The scene looks like this….
You called a seller on his ad and you noticed that his property has been on Zillow for over 180 days. The property is a nice one, it’s advertised for under market value, it is executive home meaning it is not exactly high end but definitely not a starter home. You contact the seller, and he is very motivated to sell, now what?
You fill out your deal sheet so that you can see what’s going on. You find out that it is a 5bedroom 41/2 baths in the higher end of a middle-class neighborhood. You find out that the property has a small mortgage and it does not listed in default at this time. The property is listed on the mls by the owner who is a realtor. Even though it’s listed, you decide to work with the owner-agent because he seems to be motivated to sell.
Let’s dissect this deal:
First, it is an executive type, middle class home, this means you will need that kind of a buyer. Note, everybody in whatever class they think they are in can benefit and would want to least to own a home especially if their credit was bruised. Stuff happens to everybody and executives need a home that they can lease to own too. So there is a market for lease option on the executive home level also.
Second, the seller has listed his property for less than value, this means that he’s not upside down or over-leveraged. So if he’s not upside down, most likely he has some equity and he’s going to want something for it.
Third, you know the seller is open to an unconventional sale because he mentioned you that he is willing to finance with a down payment.
What do you respond when the seller says “how much down payment can you afford?”
The answer is…..
Unless you have money and you want to do this kind of deal then negotiate the lowest down payment, sign the purchase contract, give the seller a mortgage and then go find you a buyer or rent the house. Simple.
But if you don’t have this kind of money (yet) and you’re just getting started then do this….
Second Option
Make the offer for as low as you can get it, put an option on it with an nominal option deposit and then go find a buyer with a down payment. You can sell either on terms or with an end buyer who has a new loan. I wouldn’t use a purchase contract here if you do not have a buyer yet, because your intent is misleading. You’re saying that you intend to close with a down payment when in reality you do not intent to close, you intent to assign the contract…… Nothing wrong with flipping, but you must be clear on your intent and not mislead the seller.
A third option and the one I like is this…
Make your offer based on your buy criteria (with you taking over the existing mortgage subject to and making a promissory note for the equity that the owner has. That amount of equity should also be negotiated down and the promissory note is for that amount that both parties agree on. So you take over the First mortgage and create a Second mortgage for the equity. Then you make sure you collect more than you’re paying out.
Simple as that.
