A few days ago, I posted my thoughts about how to come up with a maximum offer price for your real estate purchases. My formula, which fundamentally involves buying property cheaply enough to have 20% equity after factoring in repairs, carrying costs and my assignment fee, is an effective formula.
However, it doesn’t work for every transaction.
For example, if you’re acquiring a property via subject-to and reselling via lease-option, what are the parameters you use for deciding whether you have a good deal?
Share your deal parameters here and let’s learn from each other! Here’s a chance to show off your skills and knowledge! Thanks for reading FreeRealEstateTraining.com!
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8 Comments So Far»
When I’m doing a subject-to/lease option deal, I like to make sure that there’s at least 10-15% equity in the property I purchase (I only do pretty houses) and then also analyze the market to make sure I’ll be able to get a down payment/option consideration of at least 2% of the property value and a sales price atleast 3% above the current appraisal.
Usually I get better numbers but that’s my baseline.
I’m eager to hear the standards that other investors use.
Hi Bryan
Right now most of the properties that i’m getting, i’m turning them over meaning selling the contract, and most of the deals are from other states. I like to pic them up 60% or less, and they are all cash deals. I do most of my business by fax, email, ups, and that is the way it seems to happen in my business and i also us options alot. I’m also working on getting some private money. Like i said before i think this site that you have put together will have a great impact on how we buy as long as you keep it going and people join in to talk more about what they do, and remember there is no reason to be scared to tell what you do and how you do it, there are alot of houses out there to buy, there will be enough to go around, so thanks again bryan
The information being shared is a fantastic concept.(See Ben above)
Synergistic, helping others we help ourselves. Mel
On a subject-to deal (or equivalent lease-option), I want 15% equity with an underlying debt that has a long term low fixed rate. My goal is to sell on a wrap-around with an interest rate about 2 points higher than the underlying debt. Also, I add about 6 points to the ARV (effectively rolling-in my discount points for offering seller financing) and I require 3 points down payment. The underlying debt must not balloon before the wrap-around debt. I usually offer between 3 to 5 years balloon on the wrap to allow time for the buyer to repair his credit and refinance.
I don’t offer lease-option deals, because for the same gross earnings of a tenant I can get several hundred dollars per month more net positive cash flow from a buyer on a wrap-around due to the tax deductible interest component of the monthly payment. A 3% down payment usually works out to be about the same move-in cost for a tenant (first and last month rent plus security deposit). Be sure your equity in the deal is *created equity*, not your invested cash.
The credit crunch has made wrap-arounds easier to do, because lenders don’t want yet another foreclosure in their inventory and they are flexible on waiving the due-on-transfer. Just be sure not hide the transfer. Be prepared to offer the lender a piece of the (future) action: Slightly higher monthly principal payments in addition to the normal monthly payment, or a portion of the refinance net balloon payment.
An alternative is to use a private lender to buy with a deeper discount and then use a wrap-around to sell at a higher interest rate. Private lenders are much more receptive to “off-beat” loan terms (like non-recourse and assumability) and participation in the profits. Private lenders with self-directed retirement funds are a fabulous source of financing, especially in this buy-and-hold (or buy-and-wrap) market. I’d rather own the paper on a property for a hefty positive cash flow, than have the hassles of tenants, toilets, and turn-over.
Two cents worth, your mileage may vary.
I need help finding a good wholesaling formula. Any recommendations?
Sure, check this out: Property Pricing Strategies — Bryan Ellis
I was glad to hear Jack say that he does 10-15% on higher end properties since I think that in the real world you have to take into consideration the market that you are in. If the properties have higher values, the profit margin is a lot higher without having to go so low on he prices. But thank everyone for sharing. I would love to hear more about the wrap-around mortgages and whether or not you think those would work on small multifamily (2-4 unit) properties as well.
Wraps are very common for commercial properties, sometimes as many as 16 wraps on a property that has been sold that many times.
As for small properties (less than 5 residential units), wraps are a good way to defer capital gains taxes. The seller only pays capital gains on part of the principal portion of each monthly payment according to an IRS formula that splits the principal portion into “basis” and “gain”. The tax is paid on the “gain”. The “basis” is simply a return of after-tax investment.
If the seller is actively investing, then he may not want a wrap. Rather he would want cash to do an IRC 1031 tax-deferred exchanged into his next investment property.
If the seller is “retiring”, then the wrap is probably an excellent choice. Be prepared to agree to a pre-payment penalty to cover the seller’s capital gains tax. Retiring sellers want a long term income stream, not a big chunk of taxable cash. Of course, a buyer will want nonrecourse, no due on transfer, and a very small down payment. The property is the sole collateral for the wrap note and it doesn’t matter who makes the payments (you can resell on another wrap). These parameters are negotiable.
Hey Jeff, Could we get an example of this formula piece by piece in detail please.
Jack
#
Jeffrey Smith on July 29th, 2008 at 11:43 am
On a subject-to deal (or equivalent lease-option), I want 15% equity with an underlying debt that has a long term low fixed rate. My goal is to sell on a wrap-around with an interest rate about 2 points higher than the underlying debt. Also, I add about 6 points to the ARV (effectively rolling-in my discount points for offering seller financing) and I require 3 points down payment. The underlying debt must not balloon before the wrap-around debt. I usually offer between 3 to 5 years balloon on the wrap to allow time for the buyer to repair his credit and refinance.
I don’t offer lease-option deals, because for the same gross earnings of a tenant I can get several hundred dollars per month more net positive cash flow from a buyer on a wrap-around due to the tax deductible interest component of the monthly payment. A 3% down payment usually works out to be about the same move-in cost for a tenant (first and last month rent plus security deposit). Be sure your equity in the deal is *created equity*, not your invested cash.
The credit crunch has made wrap-arounds easier to do, because lenders don’t want yet another foreclosure in their inventory and they are flexible on waiving the due-on-transfer. Just be sure not hide the transfer. Be prepared to offer the lender a piece of the (future) action: Slightly higher monthly principal payments in addition to the normal monthly payment, or a portion of the refinance net balloon payment.
An alternative is to use a private lender to buy with a deeper discount and then use a wrap-around to sell at a higher interest rate. Private lenders are much more receptive to “off-beat” loan terms (like non-recourse and assumability) and participation in the profits. Private lenders with self-directed retirement funds are a fabulous source of financing, especially in this buy-and-hold (or buy-and-wrap) market. I’d rather own the paper on a property for a hefty positive cash flow, than have the hassles of tenants, toilets, and turn-over.
Two cents worth, your mileage may vary.
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