Okay, I’ve been playing around with a concept, and was wondering if some people here could give me some feedback if they’ve used this strategy successfully (or unsuccessfully!) in the past.
The idea is to offer the vendor 80% at settlement, with 20% on terms (ie I’ll pay it off $x per month for x years).
I worked out some numbers on a hypothetical deal, so I’ll put these in.Asking price $170k (way overpriced, probably more like $150k)
I can either offer $135k upfront (100% at settlement)
or
I can offer $165k, with 80% at settlement and 20% on terms. I would also want to include my legal costs (ie stamp duty and titles office fees) as being payable on settlement by the vendor. So on this deal that would be say $6k, which means the true price is $159k.
Now, in this scenario the vendor would receive:
$132k at settlement
$6k to go for legal costs
$27k payable on terms (say $250 a month until paid out)Now, obviously there are vendors who won’t be interested in this, or who will receive better offers than $135k. If, however, you found the right vendor who was also motivated, it seems to me that at settlement they only receive $3k less with the 2nd offer, plus they get ongoing payments.
Anyway, logically it works, but logic isn’t everything! That’s why I thought I’d ask for feedback from the forum about people’s experiences with doing something like this. Also, I’d be interested to know how you would present the deal. I’ve been told to do it in person if at all possible, but on my first attempt to do this the vendor was interstate and so I had to do it in writing. Also, would you always put the two alternatives to the vendor so that they can see that with the second deal they’d get almost the same? Or would that risk them taking the first deal, which may not suit me?
I could keep rambling on for ages, but I’ll stop and open it up for input! Feel free to pick this idea to pieces, I won’t be offended.
Oh, and for anyone who perhaps hasn’t twigged why I’d want to go to all this trouble – if I can borrow 80% on the property and don’t have to find the other 20% or costs, obviously I can buy a lot more properties, all I need is a few thousand up front to secure the deal, which will then come back at settlement.
Keep smiling
Felicity
Hi Felicity,
Sounds like an intersting concept, i.e. we all like to buy with as little or none of our own money. Your example raises a few points in my own mind.
1. At 80% LVR, regardless of a deposit or not, your borrowing capacity will be affected so there will still be a limit to the number of properties that can be bought?
2. Asking price 170k, more like 150k, offer 165k. I personally wouldn’t do it that way as straight away I am paying 15k more than I believe the property to be worth for the sake of putting no money into the deal?
3. By paying the vendor say $250 a month, this would take too much out of my spread each month and to me, defeat the purpose of doing the deal in this structure in the first place?
I don’t mean to souund like its a bad idea, personally I am always trying to do the deal with as little cash as possible, however the example you described would not fit my strategy, but it may work for you.
I would be more inclined to use the first option and offer the lower amount of what the property is worth to me.
Cheers,
Matt [
]Hi Felicity
Just regarding the terms you mentioned, ie $27k @ $250 per month; this means according to my calcs, it would take 9 years for the vendor to receive their cash in total.
How about making a bit more attractive to the vendor, by offering a balloon payment after say 2 years. It would work something like this ($250pm x 24 months = $6k with the remaining $21k paid in entirety at the end of year 2) This would/could coincide with the wrap purchaser cashing out.
Just my thoughts
Regards
David
Great feedback so far, keep it coming!!
Matt, there will always be a limit, although I’m moving into trust structures (still waiting for Steve’s latest offering!) so that may help. Right now, I’m out of money for deposits, and I’m trying to find a way to keep moving on anyway. Using private investors is one option I’ve been exploring, and may well be the better one long term, but so far I haven’t made much progress in that direction.
I’m also aware that I won’t be able to add my usual margin to the wrap price if I pay more for the property initially, but short term it may be worth it on a few properties.
Also, the point about taking too much out of my spread – well, quite frankly, if I’m paying investors up to 15% to fund my 20% deposits, I’m losing a chunk out of my spread anyway. In the end there’s not a lot of difference.
And David, thanks for the balloon payment concept – hadn’t even considered that one!!
That’s what I love about this forum, I always learn something new.
More suggestions eagerly awaited!! Hope some of what I’ve posted here clarifies my thinking and why I’m looking at this.Keep smiling
FelicityFelicity,
Although you don’t know me, I aways like reading your posts …. They are interesting.
Want the GOOD NEWS ….. Heaps of people have done this in the past …. One of my real estate agents (great friend) has done it 2 years ago when the market was flat and the vendors were prepared to listen to any offers. The come under the name of:
1. Reversed Second Mortgage.
2. Heads of Agreement.
3. Forgivable Second Mortgage.Works best when you are negotiating a [1] buy direct with the vendor of course, [2] stagnet market.
My real estate agent and good friend will be personally negotiating all these for me when the market cools off … what LEVERAGE.
This is my primary strategy to acquire and control property when the market is flat … especially a forgivable second mortgage.
Too late to go into the nuts and bolts …. however the concept works.
Regards,
Jason Moore
[email protected]Property Trader | Boston West Pty Ltd
http://bostonwest.com.au
Email Me | Phone MePrivate money lending opportunities available paying upto 12%, secured by bricks and mortar!
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