Hello everyone. I am trying to get started in wholesaling and have my first opportunity in front of me. I spoke with another investor this weekend that gave me an idea how to handle this particular deal but she confused me a bit and seemed to be getting annoyed that I wasn't getting her "simple" plan. I will try to lay out for you what she told me the best that I can. Please tell me if it makes sense or please correct me where I am mistaken. Also, if you have another way of constructing this deal please let me know.
First, some background: I live in McKinney, TX. My neighbor recently informed me that her husband split on her. She has a baby that just turned 1 yr. a couple of months ago and is now 7 months pregnant with her second child. Needless to say she cannot work and has no way of making her mortgage payment. Her husband also left her with 2 car payments, although he is driving one of the cars, and $40,000 of credit card debt used for online poker. Up until recently she thought her only option was to foreclose on the house and declare bankruptcy. I am trying to help her out of this situation. I would like to profit on the deal if possible but do not want to take any money that should go in her pocket. For example, if she was to sell her house through a realtor then she would probably get a discounted price to sell it quickly and have to pay a commission to the realtor. If she could end up with the same amount of money but sell it to me and take away the headache of showings and the stress that it might not get sold then I would have no problem with that. The two biggest obstacles in this deal I think are the potential bankruptcy and finding the husband and getting him to agree to a deal.
Anyhow, here is the plan. It gets kind of confusing so please help me out. This home is worth roughly $170,000. It is in pristine condition and needs no rehab except perhaps a coat of paint and carpet cleaning, if that much. It is really clean. She told me that she owes $135,000 and just refinanced back in November so I'm guessing the interest to be around 6%.
I was told that I should put the house under contract Subject To:. Then put the house into a land trust. In order to avoid the due on sale clause keep the current owner as a 10% beneficiary owner of the trust. Next step will be to owner finance the home to someone with poor credit. This would be like a lease option except that Texas recently made lease options illegal. However, I was told that since this is in a trust it works differently. So take a large, possibly $10,000 non-refundable down payment on the home and this would go to my neighbor. Let the new buyer finance the home through me at, say 8-9% of the future price of a 3% appreciated home with a 3 year balloon. This should create positive cashflow with the difference in interest between the two loans. In 3 years I split the appreciation with the owner and they refinance with a conventional loan. Now I can pay off the first mortgage and my neighbor keeps 10% from her ownership of the trust.
So it should look something like this:
Current home mortgage: $135,000
Current home value: $170,000
Current equity: $35,000
Current mortgage approximately: $809
New buyer takes possession with $10,000. This money goes to neighbor and she gains $10,000.
Seller financed mortgage amount at 8%: $1363
Positive cashflow: $554
My 90% = $498 * 36 months = $18,000
Her 10% = $55 * 36 months = $2,000
Assuming meager 3% appreciation (this particular area is still appreciating nicely) new home value after 3 years: $185,763
Seller has paid down $5,211 of the mortgage + the $10,000 up front down payment so current equity is: $170,552.
Hopefully now buyer has better credit and can refinance to a much lower rate saving hundreds of dollars per month.
I split the appreciation with the buyer so he refinances and pays me the remainder of the mortgage minus $7,882 giving me a total of $172,671.
The first mortgage by now has a balance of approximately $129,553. The difference is $43,118. I keep $38,806 and she keeps $4311.
Her total profit on the deal is $16,311
My total gross profit on the deal is $56,806.
After writing this now I am totally confused. Does this make any kind of sense at all? How should this deal actually look on paper? And if you have any other kinds of suggestions I'd love to hear them. I only have a few days to make this work as she is now 1 month late on the mortgage and wants to move before the baby comes. I have very little money to put into the deal myself and have no credit due to my bankruptcy which finalized in January.
Thanks everyone. Looking forward to some creative input.
--Kevin
First, some background: I live in McKinney, TX. My neighbor recently informed me that her husband split on her. She has a baby that just turned 1 yr. a couple of months ago and is now 7 months pregnant with her second child. Needless to say she cannot work and has no way of making her mortgage payment. Her husband also left her with 2 car payments, although he is driving one of the cars, and $40,000 of credit card debt used for online poker. Up until recently she thought her only option was to foreclose on the house and declare bankruptcy. I am trying to help her out of this situation. I would like to profit on the deal if possible but do not want to take any money that should go in her pocket. For example, if she was to sell her house through a realtor then she would probably get a discounted price to sell it quickly and have to pay a commission to the realtor. If she could end up with the same amount of money but sell it to me and take away the headache of showings and the stress that it might not get sold then I would have no problem with that. The two biggest obstacles in this deal I think are the potential bankruptcy and finding the husband and getting him to agree to a deal.
Anyhow, here is the plan. It gets kind of confusing so please help me out. This home is worth roughly $170,000. It is in pristine condition and needs no rehab except perhaps a coat of paint and carpet cleaning, if that much. It is really clean. She told me that she owes $135,000 and just refinanced back in November so I'm guessing the interest to be around 6%.
I was told that I should put the house under contract Subject To:. Then put the house into a land trust. In order to avoid the due on sale clause keep the current owner as a 10% beneficiary owner of the trust. Next step will be to owner finance the home to someone with poor credit. This would be like a lease option except that Texas recently made lease options illegal. However, I was told that since this is in a trust it works differently. So take a large, possibly $10,000 non-refundable down payment on the home and this would go to my neighbor. Let the new buyer finance the home through me at, say 8-9% of the future price of a 3% appreciated home with a 3 year balloon. This should create positive cashflow with the difference in interest between the two loans. In 3 years I split the appreciation with the owner and they refinance with a conventional loan. Now I can pay off the first mortgage and my neighbor keeps 10% from her ownership of the trust.
So it should look something like this:
Current home mortgage: $135,000
Current home value: $170,000
Current equity: $35,000
Current mortgage approximately: $809
New buyer takes possession with $10,000. This money goes to neighbor and she gains $10,000.
Seller financed mortgage amount at 8%: $1363
Positive cashflow: $554
My 90% = $498 * 36 months = $18,000
Her 10% = $55 * 36 months = $2,000
Assuming meager 3% appreciation (this particular area is still appreciating nicely) new home value after 3 years: $185,763
Seller has paid down $5,211 of the mortgage + the $10,000 up front down payment so current equity is: $170,552.
Hopefully now buyer has better credit and can refinance to a much lower rate saving hundreds of dollars per month.
I split the appreciation with the buyer so he refinances and pays me the remainder of the mortgage minus $7,882 giving me a total of $172,671.
The first mortgage by now has a balance of approximately $129,553. The difference is $43,118. I keep $38,806 and she keeps $4311.
Her total profit on the deal is $16,311
My total gross profit on the deal is $56,806.
After writing this now I am totally confused. Does this make any kind of sense at all? How should this deal actually look on paper? And if you have any other kinds of suggestions I'd love to hear them. I only have a few days to make this work as she is now 1 month late on the mortgage and wants to move before the baby comes. I have very little money to put into the deal myself and have no credit due to my bankruptcy which finalized in January.
Thanks everyone. Looking forward to some creative input.
--Kevin
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