This is part of the Real Estate Contract Fundamentals Series. I’m not giving you legal advice – you’ve got to get that for yourself from a qualified attorney. To get a free copy of the Real Estate Purchase and Sale Agreement upon which this series is based, visit the Monster Purchase And Sale Agreement Download Page.
———-
In our last installment of the Purchase And Sale Agreements series, I gave you some pointers on determining the purchase price for the property on which you’re making an offer.
But deciding HOW MUCH you’ll pay is only half of the battle. You’ve also got to determine HOW and WHEN you’ll pay that amount.
Usually, the purchase of an investment property is broken down into several different financial transactions. For example:
- Earnest Money is frequently paid by the buyer to the seller (or seller’s agent/attorney) immediately or soon after the offer is made
- The buyer might bring cash to the closing for part or all of the purchase
- A new loan may be necessary to finance the purchase price
- The buyer and seller may enter into a creative arrangement, like seller financing, subject-to, etc
So your next step is to determine which of these (or other) methods you’ll use for satisfying the purchase price you’ve decided to offer.
In tomorrow’s installment, we’ll talk about Earnest Money. This is one of the most commonly misunderstood parts of real estate contracts, and I’m looking forward to setting the record straight on this issue.
But for now, please do me a favor – tell us what methods you’ve used or studied for satisfying the purchase price in your contracts. Do you favor owner financing? Why? Do you make a lot of cash offers – or maybe do you use some other strategy entirely? Sound off below!
Thanks again for visiting FreeRealEstateTraining.com!
Hi Bryan,
I did a subject to deal in Hawaii. I never knew it would be as easy as it was and what was so cool is the previous owner put no time limit for me to refinance the property. He really wanted out after his divorce and he has possession of the kids. He wanted to go back to renting and he was in foreclosure by the association. I paid off all association back payments along with a couple thousand to him and I got a 6% principal and interest 30 year fixed loan. I even took it one step further and purchased a title insurance policy. The previous owner has no intention of buying anything else for a long time so it has an unlimited time frame on keeping the loan in his name. Truly awesome. Since I am a stated income borrower, I can’t secure financing easily these days even though I have a 750 credit score. So subject to is the way to do it.
gabrielle
My company uses mostly subject to transactions to purchase property. We have been pretty successful at getting the properties for less than market due to the seller being motivated for one reason or another. At that point if the property is behind in payments, we negotiate with the mortgage company to either do a loan modification or set up a repayment plan if we plan to keep the property as one of our hold properties. If we dont want to keep the property, we short sale it or assign it to another investor. If the property is current on payments, and has equity, we just take over the payments, and if it has little equity, the seller pays us to take the property if we feel we can still cash flow it.
If the seller wants to buy another property in a few years (after selling the current property to an investor on a “subject-to” deal), then the outstanding loan in the seller’s name may pose a problem for qualifying for a new loan (even though the old loan is current).
The way to resolve that issue is to offer the seller a mirror wrap-around note on the old loan. Now the seller has an offsetting asset (the wrap note) against the old loan (liability). He can now show (on paper) cash flow income on the wrap note that covers the expense of the old loan. The income/expense are equal (net zero to the seller). The mirrow wrap has exactly the same current terms as the existing loan on the property (current balance, interest rate, payment, term, balloon).
The mirrow wrap is a much better way for the seller to dispose of his property on a subject-to, compared to a lease-option deal. When qualifying for a new loan, a lender will discount his rental income to about 70% then compare that net income to the current liabilities on the rented property (mortgage, expenses, taxes, etc.).
On the other hand, cash flow instruments are not discounted at all, because he no longer owns the property (someone is else is responsible for the liabilities). The seller can now show the offsetting asset/liability as cash flow instruments on his balance sheet and financial statement, which won’t hinder his ability to qualify for new financing on another property.
Another benefit to the seller is that he can recover the property in case of default on the mortgage. On a strict subject-to deal, the seller retains full liability on the loan but has no claim on the collateral property.
All of that’s correct. For the record, a wraparound is a type of subject-to, lest anyone get the impression that they are completely different. — Bryan Ellis
Look forward to that one tomorrow. I am speaking to an agent in Las Vegas who states that the banks will not move unless you put down some type of earnest money, on their REO’s. I am looking to purchase some, and could use some of the steps to take when this pops up.
Thanks
Can you bring up the topic of… and perhaps hook us up with some training for … negotiating forbearance / negotiating loan mods…. etc.?
Thank you!
Hello B, I am interested to know if anyone is buying short sales and selling them the same day to a end bueyer. If so I have 18 buyers and I have the homes under contract to buy. The challenge is that I have not found the lender that will do a same day close for my buyers.
Hello Brian, how in CA can I flip a property without having the title seasoning issue be a concern for the buyer to close?
I am buying the home as a short sale and selling the home to a third party buyer.
Thanks.
Rodolfo de Hoyos
Realtor/Investor
Rodolfo,
You cannot have the end buyer come in with an FHA loan for the flip. Unless someone has devised a way to do so (LMK). You may have to find a bank who does not have to meet seasoning requirements and try to get the end buyers qualified for a conventional loan through them.