Advice needed on deal structure!

[wesgreenwood]

Fellow members, I could use some advice on how to proceed with this deal.



Here's the particulars.



Private sale, Detached Bungalow, 1000 sq ft, 3 bdrm 2 bath, separate entrance to basement and detached garage.



Asking price 299,000. Expected purchase price is 265-270k. The house was purchased 3 yrs ago with only a few windows changed during current ownership.



My question is on how to structure this deal. Here is what I would like to do:



I discussed with the seller that I would like to negotiate a sale price now and I would have him hold his current mortgage and the property in his name for 12-18 months while I do the following(He was very receptive to this idea):



Rent the upper level out immediately as well as rent the detached garage out on a separate lease. During the first 6-8 months of my possession, I will add a secondary 1 bdrm basement suite to the house. Once that is complete, I will rent the suite out, let the rents stabilize then seek an appraisal at the after repair value.(Similar houses are valued at 315-335k within a 1 km radius of this property). After the appraisal is in, i would apply for a conventional mortgage at this amount and pay the seller the sale price agreed to on the earlier date.



I currently have 50k of capital to work with and I recently completed a basement suite in a house in the same neighborhood as this one for an all in cost of 40k.



My goal for this is to use my capital for the renovations instead of a down payment and to get the after repair value high enough that 80% of this will be enough to pay the seller that agreed to sale price negotiated prior to the renos



Now, how should I structure this deal? what I am thinking right now is that i put a lease with option to purchase in place with the seller, that includes the negotiated sale price 12-18 months down the road. This will give me control of the property to do my renos and rent out the upper level and the garage. I will make regular payments to the seller just like a bank and he will continue to pay his mortgage as usual. at the end of the term, i will get a mortgage and pay him the sale price then take ownership of the property.



Does this sound about right?



Any suggestions or input would be greatly appreciated! This is my first time venturing out of a standard buy and hold deal!



Kind Regards,



Wes

 

[Thomas Beyer]

Three options:



a) as your describe, lease with an option to buy. Say $10,000 (or more) today, with a payment of X/month, with an option to buy for Y in 24 month (or less).



b) Agreement for Sale, which is somewhat similar but a legally binding contract, i.e. not an option, but an agreement (today) for (future) sale !



Find out what the seller needs today in terms of cash, and how much $ per month to satisfy his mortgage.



In either case, the existing financing stays in place. Thus you have to understand the current terms and any penalties on discharge. Ideally, align the purchase date with his mortgage expiry date, more or less.



c) buy with a VTB, say 5% down, 70% first and 20% VTB mortgage. Then do your upgrade work and re-finance when done, say a year later. Not all banks do that, and thus I used 70% rather than 80% first mortgage as that is easier to obtain

 

[wesgreenwood]

Thank you for your reply Thomas!

This helps to confirm what I was thinking for the deal.

Great tip on trying to arrange the lease to end with the mortgage term if possible. That could prove to be a good bargaining chip if the mortgage payout penalty is quite substantial!

Wes

 

[RedlineBrett]

[quote user=wesgreenwood]My goal for this is to use my capital for the renovations instead of a down payment and to get the after repair value high enough that 80% of this will be enough to pay the seller that agreed to sale price negotiated prior to the renos


Remember that when you go to close and cash out the seller that lenders will only lend to 80% of the purchase price, not 80% of the ARV (after repair value). So if your intent is to use the new higher value to effectively 100% finance the property then you will need a purchase contact for the full ARV.



So you may need to cash out the vendor, and then refinance afterwards to back out as much of your capital as you can before moving on to the next deal.

 

[wesgreenwood]

Brett- I Just spoke with my mortgage broker regarding banks financing only to 80% of the purchase price or the appraised value, whichever is lower.

I was unaware of this , chalk it up to a rookie mistake.

I only have enough capital to close on a conventional mortgage or to do the repairs, but not both.

That was my goal with what I had in mind for this deal.

In your opinon, or anyone else's, want options do you see for me to accomplish these goals? Is it even possible?

 

[RedlineBrett]

[quote user=wesgreenwood]
I only have enough capital to close on a conventional mortgage or to do the repairs, but not both.


This is what loans are for. Talk to your mortgage broker or banker about the following:



1. Purchase plus improvements mortgage (needs to be owner occupied, but maybe this is in the cards for you)

2. An unsecured line of credit to allow you to do both, and then refinance it out along with your down payment capital once repairs are complete

3. a joint venture / money partner. If you have a great deal and a way to add value to the project your opportunity could make sense to an investor.

4. A general contractor that will wait for the refinance to be paid a portion of the bill for the work.



Good luck!