My Pinole Real Estate

In this market, there are a high number of investors who are buying real estate for cash in this extremely opportunistic market. Many people are buying homes in extremely bad condition, fixing them up and then selling them again. There is one aspect to this process that I would like to suggest. Become the bank! Let’s say you decide to buy a house for cash and then fix it up. You have three options, live in it, rent it, or sell it. It’s likely that you want to rent it or sell it. One of the biggest impediments to selling is a loan for the prospective buyer. It will most likely be an FHA or conventional loan but something could go wrong.

What if you offered seller financing?

Suddenly you open up your buyer pool substantially. I know what your thinking! What if they default??? OK let’s back up. First, you find a buyer, then you do your due diligence. Do they have a job? How many years? What’s their income how much do they have in savings, check their credit. So the point is you won’t be as conservative as the bank but you’re still going to be smart. I would recommend at least a 5% down payment. You use a title and escrow company to complete the transaction. Everything is recorded, legal and on the books. The buyer then starts sending you his payment. Here’s an example. Let’s say you buy a house for $100k cash and you fix it up and it’s now worth $200k. You decide to sell it to a buyer with seller financing.  After your due diligence, the buyer puts $10,000 down and you finance $190,000. The monthly payment is as follows (assumes a 6% interest rate):  Principal and Interest $1,133.48. This is your income. You may say this is less than I would receive in rent, but remember you just received $10,000 up front. Your income for the first year is $23,601.76.

Even if the buyer defaults after the first year, you will still be positive in income and you can sell it again. Most attorney’s will give you a flat rate for a basic foreclosure. Additionally, the legal fees are tax deductible. Even if you have to re-carpet, paint and put in new appliances, it’s still a great deal. I think the benefits out-way the deficits.

Benefits

1. Increase your buyer pool.
2. More flexible than a bank.
3. Use short or long term financing.
4. Be in first position.
5. Charge higher than market rate interest rate.
6. No appraisal required.
7. Someone else is responsible for taxes, insurance, and maintenance.
8. If they default, you get the property back.
9. Legal fees are tax deductible.

Deficits

1. Buyer could default.
2. Buyer may not maintain the property.
3. Potential legal fees for a foreclosure.
4. Possible tax consequences for income.