Brainstorming for Condo, Part II

48 hours have passed (plus or minus), so here goes:
BTW - this scenario occurred before the market collapse for condos in Florida, and just like Old School Rap (you didn't think I'd let you forget that one, did you) Old School Real Estate investing principles never go out of style - just, adjust you numbers accordingly. (My numbers reflect the original answer given to this investor previously).

The Seller wants to invest in real estate, needs/wants some cash, and is willing to owner finance a portion of your purchase. Why not assist them in starting their investing future with this unit? You can offer to do a Lease with Option to Purchase, a “Split Funding” deal, or an “Equity Participation” venture, to name a few.

A. Lease w/Option: You negotiate a purchase price with the Seller at a pre-determined time in the future. You put down a specified dollar amount as down payment on the purchase price. You execute a Lease w/Option to Purchase and pay a monthly rental amount. At the designated point in time, you execute the purchase of the property at the pre-negotiated price. For example: Purchase price of $110,000 (factors - current estimated value, needed repairs, anticipated future profit margin, closing costs). $7,000 down payment, $700/month rent, purchase price of $110,000 (minus $7,000) in 2 years. Since this is to be your primary residence, “holding cost/rent” is not been factored in. Also appreciation is not factored. In doing your homework, you would have discovered if Leasing/Renting is allowed in the condo complex. A fair deal.

B. Split Funding: You negotiate a purchase price with part of the money due at closing and the remainder due in the future. For example: Purchase price of $120,000 (factors - current estimated value, needed repairs, appreciation, closing costs). $60,000 1st mortgage, Seller held 2nd mortgage for the remainder due in 3 years. 2nd mortgage has no payments and is a single payment lump sum balloon. 2nd mortgage may or may not include accrued interest (negotiable), but should not have any payments (remember, the condo monthly maintenance fee will likely increase with title transfer). If the Seller wants monthly payments on the held 2nd, you can reduce the overall purchase price, increase the time frame that the 2nd balloon is due or lower the amount of the 1st mortgage. The property appreciation between closing date and the due date of the 2nd mortgage is you anticipated profit margin. The Seller gets their price, you get your terms. A fair deal.

C. Equity Participation: You negotiate a lowered purchase of the property, factor in a profit spread for yourself and agree to share any amount above that amount with the Seller in the future. For example: purchase price of $100,000. Your initial (future) estimated profit spread of $12,000 (factors current estimated value, current needed repairs, and closing costs). Combined “costs” equal $112,000. You agree to share with the Seller all proceeds above and beyond a sells price of $125,000 when you sell the property (3-5 years). Your 2nd estimated profit spread is $13,000 (spread from $112,000 combined cost to split adjusted price of $125,000, PLUS a percentage of the proceeds above $125,000. Potential profit to you: $25,000 plus a share of the appreciation. (The upfront amount, the sales price participation point and split percentages are all negotiable). Seller gets a larger lump sum of cash up front and a share of the appreciation. A fair deal.

In Summary, sometimes with a willing Seller, you can walk then through the deal and show them the “nuts and bolts” of the transaction and your exit strategy. The key is to make a fair offer and then demonstrate WHY it is a fair offer. It is very difficult to defend a “lowball” offer if you walk someone through the transaction. Many Real Estate Investors would not walk the Seller through the transaction under any circumstances. They would explain the offer, but not their exit strategy, anticipated profit margin or how that margin is obtained. Explaining the inner workings of the transaction is up to you. However, you have identified a Seller with an interest in knowing more about RE investing and they have what you want – the property AND the willingness and flexibility to owner finance. How you choose to gain their trust, purchase the property and develop a possible friendship is ultimately up to you.

Brainstorming for Condo, Part I

A real estate investor who was relatively "new" asked me to help brainstorm the following scenario:

Q: I found a lead on a condo that I would like to live in as my primary residence. How can I structure the deal? The condo is free and clear, the monthly maintenance fee is about $190/month, the Seller needs some cash (they want to start investing in real estate too), but is willing to owner finance a part of my purchase. The after repaired value of the unit is about $120,000 and it needs updating of the kitchen and interior painting. I have good credit and can put down up to 20% ($24,000), but would rather not… Any ideas?

A: Congratulations on taking the first steps toward buying this unit. There are several ways you can approach structuring this transaction. With the condo being free and clear, you and the Seller have quite a bit of flexibility to find an equitable solution.

I. First, order of business is due diligence or “doing your homework”. I would further evaluate and define your “exit strategy”. You stated that this would be your primary residence – for how long? What are your plans for the unit when you leave? What circumstances would make you leave? These factors help shape your purchase offer.

II. Secondly, I would evaluate the condo complex – are there any ongoing or upcoming assessments that will increase your monthly maintenance fee? Is there any current or pending litigation against the condo association? Are there any specific restrictions outlined in the Condo Association Bylaw documents that would be a concern?

Any ideas from YOU the reader? 48 hours from now, I'll post 3 ways this investor can choose to proceed. Until then, I'd like you to brainstorm and post your ideas in comments. There are no "wrong" answers, just different viewpoints.

Thank you