a year, they will come back to me. I vow not to tell them what I think of them yet.

 

Thanks again. :-)