Dammit - I've got that itch again.

[Puppeteer]

Hi Hernan,

The comment wasn't aimed at you (or anyone else in particular).

Having eager teenagers continually asking questions with no real intention of puting in any hard work to make money, is one thing that really irks me. It's like they want me to do it for them. If they are putting in the hard yards themselves and want some guidance, then I'm more than happy to help.

I guess I just heard the "no-money down bit" and went into rant mode

You sound like your well ahead of me anyway, so perhaps I should be approaching you for mentoring I'm still at the stage where banks are happy to lend me money, and while I know that more innovative deals (such as options, vendor financing and wraps) exist, and basically how they work, they aren't part of my current strategy, so I haven't spent a huge amount of time doing detailed research on them. Perhaps in the future, when my portfolio is a bit more healthy, and banks are a bit more nervous

Oh, and thanks for the book recommendations. I'll check out the bookstore today. I've just finished my last ones.

Take care, and best of luck.

 

[OPM-addict]

Hi Herman,

I understand what puppeteer talk about with people asking about advice on no money down deals.

I give whatever limited advice I can to people. Some act on it others don't.

I have only 3 properties but I'm looking for my 4th now and it will not involve a "No money down deal". For I only found those type of properties benefical for the developers not really for the investors.

But saying that. It does bring other future addicts in RE.

To all addicts have a great passive income day.

Respect, Peace, Out.

OPM-addict

 

[liverpoolharryk]

Pity about your calf strain Hernan, that will keep you out of action for a while. (if your a Chelsea fan you will know what I am talking about).

 

[Hernan Crespo]

Haha...i am definitely a Chelsea fan...yeah pity that calf strain!

Yes, i understand what you mean by some over-enthusiatic, over naive people thinking they can make money from real estate by making a few phone calls

The problem with my portfolio is lots of it is negatively geared after refinancing and also because some are land pending DAs, which i am going to put some houses on this year. so i am by all means just an amateur.

I am looking a putting an option down on a house in the next week or so.

The deal benefits all in that:

Agent’s benefit:
-Commission paid upfront
-Exclusive right to sell at least one of the houses upon completion (it's a subdivision and building of a single house -end up with 2 houses)

Sellers benefits
-get full price for property
-no-risk if project fails- gain extra house in backyard!
- $20K cash for free in 12 months if the project fails (10K agent’s fees are pre-paid! and 10K in option money non-refundable)
-enjoy capital gains if the project fails
-continue collecting rent from the tenant in the meantime

How i benefit
- minimal cash outlay and ability to look for other projects in the meantime
- profit by flipping at the end of the project with perhaps about $120K cash used, estimated $50K-100K nett profit.

Hypothetically if I were to get an investor to come up with the $120K cash and share the profits with him 50-50, a total of 4 parties will win in this project!

Risk is of course the project cost can increase and/or out of desperation i sell the properties at no profit in a falling market (with interest rates going the way they are)

There's my definition of a 'no-money' deal.

Never tried this before but it seems to work in theory..anyone can spot holes in this?

Crespo

 

[Puppeteer]

Doesn't really seem to be no-money down to me.

You have to put up $20K don't you, for the agents commission and the option fee.

I thought options worked a bit differently.

You pay a fee to have the exclusive option of buying the property for a set price at a set time in the future.

The benefits for the buyer, is that they secure the property at a price that is set. If the market hasn't gone to plan, then they can choose not to proceed with their deal, and forfeit the option fee. If there is profit to be made, then continue with the deal. The buyer also doesn't need to worry about being gazumped as the price is set, they have an exclusive right to buy, and they have time to arrange finance etc.

The seller profits because of the option fee that they receive up front, and as a worst case scenario, the property goes on the open market, and they pocket the option fee.

I think the keys are the amount of the option fee, and the capital gain that is predicted and agreed between the vendor and the option holder. The vendor will want to try to set this as low as possible, to maximize profits on flipping, while the vendor will want it as high as possible to ensure maximum profits on their sale. If it's set too high though, then the purchaser won't proceed and the vendor will need to go to the open market (which isn't necessarily a bad thing).

I'm a bit confused by the deal you are proposing. You say that the vendor get's full price for the property. If this is so, how can you make $50-100K by flipping it. Is a price agreed when setting up the option, and can you choose not to buy if capital gains aren't as high as expected, or are you basically buying off the plan?

Who is paying for constuction of the house? You or the current owner?

"Risk is of course the project cost can increase and/or out of desperation i sell the properties at no profit in a falling market (with interest rates going the way they are)"

Seems like you have exposure to the construction costs.

If it were me (and this isn't advice BTW), I'd suggest the owner pay for the construction, and you pay a fee to have an exclusive option to buy the home at a set price upon completion - oh and the agent should only get commission on the final amount you pay (either option fee, or option fee + purchase), when the money is received by the vendor - though I guess that's really between the owner and the agent.

 

[Hernan Crespo]

Your points and suggestions made are very useful, thanks a whole heap!

My idea was to bring in an investor to come up with all the cash for the option and construction. Yes, technically speaking what i am proposing is not a true-blue 'no-money down' deal, i think it would be hard to get any vendor financing in this market unless the deal being proposed is a top-notch one.

To clarify, the 50-100k is made on the sale of the 2 houses upon completion of the second house. Currently there is an single house on the land with DA for building a second behind. So the initial house and land is worth say 450K (20K option fee plus 430K on settlement), 120K construction cost and say 15K in stamp duty and legals. Plus say $10K for subdivision approvals

After development, the existing house is worth say 350K and the new one is worth say 400K.

Total cost = 605K
Total selling price = 750K

Gross profit = 145K
Minus agent fees = 25K

Nett profit = 120K

Does this picture look clearer to you now?

Any more feedback will be totally appreciated!

Crespo

 

[Jakk]

Originally posted by Hernan Crespo
After development, the existing house is worth say 350K and the new one is worth say 400K.

Total cost = 605K
Total selling price = 750K

Gross profit = 145K
Minus agent fees = 25K

Nett profit = 120K

Does this picture look clearer to you now?

Any more feedback will be totally appreciated!

Crespo

Just forgot one little thing.....GST
sorta makes a dent in that there profit.

Regards

 

[Puppeteer]

You'll also need to factor in the effect of Capital Gains Tax.

Also, how will you profit from this deal if someone else is puting up all of the money? If I was the investor, I'd only be willing to share the profits, if you were sharing the risk at the start, by puting up some of your own capital. The only other way that I'd do it is to buy the whole thing from you (flip the option, as it were), but the numbers would need to add up even after your profit, so your profit margin would probably be quite small.

Also, does is the DA an application or an approval. I thought that if it was already approved, then the subdivision would also have been approved.

 

[Hernan Crespo]

Good points made, those are some of the things i need to think of! Thanks heaps!

I thought that was the case with DA's as well but on this one they seem to have a DA without the sub-division (??) according to the agent...will have to look more into it.

Actually i was discussing with a friend today and he told me of another practice, which is currently being used.

Hypothetically, if a property costs say $1m, you offer 65% of the total upon settlement, with the remainding 35% offered as a second mortgage to the seller with settlement in 1 year. In the meantime you get your DAs etc and build. You then share the profits 50-50% when selling the property.

Of course then you are liable for the building costs. I heard some lenders lend 65% or more on the final projected valuation, so that may minimise your actual cash layout. Of course if you negotiate so you dont have to share the profits 50-50 but like 70-30 it might be more worthwhile....


Crespo

 

[Puppeteer]

That's kinda like vendor financing.

Whatever you do, you need to remember that there needs to be something in it for the vendor, or whoever you are imposing on, otherwise, they will just find someone who is prepared to deal with a straight out sale, especially if the arrangement is going to be complex.

When you are chasing these types of opportunities, you will almost always be giving up some of your potential profit in the deal.

If you always think win-win, then you will be more likely to swing the deal.

Best of luck with it. Let us know how you get on.

 

[Hernan Crespo]

Thanks for the kind advice and very stimulating insights and discussion!

Hope to hear more from you in the future!

Cheers,
Hernan Crespo