“Unique” financing

I figured that if I’ve only got 12 months in one year and I’ve got MORE than 12 goals to accomplish, I might as well get started knocking my goals out.

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I’ve been biking to work, although this week has been rough.  I biked to and from work on Monday, biked TO work on Tuesday, and plan to bike HOME from work on Friday, but it’s been bitter cold.  My ride in on Tuesday morning was literally painful.  The above photo was taken after ice began to fall out of my beard.  That was the biggest smile I could muster.  Paraphrasing from “Jaws”…”I think I need a bigger beard!”

So, I’ve been biking to work.  Not at my 66% threshold yet, but I’m working on it.  Once it hits ~30degF, I’ll be able to ride every day.

Not to sit back for too long, I’ve been working on at least one of my other goals: use ‘unique’ financing to fund a purchase.  I have two instances of using unique financing, but will only discuss one of the potential deals now.

For the past two years, there has been a duplex for sale in Philipsburg, a good C-C+ town.  I had toured this duplex over two years ago when I was considering becoming a landlord.  I didn’t understand the benefits of purchasing a fully rented building.  The cash flow benefits of my UFUOs DOES explain why I enjoy rehabilitating housing.

I’m always searching the MLS for properties that meet my ideal rental criteria and I stumbled across this duplex again.  The owner had dropped the price about $2,000 since I last looked at it.  I learned that the owner had paid off the mortgage since I had last toured the duplex.  Because there was no lien on the property, there was no ‘Due on Sale’ clause to be fulfilled, so this gave me the opportunity to make an unconventional offer.

In addition to no lien on the building, the advertised rents were significantly under market rent for the units.  A 2-bedroom unit in Philipsburg rents for at least $500/month, meaning this duplex should generate $12,000 gross rent for the year.  The units are currently rented for $475 and $435, or about 91% of expected rent for the area, meaning there is upside potential for the rent.

Lastly, the residents are both medium-term residents, meaning they have been living in the building for more than one year, which increases the chances they will remain in the building so long as I am providing good living conditions for them.

Banks are currently offering me 80% financing, meaning I need to have 20% cash to put down (plus closing costs).  I don’t, and won’t have 20% to put down on this duplex for approximately 6 months.  Rather than let that bother me, I decided to make an offer in which the owner carries the debt until I have my 20% and I can get a standard loan from the bank.

I crafted my offer as follows: I would put 10% down with the owner to carry the balance amortized over 30 years, due in 1 year.  This means that the loan is a ‘standard’ mortgage, paid back over 30 years (rather than the 20 years I get from local banks), however the loan is due in 1 year, so I will need to either pay off the loan in one year (not going to happen) or refinance the property within one year.

In order to make my offer stand out and show that I know what I’m doing, I included my entire financial snap shot including: IRA balances, Individual stock balances, net worth including HBS and personal property as well as my personal monthly budget.  I also included a personal resume.  Lastly, I wrote a cover letter similar to the one I sent to the owner of the 4-plex in Millheim (see: About that Deal…).

I honestly think Realtors must get tired of the standard 30-year financing deals, because the first thing I heard about my offer was from the seller’s agent, and he said that my offer “was the most impressive offer package he has seen in his 30 years as an agent.”  My Realtor told me that I “certainly keep it interesting” for her.  She indicated that she has a bunch to learn from my work.  Sometimes I think “not the conventional path” is the story of my life, but that’s OK by me!

For this specific deal, I will need to come up with $6,090 plus closing costs in order to purchase this duplex.  Pulling this cash together will be tight, but should be doable.  Rather than ask for the standard 45 days, I asked for 60 days, which gives me two month’s of rent  and four pay checks to save and time to move cash out of stock accounts if needed.

The deal isn’t signed by both parties yet, but has been agreed to (verbally) by both parties.  Hopefully by the end of next week I will be able to report on my executed contract on the duplex.

Stay tuned…

 

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