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  • Refurbish/Develop

    My first assisted sale

    Hi all,
    I have been involved in buy to flips and worked hands on as a jack of all trades for a number of years now, mainly for family members, but feel this has become too much like hard slow work.
    So I read some books on creative investment strategies looking for a new approach to property investing, and wanting to go it alone as nobody thinks like me.
    I have been approached by a property vendor who inherited a house but has had it on the market for 2 years with no interest, and also has had negative experience with nightmare tenant, and asked if I would be interested. 
    The property needs a lot of work after the tenants left it with a lot of damage, and the vendor's asking price, while BMV, is still out my price range for cash, and even using some creative investment strategies I can't make the numbers stack up for a win win.
    Asking price 100k
    Current market ceiling 130k

    I want to help him achieve his asking price, and with a bit of work even the market value. There is no mortgage and no renovation money. The property is currently sat empty. 
    I am reluctant to agree to an AS where I fund the renovation simply because there is no guarantee the property will sell even after a renovation, plus there's brexit, and the slowing of the global economy which could mean anything. 

    Now I don't know if this is OK/allowed, hoping someone can give advice; but my idea for an AS or maybe a Lease Option, not sure, is to rent the property from him myself and pay him rent at an agreed reduced rate (50%), so he is getting cash flow from the property, and with the other half of the rent I buy materials to carry out the works over an agreed period e.g. 12 months. Obviously I would take care of all maintenance and out goings as a normal tenant would. So relieves him of any burden, puts cash in his pocket, and his second home is renovated at no cost to him. (Maybe a little cost when doing big jobs like kitchen and bathroom).

    With either an AS or LO can an investor (me) live /rent the property in the agreement, is it allowed?

    Then after the 12 months or when all works are complete, and the property sells assuming market value, the vendor gets his asking price, plus solicitor/agent fees returned to either myself or vendor, whoever pays, and then any profit is split 50/50.

    That doesn't sound as good now. Maybe I should get anything over the asking price, and after fees are paid. Up to a certain amount e.g. 15k, and then split whatever is left.

    What do you guys think? I'm just starting out with this approach so any help offered will be gratefully received. 
    Main thing is, can I rent the property to myself under those agreements?

    Thanks

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    Have you considered him selling the property to you, with low or no deposit, and him granting a private mortgage?
    You buy it cheaply, live in it whilst paying a mortgage to him, not rent, then you sell it or remortgage to a conventional lender when the renovation is done.
    He gets a guaranteed sale, with money paid monthly until the work Is finished.
    Sounds like a win win to me

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    Hi Gary, thanks for the reply.

    I hadn't thought of that no. Would the mortgage payments paid to the vendor count as money off the total agreed sale price?
    If so, that actually sounds better than what I suggested. 

    I have been looking at my suggestion again and when writing the numbers out, the rent paid, even if I used 100% of the rent over a 12 month period it would probably only cover half the material costs, so not such a great plan after all. 

    So I was thinking this morning maybe a Lease Option, sale option, or rent to own. But I don't think I can live in the property with the first 2, but also I think I can only sell the property on with the sale option, as long as there's an assignable head of terms agreement in place. Forgive me if I'm wrong, I wrote some notes on the different option and now scrapping round to find them lol.

    But your suggestion works even better, if the monthly mortgage payments do come off the total value, as is usually the case, but there's also usually interest on each payment with e.g. a bank. 

    Does that type of agreement have a name? Is it called vendor finance?

    Thanks for your help. Appreciated.
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    No, my thoughts were a straight forward sale and purchase. He gets his 100k asking price, but has to wait for a while before he gets a lump sum, in the meanwhile he is receiving interest payments from you.

    You get to own the property, and can live in it, renovate it and then sell it and repay the original loan100k from the proceeds.
    You might sweeten the deal by putting in some cash deposit, if you have it, and the interest rate charged/ agreed can be negotiated. I suggest around 4% is better than he would get in any bank, and is around what a lender would charge you, if you could find one.
    The 100k asking price is worth negotiating too.
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    Hi Gary, sorry I didn't see your reply.... this site is a little bit glitchy using via phone browser, need some html5.

    Your way sounds like a great idea, but will need to think of a way I can explain it confidently so I sell the idea to him.

    I think he might move on the asking price because it took him about 10 seconds to say 100k, but assuming it is 100k;
    He obviously wouldn't get that at time of sale, it would be deferred to a later date?
    Would that be a specific date or whenever I either sold or paid?
    So the monthly interest payments are like rent but not rent. And are an incentive to him for immediate cash flow?
    The 4%, is that in addition to the monthly interest payments or would I use to target that p/a, divided by 12 months = the monthly interest payments?

    I would want to make sure the interest payment didn't go beyond my potential profits, so would ideally want it back on the market asap. This would tie up a lot of funds so there's an opportunity cost as well.

    You've sold one person on the idea anyway lol Smile

    Thanks for all your help
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    No ,think off it like this. He sells you the property for, let’s say, 100k. He now has a guaranteed sale and no longer owns the property.
    At the same time he is lending you 100k ( or less if you are putting some cash into it). You are paying interest on that loan, to him at,say, 4%. 100kx4% divided by 12 months = £333.33 pm.
    This is interest, not rent, not prepayment, just interest.
    When you have refurbished the property and sell it, or refinance it, his loan is paid off in full. Simples!

    If you can’t afford the monthly payments as well as the refurb costs, negotiate the purchase price lower, the interest rate lower or both. He may want to put a time limit on the deal of say 12 months. You need to be certain that you can sell/ refinance within that timeframe.
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    Brilliant, thanks Gary.

    So it's a bit like an interest only mortgage, but without the large deposit, and a shorter time frame.

    There are so many ways to structure a deal, I just need to fill my property investment toolbox and learn what ones right, when. Time + opportunity = experience.
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    Just to clarify, the 100k loan from the vendor is just on paper, yes? The agreement would be that the loan is paid like you say; when property sells, I refinance, or.... agreed time expires and the property is returned to vendor.
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    Do you not get it? The property will be yours, never returned to the vendor. You would owe him 100k.
    This would be paid of when you sold, remortgaged or won the lottery.

    His only interest in the property is a first legal charge, the same as if you borrowed the money from a bank.

    Sorry but if this concept is too difficult for you, then perhaps you shouldn’t be getting involved in property speculation at all.
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    Ye I think I get it, but I always think in worse case scenarios and try to plan for all eventualities.
    If a time limit is set, something has to happen at the end of that time limit e.g lease option 5 years, if option not exercised, option either extended or expires with property returning to vendor.
    I know you are not suggesting a lease option, you are suggesting a 100k loan with a time limit.
    So worse case scenario, a global recession hits 2020 with bank debts the way they are and interest rates close to zero, economic hit as bad or worse than 2008... Property market stalls and I find I can't pay the loan back in time, in normal circumstances the property would be repossessed by the lender i.e. vendor. I.e. property returned to vendor. 

    You might read that thinking WTF is this guy on lol, but I study global macro on a daily basis and have an interest in the markets, with a focus on Crude oil. There's no guarantee that all that will happen but all the signs are pointing that way and have been for a while. Plus if history repeats itself, which it usually does, then we are about due the next economic downturn. 

    So that is me planning for the worst but hoping for the best. Obviously I'd want to sell and make the profit and move on, but I can consider an expiration date as an alternative exit strategy for my own reasons.

    Thanks for you help.

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    You would have it written into the contract that after, say 18 months the interest rate. Would increase from say 4% to say 8% or try for 6% you don’t want a set in stone cut off point for the reasons you say. On the other hand he wants an incentive for you to sell/ remortgage within an acceptable time period.

    It’s all negotiable and the lower interest rates, and purchase price, for the longest period is what you want. He wants s the opposite, so negotiate!
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