Quick Turn Deal

[GaryMcGowan]

I was encouraged to share this story which happened to me this morning.

Email Lead came in from Kijiji ad that I had placed.

The Property:
3 year old Townhouse condo in Kitchener
FMV - 255k
LTV - 225k
PIT - 1,448 per mth at 5.25% fixed due Feb 2012
Behind in Mortgage - 2,400 (she has been making partial payments)

Single Mom working two decent jobs. Lost part of her income back in the summer. No Husband due to death 8 yrs ago, Yes she could of gave me a story but my gut tells me the emotion was genuine. She understands that she needs to sell and cover her debt. She has owned it since 2006

My Strategy...

Bring her mortgage up to date,
Create a 50/50 JV deal. She stays on title and keeps her current mortgage. We will share all the costs and profits.
Locate a RTO tenant with a min 3% deposit on 250-260k. I pocket the deposit to cover my costs. 7,500 or so.
We lease the condo for min 2000 per month plus $85 condo fee.
Cash flow should be around 450 -550 per month which we share.
Sell the property in 2-3 years at 5% appreciation and there will be approx. 60k in equity to share!

This was one of those deals that I feel I could have taken the full profit and paid her a lease payment of 1500 per month. However learning a little about her on the phone and the situation I saw an opportunity to help. I now have turned her monthly shortfall into approx $200 profit a month. If you could have heard her emotion when I explained that I “may” be able to do this. You would almost do this deal for free....

She has a little homework to do on her side; ie fax me the condo docs, her mortgage information and so on.
I hope to have this concluded by the end of next week.

The good news for us Ontarians is this deal does not need to have some fancy paper work. I already have my JV agreements and RTO agreements.


Any comments on how you would structure the deal differently?

 

[brad]

Those #`s seem high to me. I think the 3% down payment is doable, tough, but possible. $2000/month for a town home is up there, even when factoring credits. I hope I`m wrong though!!!!


Just my 2 cents.

Brad Hamilton

 

[JessHunt]

Hi, Gary

Having been there, I can`t tell you how grateful I am for the boost you are giving this single mom. Human children have 2 parents for a reason. The compassion I see in REIN is truly what keeps me coming back. From the bottom of my heart, I thank you for helping this mom support her kids and to not be forced to raise them in an environment of welfare, poverty and dependence.

Jess

 

[TerryKruse]

QUOTE (GaryMcGowan @ Dec 4 2009, 07:31 PM) I was encouraged to share this story which happened to me this morning.

Email Lead came in from Kijiji ad that I had placed.

The Property:
3 year old Townhouse condo in Kitchener
FMV - 255k
LTV - 225k
PIT - 1,448 per mth at 5.25% fixed due Feb 2012
Behind in Mortgage - 2,400 (she has been making partial payments)

Single Mom working two decent jobs. Lost part of her income back in the summer. No Husband due to death 8 yrs ago, Yes she could of gave me a story but my gut tells me the emotion was genuine. She understands that she needs to sell and cover her debt. She has owned it since 2006

My Strategy...

Bring her mortgage up to date,
Create a 50/50 JV deal. She stays on title and keeps her current mortgage. We will share all the costs and profits.
Locate a RTO tenant with a min 3% deposit on 250-260k. I pocket the deposit to cover my costs. 7,500 or so.
We lease the condo for min 2000 per month plus $85 condo fee.
Cash flow should be around 450 -550 per month which we share.
Sell the property in 2-3 years at 5% appreciation and there will be approx. 60k in equity to share!

This was one of those deals that I feel I could have taken the full profit and paid her a lease payment of 1500 per month. However learning a little about her on the phone and the situation I saw an opportunity to help. I now have turned her monthly shortfall into approx $200 profit a month. If you could have heard her emotion when I explained that I “may” be able to do this. You would almost do this deal for free....

She has a little homework to do on her side; ie fax me the condo docs, her mortgage information and so on.
I hope to have this concluded by the end of next week.

The good news for us Ontarians is this deal does not need to have some fancy paper work. I already have my JV agreements and RTO agreements.


Any comments on how you would structure the deal differently?

I think it is great that you are able to help this person get out of a financial mess. She gets a chance to recover and start over with a payback a few years down the road. The situation becomes a win-win for both of you.

Good luck and congratulations.

Terry

 

[RedlineBrett]

QUOTE (brad @ Dec 4 2009, 08:23 PM) Those #`s seem high to me. I think the 3% down payment is doable, tough, but possible. $2000/month for a town home is up there, even when factoring credits. I hope I`m wrong though!!!!


Just my 2 cents.

Brad Hamilton

Definitely agree with this. Someone with 3% down and able to afford 2085/month is very close to being able to buy their own place on the open market.

You need to get that rental amount down to be very close to market rents for the area...

 

[housingrental]

Awesome Gary
Two concerns though
As Brett and Brad have posted on rent amount seems high... Someone could rent a comparable townhouse in area for $1200-$1300.
Another concern - Make sure your current value for the townhouse is bang on before proceeding with anything... This will obviously depend on the particular setup / finishing / area but $255K for condo townhouse is on high end of pricing in Kitchener...

 

[GaryMcGowan]

You are right, $2,000 may be a bit much for this property.
We do have tenants paying us that much and more for Rent to Owns around the 250-265k price range.

I thought I should update everyone on this transaction.

The owner and I have been having some heart to heart conversations and the bottom line is. She does not want to have a mortgage and owe the bank money. She wants to go back to renting. I have explained that we would share the responsibilities and that we could take her current situation and turn it into a positive one. I did not want to force or pitch this idea very hard if this was not comfortable for her.
What she has agreed to is for me to buy her home at 230k with Feb 1st closing and it will be vacant. She owes almost that to the bank. This does provide a neat and tidy RTO property as we will get a qualified RTO buyer in at 240k+ range and my expenses will aprox $1100 a month. Even if I set the RTO payment at 1600 (which is low compared to our other properties) this property will be cash flowing at 500 a month. I will close with a JV partner and part of the capital from the JV partner creates a reserve fund. All our tenants are 100% responsible for the maintenance and repairs and condo fees.

With this I`m still able to get create a great return for our partners and I was able to offer a solution for the owner.

I`m also willing to assign the deal if anyone wants it.

 

[Dan_Eisenhauer]

My immediate reaction is also that the rental figure is too high. Without doing an in depth calculation, one of my rules of thumb suggests the RTO rent, including strata fees, should be $1700 - $1850 per month for a house with current value of $250,000.
One RTO guru I follow uses market rent PLUS 25% as a quick rule of thumb.

The second issue I have is using 5% appreciation per year for the next 2 years. Realistically, how many people in this room believe we will see 5% appreciation per year for the next two years? There are some well known RTO operators, members of REIN, who do use that figure. But in the final analysis, the Tenant-Buyer needs to be able to finance the purchase at the end of the term. In order to do that, the TB needs to get an appraisal that justifies that stated price. If they can`t get that appraisal, they won`t get the mortgage they "have been promised". IMHO, 5% is far too aggressive for an appreciation factor.

At our recent REIN meeting in Vancouver, I had this very discussion with one of our most prominent REIN members mortgage broker. (You can fill in his name.) His concern echos mine.

Over the past 50 years, our average annual appreciation has been about 6%. We have just come out of a 20 - 30% appreciation period, and are now in a zero inflationary period. Real estate CANNOT, IMHO, outspace the CPI. I predict that we will see a cooling off of the real estate market when interest rates begin to climb next year. I believe that the market is currently being driven by first time buyers who are jumping into ownership when rates are at historic lows. They are future buyers who are buying today.

So, if you do not believe the CPI will increase at 5% per annum for the next few years, then don`t use it in calculating your ROIs on real estate purchases. I also predict we are going to have many TBs become very disgruntled when their contracts come up for purchase because of their inability to get adequate financing.

 

[housingrental]

Hi Gary

Thanks for the update

How have you determined the market value of the property? Have you gotten local realtors to pull comps?

 

[GaryMcGowan]

QUOTE (housingrental @ Dec 19 2009, 05:18 PM) Hi Gary

Thanks for the update

How have you determined the market value of the property? Have you gotten local realtors to pull comps?

Yes we have, otherwise we would be purely guessing on the value.

Glad you asked the question. Questions are always good to keep our ducks in a row.