Hey there Awesomely reader, Lee Arnold here with a cool, creative method of financing…
I’m sharing info about a real “subject to” deal, meaning the loan/mortgage stays in the homeowner/seller’s name, but the investor-buyer gets the deed and controls the property.
But what’s special in this blog post is our 3-tier offer and details about financing the rehab on the mortgage second position. Really interesting stuff! Follow along…
So, a deal was discovered by one of my clients — we had actually gone to look at a different house and noticed this particular house next door. It had a padlock on the front door, which is strange for a residential property.
So, we knocked.
Nothing happened.
We left a note on the front door that said, “Hey, we’re really interested in purchasing your property. Give us a call.”
And… the homeowner called us!
Sure enough, she was interested in us purchasing the property, so she asked what we could offer. So, we did some research and determined that fixed up, the property would be worth about $139k.
But, in its current condition, it was only worth about $35k. So, we needed to buy it for around that amount for this deal to make any sense whatsoever.
And, when we pulled a report on the property, we discovered that there was an underlying loan on the property of $49,500.
When we talked with the seller, she said, “Well, all I’m really concerned with is not having to make this mortgage payment anymore. That’s the thing that’s killing me.”
So, we then presented her with my 3-tier offer structure.
In a 3-tier offer structure, we put in several different scenarios of what we’d be willing to pay, and the seller can choose from the 3 alternatives.
We offer:
- A Low-Ball Cash Offer
- It’s the lowest of the 3 offers. If done correctly, this amount will offend the seller. That’s ok. Remember there are 2 other offers to come. This offer is admittedly a low-ball offer that sets the subsequent 2 offers up as being better, and more worthy of consideration.
- A Small Down Payment with a Seller Carried Second
- This offer mixes cash and seller carry. Because you’ll include terms that are advantageous, you’re able to offer more than cash alone. This offer should be structured to appeal to the seller who expressed a need for some cash up-front, but doesn’t need all the cash at once.
- 100% Seller Financing
- This option requires the least out of pocket from you, the investor. Coupled with advantageous terms, this option allows you to make the highest offer. This is the ultimate win–win option. The investor controls a new property with no money out of pocket, the seller gets his/her house sold and will receive a monthly income.
Here’s what we did for this deal:
- Option 1: We’ll give the seller $35k cash.
- Option 2: We’ll give the seller $49,500, take over her underlying balance, and she can carry back the rest, which was $500 bucks.
- Option 3: A seller financing offer.
The borrower came back to us and said, “Well, tell you what, guys, if you’ll go to $51k, I’ll do the deal.”
So, we added an addendum to the contract showing that we’re taking over the underlying mortgage with the bank for $49,500, and we’re going to cover the difference of $1,500 with cash.
We bought the house for $51k, ARV was about $139k, and it needed about $30k worth of renovation/rehab.
Now, this is a cool deal no matter how you slice it…
#1: We didn’t have to go out and get private money financing on this thing. Because we were just taking over the underlying loan.
#2: It gets super interesting with the $30k — where do we get that money for the rehab?
Well, the answer is something that we constantly teach our students… it’s very simple and easy to get second mortgages behind bank-carried first mortgages.
The deal is clearly logical and makes a ton of sense! I’ll put some perspective on this…
I teach that you can go to 65% ARV. If the ARV for this deal is $139K… 65% of $139K is ~$90. So, there’s a first mortgage for $51K — and with that $90k, we can lend up to $39k in the second position for the renovation and rehab on this deal.
These are the deals that you can get very, very wealthy from.
Side Note: These are the kinds of transactions that you do when you want to buy properties through a self-directed IRA account. That’s a whole other topic for another email. 🙂
So…
Keep your eyes open.
You never know when you’re driving by some of these amazing gold mines — and you want to make sure you know how to take advantage of them.