Hey guys,
I'm trying to find some info on a strategy I discovered at a seminar which allowed you to profit from real estate without using your own money or qualifiying for a loan. I know a few strategies like this exist so I'll explain what's involved:
Firstly, as a buyer, I approach a seller who is having difficulty selling the property – but also has an asking price higher than the mortgage. Another requirement is (usually) that the area the house is in has is experiencing an upward growth pattern of atleast 10% per year.
What happens next is I offer the seller a 12 month contract to buy his property for MORE than his asking price after the 12 months. In the mean time I agree to "take over" his mortgage repayments (interest only) in exchange for control of the property, letting me put a tennnt in, giving me an income while I search for a buyer to take it over once the property goes up in value.
Basically its a positive cashflow strategy that doens't require me getting any money from the bank, just enough for a decent laywer to draw up the contract for me.
What I want to know is:
1. Is anyone heard of or been involved in a deal like this before and does it have a name?
and
2. If so, what usually happens after the 12 months is up and I haven't found a buyer to pass it onto and/or don't qualify for a loan with which to buy the property myself?
Update: I've done a little more research and it sounds like a combination of an "option-to-buy" and an "assumption of mortgage" contracts. Anyone with any clue what might be involved in this kind of deal please let me know
Basically this method is called a "wrap" so you are buying and selling a property without you name ever actually touching the property itself for longer then say an hour. The idea is good however you need to understand the that finding a seller that is going to agree to such terms is going to be hard.
If you want to continue looking for a deal like this to work, then get out there and start making offers however i dont like your chances there just isn't much in this for the seller and you are putting your self out if you cant turn over the property. In your contract make sure you include a finance clause if you continue along this path.
My suggestion would be to continue along this thought process however offer the seller a little more and your self a little more. For example find a house that is a bit run down that you think needs a bit of work, make an offer for a 12 month lease with optin to buy and a list of work that you intend to do in this time. This will not only push the house price up to make it easier to sell but will also make it easier to get a loan if you can't sell in your 12 months.
Just a question where are you looking to buy?
Good luck bell432
Thanks Bell,
I'm getting an attorney to look into this for me as well as far as my legal obligations are concerned, I was wondering though is it still considered a 'wrap' when you're actually taking control of the propery (in my case putting a tenant in) in exchange for paying the mortgage for the seller?
I'm considering around Sydney, the North Coast and Central Coast maybe, as far as Newcastle too.
One thing I had in mind was to offer the seller a price slightly higher than their asking price as long as they have some equity in the property, as this would allow me to grab a possitive cashflow asset for atleast 12 months or until I can find another buyer.
It is just an option agreement.
If you cannot settle or assign your option to someone before expiry it is over for you. You would lose your option fee and any expenses incurred and will have no rights over the property unless you can negotiate a whole new agreement.
It is a very good strategy for making money from seminars, but very hard to implement in practice with real property – probably works well with shares tho.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry,
I had assumed that if I can't find either a buyer or finance before the end of the 12 months I'd forfeit everything I'd paid to the seller already.
I'd mainly try this strategy for two reasons: one because of my financial situation, as it would be extremely hard to get a loan right now as a working musician, and two because it would allow me to put a tenant in the property and get some cash flow out of it while looking for another buyer.
I think you will have a hard time convincing the owner of the property to allow you to keep the rent!
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:I think you will have a hard time convincing the owner of the property to allow you to keep the rent!I think that's the part that that's been most confusing as this really isn't a tradition deal…
From my understanding I would take control of the property in exchange for paying the sellers mortgage from day one…
The idea is that you would find a seller who is having trouble selling the property or paying the mortgage. In exchange the buyer offers the seller a slightly higher price than the asking.So the buyer benefits: Getting control over the property (and can put a tenant in), with the opportunity to sell to another buyer before the end of the 12 months, and only cost is legal fees (if the tenant's rental covers the mortgage repayments).
The seller benefits: Mortgage is paid for, house is sold in 12 months or less and gets good value on the sale.
ok, that may make it doable.
But if someone cannot pay the mortgage then they are possibly in great financial difficulty. If they were later to go bankrupt then you may have to deal with the clawback provisions of the Bankruptcy Act, particularly if you are paying under market value for a property. So make sure you seek legal advice for this sort of thing before you start making offers.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Munglord
When you begin looking at vendor finance (VF) stategies it's a good idea to get a clear idea of how the most popular VF strategies work:
1. An Instalment Contract (sometimes called a Wrap). This is a real contract of sale with a delayed settlement (sometimes up to 30 years), during which time the buyer is given a licence to occupy, if they pay so much per month/fortnight/week, at a particular variable interest rate, etc etc, i.e. the Contact of Sale is also used as a credit contract.
2. A Lease/Option (sometimes called a Rent To Own). Here you take out a Residential Lease on a property and, at the same timw, take out a Call Option on the property. These two documents give you the right to occupy the property (Lease) and the right (but not the obligation) to buy the property (Option), for a fixed amount, for a fixed period of time. If you don't buy within the specified time, the Option disappears.
Sometimes people do what are called Back-to-Back Lease Options. Another name for the same thing is a Sandwich Lease Option. In very basic terms the Sandwich L/O is where you take control of a property with a L/O and within this L/O you retain the right to sub lease. You then on sell the property with another L/O, obviously with a strike date set before your L/O runs out.
Since we started in VF in 2003 we have used the L/O strategies many times. However we don't find them as secure as the Instalment Contract, so we tend to stay away from L/O's these days.
3. Deposit Finance (sometimes called a Second Mortgage Carry Back). Here the buyer of a property gets a traditional first mortgage and the vendor (seller) supplies the deposit, in the form of a loan to the buyer.
Out of the three strategies above, I'd guess that the seminar presenter was talking about the Sandwich Lease Option. We have seen lots of these transactions work but we've also seen some hit trouble. Mainly because half of the transaction is a Residential Lease and this means you're exposed to all the joys of the Residential Tennancy Tribunals.
If you are considering using the Back-to-Back L/O I'd suggest you become very well educated on what's involved.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
If you dont own the home during that 12 months, how do you get landlord insurance?
Hi Intrigue
You use one of the two Insurance Brokers that I know who specialise in insurance policies for vendor financiers. A limited Power of Attorney is also a great help.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
Hi guys
Paul sums this all up very well, you have to have the right legal frame work in place. To protect you, the owner and the person you are on selling/leasing to.
It is very similar to a wrap or more recently a sandwich lease. The benefit to the original owner ( who maintains a caveat over the property so they dont misss out at all, is if all goes wrong they have los tnothing, they just earnt good rent for the agreed period of time and now are back where they were, looking to sell. The advantage to you, the "man" in the middle isyou may be paying the owner x amount in rent but charging your potential buyer a little more ( the option fee as oposed to the rent) for the opportunity to enter the property market as an owner….which is becoming harder and harder for decent, hard working Aussies on normal wages…..who has a 10% deposit (or more!) saved plus legals and stamp duty fees? But they can surely afford to pay a mortgage and this gives them the opportunity to demonstrate to the bank their reliability,
sure there are problems and potential hurdles, pre screening of your purchasers thoroughly is essential but potentially this is a win win situation for all involved. I love this set up when its done ethically and legally and properly all walk away satisfied!
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