New to RE. Is this a thing? Any reason to avoid it? What I'm thinking is: - There are properties that have been on the market for a long time and have gone through multiple price reductions. - Owners may be anxious to cash out at least partially. E.g. maybe they need the money to move to another city, or to pay the mortgage, or just want to take some of the risk off the table. - Owners are... [more]
New to RE. Is this a thing? Any reason to avoid it?
What I'm thinking is:
- There are properties that have been on the market for a long time and have gone through multiple price reductions.
- Owners may be anxious to cash out at least partially. E.g. maybe they need the money to move to another city, or to pay the mortgage, or just want to take some of the risk off the table.
- Owners are probably tired of the sales process, multiple promising buyers that fizzled out, etc., and would be glad to have at least some partial success in selling.
- I swoop in and offer to buy a minority interest (10%-40%) at a discount.
- I do this with enough properties that I have the whole process templated out. A trusted crew of inspectors, standardized legal agreements. Low transactional overhead per investment.
- I contact the owners directly and negotiate with them, so that would usually mean their broker would have no claim to a fee, right? Or do broker's agreements usually require a fee for any sale, even if the buyer didn't contact the broker and the owner didn't use the broker during negotiations?
- The legal agreement would require the owners to continue to sell the property at market value, do normal maintenance, not damage its value, etc. They would be responsible for ongoing costs and any future broker's fee. Maybe give me veto power over any sale. Standard clauses to protect my investment.
What do you think? Good investment strategy? Is this a novel approach or something common already?
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Response by bryantpark
almost 8 years ago
Posts: 83
Member since: Dec 2011
This is not going to work for the following reasons:
1) Many (most) properties are mortgaged, and even if the owner wanted to do this, the bank is not going to be ok with the owner "partially selling" the security for the loan.
2) Owners can already cash their equity out with a HELOC or remortgaging with cash out, and the bank is probably going to be a lot easier to deal with and better at this than you.
3) Owners that are "tired of the sales process" and would like some "partial success" can lower their asking price or rent the premises any time they want to instead.
Ignoring all those things, and imagining you find a naive owner who wanted to take you up on this, how do you imagine the arrangement would work? Would they pay you interest for your capital, which could be tied up in their property for months or years? What would you do if they don't pay that?
Would they still be responsible for the taxes and maintenance? What are you going to do if they stop paying, and the property gets some liens put on it? What happens when they want to take a lower price than you do, or stop cooperating with the sales process (very easy for them to not make it available for showings, or present it poorly)? Basically it would be so easy for both parties to screw each other that no reasonable person would be interested in this, given the alternatives available.
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Response by Squid
almost 8 years ago
Posts: 1399
Member since: Sep 2008
to answer your question re: brokers' commission - yes, seller would still be responsible to pay the commission even if you tried to circumvent the broker and contact seller directly.
Also, notwithstanding bryant's post above, which is completely on-point, what really would the seller be getting from this 'deal' other than a little advance cash and a big headache? What would be the point?
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Response by jelj13
almost 8 years ago
Posts: 821
Member since: Sep 2011
I'm assuming you're looking into private houses rather than condos or coops. This ownership deal would not be possible in a coop since the Board would not give approval for splitting the shares of stock allocated to the apartment. I'm not sure how this would work in a condo since any change of ownership would have to be approved by them, although usually based on your financials.
I can't imagine selling giving a percentage of a property to a total strangers. It's hard enough to deal with relatives and close friends ....
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Response by SteveFR
almost 8 years ago
Posts: 74
Member since: Apr 2017
Fiddle.... no coop board or condo board is going to let you swoop in in anything. Multiple price reductions that you might be seeing are overwhelmingly for very undesirable properties( 1st fl, view of brick wall, bad layout with wasted sq footage, high cc charges, undesirable building etc..). Those properties are big headaches anyway.
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Response by 300_mercer
almost 8 years ago
Posts: 10570
Member since: Feb 2007
There are funds/ companies who have or are trying to do this for single family homes. Fundamental issues are:
1. Title to the home. Usually equity exposure is via long form document similar to ISDA.
2. When do you get your money back if the only people you get are people who are not interested in selling?
3. How do you know that the maintenance is adequate for the house?
4. What happens if the owner wants to renovate? What is maintenance vs renovation?
Bottomline is that it is not worth wasting time.
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Response by ximon
almost 8 years ago
Posts: 1196
Member since: Aug 2012
Fiddlesticks, lots of people try to think of creative ways to make money from distressed owners but the essence of your business strategy seems to be talking someone into a bad deal. This was a popular business in the 1980's and 1990's with some so-called investors getting rich by selling books and giving seminars that explain how to do it.
I would stop thinking that buying less than 100% of a property is a business that makes sense. This only makes these deals more complicated and risky. IMO its a much better business to simply buy 100% of the property at a discount to FMV and then flip it for a quick profit and then do it again and again assuming you can find other distressed sellers. If you can get financing, you can possibly make this a very good business although transaction costs may kill you.
The other way people make money in these situations is to become a hard money lender with rights to foreclose if owner defaults.
Neither option seems like a business I would be proud to be a part of but to each their own.
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Response by 30yrs_RE_20_in_REO
almost 8 years ago
Posts: 9877
Member since: Mar 2009
"Distressed" properties are usually in that situation because they are under water vis-a-vis debt. You might be better off finding properties where the foreclosure process has begun and trying to work out a short sale.
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Response by Fiddlesticks
almost 8 years ago
Posts: 6
Member since: Jan 2018
Thanks for all the feedback. I think HELOC is probably the biggest direct competitor. Rates for that appear to be about 5%, so to be competitive I'd have ask for a smaller discount than that, basically killing any chance for a healthy profit. The remaining homeowners open to an offer would be the ill-informed or those that for some reason couldn't get a HELOC.
I guess if I want to own 10% of a bunch of properties the way to do it is to own 10% of a fund that owns 100% of each of the properties.
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Response by JR1
almost 8 years ago
Posts: 184
Member since: Jun 2015
If you want to do partial, why not just do a REIT, better yet a publicly traded REIT?
It'll save you a ton of paperwork and headache. Only downside is lack of depreciation.
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This is not going to work for the following reasons:
1) Many (most) properties are mortgaged, and even if the owner wanted to do this, the bank is not going to be ok with the owner "partially selling" the security for the loan.
2) Owners can already cash their equity out with a HELOC or remortgaging with cash out, and the bank is probably going to be a lot easier to deal with and better at this than you.
3) Owners that are "tired of the sales process" and would like some "partial success" can lower their asking price or rent the premises any time they want to instead.
Ignoring all those things, and imagining you find a naive owner who wanted to take you up on this, how do you imagine the arrangement would work? Would they pay you interest for your capital, which could be tied up in their property for months or years? What would you do if they don't pay that?
Would they still be responsible for the taxes and maintenance? What are you going to do if they stop paying, and the property gets some liens put on it? What happens when they want to take a lower price than you do, or stop cooperating with the sales process (very easy for them to not make it available for showings, or present it poorly)? Basically it would be so easy for both parties to screw each other that no reasonable person would be interested in this, given the alternatives available.
to answer your question re: brokers' commission - yes, seller would still be responsible to pay the commission even if you tried to circumvent the broker and contact seller directly.
Also, notwithstanding bryant's post above, which is completely on-point, what really would the seller be getting from this 'deal' other than a little advance cash and a big headache? What would be the point?
I'm assuming you're looking into private houses rather than condos or coops. This ownership deal would not be possible in a coop since the Board would not give approval for splitting the shares of stock allocated to the apartment. I'm not sure how this would work in a condo since any change of ownership would have to be approved by them, although usually based on your financials.
I can't imagine selling giving a percentage of a property to a total strangers. It's hard enough to deal with relatives and close friends ....
Fiddle.... no coop board or condo board is going to let you swoop in in anything. Multiple price reductions that you might be seeing are overwhelmingly for very undesirable properties( 1st fl, view of brick wall, bad layout with wasted sq footage, high cc charges, undesirable building etc..). Those properties are big headaches anyway.
There are funds/ companies who have or are trying to do this for single family homes. Fundamental issues are:
1. Title to the home. Usually equity exposure is via long form document similar to ISDA.
2. When do you get your money back if the only people you get are people who are not interested in selling?
3. How do you know that the maintenance is adequate for the house?
4. What happens if the owner wants to renovate? What is maintenance vs renovation?
Bottomline is that it is not worth wasting time.
Fiddlesticks, lots of people try to think of creative ways to make money from distressed owners but the essence of your business strategy seems to be talking someone into a bad deal. This was a popular business in the 1980's and 1990's with some so-called investors getting rich by selling books and giving seminars that explain how to do it.
I would stop thinking that buying less than 100% of a property is a business that makes sense. This only makes these deals more complicated and risky. IMO its a much better business to simply buy 100% of the property at a discount to FMV and then flip it for a quick profit and then do it again and again assuming you can find other distressed sellers. If you can get financing, you can possibly make this a very good business although transaction costs may kill you.
The other way people make money in these situations is to become a hard money lender with rights to foreclose if owner defaults.
Neither option seems like a business I would be proud to be a part of but to each their own.
"Distressed" properties are usually in that situation because they are under water vis-a-vis debt. You might be better off finding properties where the foreclosure process has begun and trying to work out a short sale.
Thanks for all the feedback. I think HELOC is probably the biggest direct competitor. Rates for that appear to be about 5%, so to be competitive I'd have ask for a smaller discount than that, basically killing any chance for a healthy profit. The remaining homeowners open to an offer would be the ill-informed or those that for some reason couldn't get a HELOC.
I guess if I want to own 10% of a bunch of properties the way to do it is to own 10% of a fund that owns 100% of each of the properties.
If you want to do partial, why not just do a REIT, better yet a publicly traded REIT?
It'll save you a ton of paperwork and headache. Only downside is lack of depreciation.