Home › Forums › General › EHTrust/EHT Topics and Creative Real Estate Financing › Benefits for seller
February 8, 2006 at 6:24 pm #14327
Ok guys let me see if I can shed some light on this senario.
Regardless if you’re going to rehab, recondition, finish the basement or just “flip” it without doing anything to it, the use of a Simple NARS Trust accomplishes a really important thing here.
As an investor getting perminant financing, the financing is only based on the “purchase price” of the property and in most cases is going to require a down payment. Well, since most investors I know don’t like to tie up their hard earned money, the placing of a sellers property into a Simple NARS Trust could offer some incredible little benefits.
Property currently worth $200,000 and not in bad shape.
Seller willing to take to take $175,000 for what ever reason.
Balance on loans is $150,000.
As an Investor wanting to buy it because it has $25,000 in equity you need to obtain Non-Owner Occupied Financing on $175,000. Even with 700 FICO scores most lenders will only offer you 90% to 95% financing of the Purchase Price not the value of the property. That means that you must come up with $8500 (5%) to $17,500 (10%) plus closing costs to purchase this property. And of course the cost of carpet and paint plus the cost of marketing (e.g. Ads, Signs, etc.) Oh, and let’s not forget Holding Costs (e.g. Monthly Payments until you get an RB)
So let’s turn this upside down and see if we can either reduce or eliminate our costs, including the down payment.
Are you ready, listen real close cuz I’m given a quiz at the end.
Armed with only a $10 bill, an NEO and an Appendix #1, your offer to the Seller is to Acquire a 90% Beneficial Interest in the Sellers Trust with the 1st right to purchase the trust property at FMV. Remember FMV is $200,000.
You then go to your favorite lender and obtain this crazy new loan for Investors called a Pay Option ARM based on your purchase price of $200,000 (95% NOO) with payments of only $750 per month PITO. That’s right, only $750 per month PITI. Ok, I know, you do have to put up 5% or $10,000 but that’s ok your going to get it back at closing!!!
Now wait just a minute there Scotty Boy, isn’t that illegal? Well yes it is if you don’t use a Simple Trust. As “a” Beneficiary with the 1st Right to Purchase the property at FMV, nothing more nothing less, you simply excerzise your right. At termination, regardless of who or what purchases the property, you will recieve your contribution to the trust, or equity, at closing. That includes any moneys paid to the seller as a down payment. Who is the Seller you ask? The Trustee. The Title Company will gladly give a check to the Seller for their Equity. The Seller/Trustee pays the Beneficiaries their respective contributions. Or in my case, the Title Company will pay the Beneficiaries directly as per the Seller’s/Trustee’s direction.
So you purchase the property from the trust and get a check for $25,000 (your Equitable Contribution to the Trust) which includes your $10,000 down and a nice profit (or cash out) of $15,000 minus the loan closing costs if you didn’t finance them in.
The Seller/Settlor’s loan balance of $150,000 is paid off, they get their $25,000 Equity and they’re off to Disney World.
What do you do with your nice little check? Howbout carpet and paint, marketing and holding costs? Let’s say it takes you 2 months to clean it up and you spend $5000. That means that by the time you find a suitable Resident Co-Beneficiary you still have $10,000 left in Hip National Bank.
Well now something really interesting happens. You (or at least I do) get a check from the RB for 5% plus 1st and Last month. On a $210,000 property (oh yeh, I bumped the equity because, well, just because) 5% would be $10,500. After Closing Costs and Two Months of Contingency Fund that would leave you with at least $3500 in Upfront Profit if you are NOT a Network Member. Payments to the RB would be $1500 per month.
So what’s the bottom line here?
As an Investor you got to legally pull cash out ($15,000) at closing, have money for clean up, marketing and holding, put $13,500 in your pocket, cash flow $750 per month for 60 months, $35,000 in beginning equity, and half of the NET Profits at termination. If you had an appreciation rate averaging only 5% for the 60 months you would profit a total of over $70,000.
Any Questions?February 8, 2006 at 6:49 pm #14328
scott_l._moyes, No question. Your senario makes sense, cause you had equity to pull out going in. I was just interested in healthy discussion like this, which some of the people here seems to have problem with it. I’ll just go somewhere else.
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