It’s hard to keep covered against the chill winds of the market sometimes. Perhaps it’s possible to get a nice, thick sheepskin warming the front half of your body, but investors, builders and developers are increasingly finding their backsides completely exposed to the elements . . . brrrr!
If you’re a real estate investor, investing in shorts sales and REO’s, how can you keep clothes on both sides of your body simultaneously? Is there a way around the seasoning issues that hang these deals up?
What in the heck am I talking about?
Here’s a typical scenario:
Investor buys REO bank foreclosure for 50 cents on the dollar or less. They get a great price (that’s the sheepskin in the front), but they’ve used hard money at 12% with a 1 year balloon, so they need a quick exit strategy.
That’s where they start to feel a bit naked, because it’s harder and harder to pull off a quick exit for full asking price these days. Investors/rehabbers are often left exposed on the backside because they can’t flip the property around in a timely manner due to seasoning issues with conventional lenders. This lag time eats heavily into profits.
This leads to a flash of inspiration. The investor thinks to himself:
“Ah hah! I’ll buy cheap with all cash, and just use seller financing to sell this property quickly for the highest possible price, and then I’ll simply turn around and immediately sell the note to a trust deed investor, grab my profits and be out of the deal.”
It’s just that simultaneous clothes aren’t as fashionable as they used to be. There just aren’t a lot of investors lined up to buy these types of notes any more, and the ones who’ll buy them want steep discounts.
Seasoning is an issue. In general, note buyers want to see that either,
- the seller owned the property 12 months before selling it, or
- he has received at least 12 months’ worth of payments from the buyer before trying to sell the note
So is the ‘simultaneous close’ really dead?
Yes and no . . . there’s a niche product that circumvents the traditional seasoning issues and acts as a true simultaneous close, paying .85 cents on the dollar.
How can they possibly do this? Most note buyers are only paying 70 to 80 cents on the dollar, starting with a note that is no more than 80% loan-to-value (LTV).
They underwrite the deal from the very beginning.
The prospective buyer fills out a 1003 (loan application) and pays for a credit report, and the investor reviews the file. Some buyers will qualify (FICO 600+) for the program, some won’t (credit scores below 600 are not impossible, but will require some seasoning before the note can be sold).
If they do qualify, here is a sample of what an average deal might look like:
• Only offered on owner occupied SFR’s (no mobiles or row homes)
• 5% cash down payment
• Seller carries a 15% second
• Seller creates and immediately sells an 80% first at .85 cents on the dollar
• Face interest rate on the 1st note will be somewhere between 8.5% – 10%
So, here’s what the numbers look like:
• Purchase Price: $100,000
• Down Payment: $5,000
• Seller Carry 2nd: $15,000
• Seller Carry 1st: $80,000
• Proceeds From Selling 1st to Note Buyer: $68,000
The seller/investor/builder walks away with $73,000 ($5K + $68K) cash and a note for $15,000 that will get paid off when the buyers refinance, so they snag $88,000 total for their $100,000 property.
It’s not a golden hammer and won’t make sense for everyone, but it is an option that’s out there if the seller can absorb the 15% discount and wait for the 2nd to pay off down the road.
And even though the buyer will have what sounds like a high interest rate, most of the time they still come out ahead owning instead of renting on an ‘after tax’ basis, and it’s a way for them to get around the cracks of conventional financing that some buyers fall into.
When the financing machine is rusty, we need to look for ways to lubricate the system and get those creaky parts moving. Buyers need to buy and sellers need to sell.
The simultaneous clothes is just another way to dress it up.
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