seller refinancing, what kind of term should he be going for?

[MichaelDunbar]

hi there everybody,

i've just negotiated a deal with a seller in which he's agreed to refinance his property and pull out some of his equity for his new home. i'll be taking over the payments on this new mortgage. i'm not sure what kind of term he should be asking for at his bank. Should it be a 3 yr term? 1 yr? i have a few exit strategies, 1. may RTO for 3 yr term to another buyer. 2. could wholesale it to another investor 3. rehab and retail it. can someone provide any insight on this one? also, seller is thinking that the bank will want to know what company i'm working for in order to refinance his property. has anybody ran into this before? i don't have a company yet, but isn't it a reality that it's just a private buyer(me). is this even important?



thanks ,,



mike

 

[GaryMcGowan]

I think if he is open to the idea you may want to look at 5 yr VRM open.

This way you can sell your interest in the property and leave options open for the seller, yourself and the ultimate buyer.

The bank at this point do not care who you work for and they shouldn't need to know. The seller is negotiating with the bank to refi on his merits not yours. If he has 50% equity in his home he can go up to 80% LTV with most lenders. He will have to supply his financial picture.

Once he has the new financing in place you will sign a AFS agreement with him and you will agree on a monthly payment and term of the AFS which 9 times out of 10 will match what time he has left before his next renewal date.

 

[AndreaW]

I concur with Gary re: 5 yr mortgage. If the house needs significant work done to it, it may be hard to find a rent to own tenant who will want such a property as they will have to put out a bunch of money into it. If the house just needs a good cleaning and paint then rent to own is a good option.



It's hard to advise you re: wholesaling to another investor without knowing more of the financial details. Same with rehabbing it - do your due diligence and estimate cost of repairs and then double it.

 

[neill]

We have typically been going with 5yr variable closed mortgages on our RTO properties with re-fi.



Feedback welcomed for this thought process:



The interest penalty for payout is 3 mos interest on closed VRM.



On a 300k principal balance, @ prime-0.7 = 2.3% payout today would be 6900/12 x 3 or approx $1725. The savings annually on the rate difference (can anyone confirm prime + 0.6 or so is current VR open?) is 3900 per year, so you are ahead after < 6mos.



Lower payments = better cash-flow as well





Thoughts?

 

[AndreaW]

The math looks good to me Neill - this is a numbers game after all.