If you’ve been investing for some time now, you’ve probably ran into scenarios where you, the investor, and the buyer are just a smidge off on price. I’ve been in these same situations, where the seller and I are, say, $5,000 off, I’m at my absolute top dollar, and they’re outright bottom price. Oftentimes in these situations, the deal will go stale and the seller will either end up keeping their house, or selling to another competitor, and that means no profit for you.
Lending Costs
If you’re like 99% of other home-flippers, you probably use a lender of some sort to fund the entirety, or at least the majority of your flip. Whether it’s a hard money lender, a rich uncle, or Peggy Sue down the road who won the lottery last year – whatever the situation, generally there is a lender behind all of these flips.
As an investor, part of our due diligence is to calculate the ARV, rehab costs, selling costs…you know the drill. Calculating lending costs is also part of that due diligence, and as you’re well aware, lending doesn’t come free. In fact, this generally amounts up to several thousand dollars, if not more, depending on the price range of the property. In the scenario above where you and the seller were a few thousand off, if only you could get your lending for free on this deal, you would be able to swing it. You would be able to make your seller happy, create a beautiful home for a new family to live in, all while getting a decent amount of profit from the sale of the property. Silly lending costs…
The Solution
If you find yourself in this situation, don’t fret, this can be solved fairly easily depending on the seller’s situation. What we want to do here is to determine if the seller would be okay agreeing to a short-term owner financing situation. Let’s look into an example scenario. Let’s say the seller is stuck at a price of $85,000 and that is just slightly off from your $82,000 top dollar and you can’t come up another cent. Our goal here is to see if it’s possible to structure a short-term owner finance situation. It might look something like this:
· $85,000 Purchase Price
· $5,000 Down Payment
· $500 Monthly Payment
· 8 Month Term/Duration
In this scenario, you’d pay the seller $5,000 at the closing table, and then pay them $500 monthly until 8 months down the road when the full amount of the note is due or you sell the property – whichever happens first. Hopefully it’ll be that you sell the property first. So, let’s say you’ve bought the property, paid the seller his down payment, and 4 months later, after you’ve completed the rehab, you’re finally set to close with the end-buyer. You would then owe the remaining $78,000 principal amount to the seller when you sell the house. We arrive at $78,000 by taking the $85,000 Purchase Price minus $5,000 Down Payment minus 4 Monthly Payments of $500.
Presenting This To The Seller
Okay, so now we know how to structure this deal to make it work for both parties, assuming the seller is okay with waiting several months in order to get their extra $3,000. What we do now is ask the seller, “Okay Mr. Seller, it seems we’re both just slightly off on our numbers. If we came up to your asking price, would you be willing to sell on terms?” Likely, they’re going to say “What the heck does that mean?!”
“Mr. Seller, if we can come up to your $85,000 purchase price, would you be willing to take monthly payments for 8-12 months all while we rehab the property and find a homeowner to purchase the property afterwards? It would look something like this…we can pay you $5,000 up front, and make $500 monthly payments to you until we sell this house in 4-6 months.”
Now it’s up to you and the seller on which route you want to go. Maybe the seller wants $10,000 down, maybe they want $650/month, maybe they only want a 7-month term. There are all sorts of ways this conversation can go, but ultimately from this point, it is completely up to you and the seller to negotiate which terms work for both parties. Maybe the seller doesn’t want to go this route at all, and they want their cash right this instant! What happens now? Well, likely nothing unfortunately. You probably can’t buy the house, but at least you tried every option – after all, you can’t flip every house you come across.
But Wait…What If There’s an Existing Mortgage In Place?
If there is an existing mortgage in place, you can assume their existing mortgage and make payments on their behalf until the property is renovated and sold. This transaction is called “Subject To.” This can actually be beneficial to the seller’s credit score, as you are making the payments on time.
If there is a mortgage in place, and the seller has additional equity they need to paid, it would just be structured as a hybrid of both Subject To and Owner Financing. We assume the payments on their existing mortgage and create a new note to make payments towards their equity.
These above methods enable us as investors to both pay more to the seller and also save money in return. Whether that saved money comes from lending costs or simply the cost of opportunity, since hopefully you can take down more properties with this method!
Written by: Ryan Whitcher of Harmony Home Buyers