How far
Posted on April 20, 2007 - Filed Under Business |
Champagne hangover be damned!
SFX: Phone Rings
Cat: Good morning Clifford. How are you?
Clifford: I’m fine, thank you for asking. Ask the seller if he would be willing to finance the second mortgage. If he does, this deal may saved.
Seller financing.
I almost missed it.
The 13% interest rate on the second mortgage had to go. If that would diminish to 8%, then I am back above $100/month in cashflow. My zany scheme: Offer the seller 8%, payment of $100/month with the balloon payment due at the end of term (3 years). After two years, the property could be refinanced and the seller could be paid off.
There was one more trick up my sleeve. Break Glass in case of Emergency type of thing. I could pay "points", that is to say pay extra at closing and reduce the interest rate on the first mortgage. Add to that finding a cheaper insurance company, maybe asking Cat to reduce her property management fees. I felt this deal could yet be saved.
LenderLady told me that the seller financing was acceptable.
One item down.
It was at that moment an interesting question popped into my head: How far do you go to chase down a deal?
I have become accustomed to the idea that anything worth having requires a fight. If, at the first sign of trouble one abandons all hope then nothing will ever be gained. Nothing every goes perfectly; nothing ever goes smoothly. Throughout life, there will be the proverbial bumps in the road. We win, we lose. It is the nature of the game: the nature of life.
I am not some kind of Emergency Room Doctor, trying to save a patient’s life. This is a real estate deal; nothing more.
So when do you call it quits?
This question was beyond me. This type of situation had never confronted me before.
There was one person who I knew I could talk to and he wouldn’t be afraid to be honest with me.
My mentor.
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Comments
5 Responses to “How far”
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“So when do you call it quits?”
Answer: When you stop having a good probability of making money on the deal.
I don’t quite understand why you are chasing after a smaller and smaller return. Is it for the emotional high of owning this property? For the educational benefit of working out a deal? Maybe you are expecting to be more cash flow positive soon? Or you are expecting appreciation? If so, fine. Otherwise, I don’t understand.
An important rule to remember in REI is to never get emotionally attached to a property. The deal of the year comes around once a week. If you find yourself stretching and hoping that all the stars align so that the deal can be made, it’s probably best to walk away and look for another deal.
As for refinancing, I just read an article in a local Phoenix REI magazine about this. For investors who are buying a property to hold on to for years, why would you not go with a 30 year fixed? Rates are as low as they’ve been in a long time (although not the lowest), so why wouldn’t you want to lock those in for 30 years? If you go with an ARM or something you have to refinance later, you may increase your cashflow a bit now, but at the cost of less cashflow in the future. Just some food for thought. If you plan on selling in a couple years, this obviously doesn’t apply.
Cliff, your first mortgage sucks. 8.875% with 1.5 points? You need to shop that around. I assume that your credit score is good, I don’t think you’ve ever mentioned it.
It’s good that the seller accepted the financing.
How much of the $6700 in seller paid closing costs are you using up? You should use it all if possible.
As for calling it quits, you are at $100/mo. On your first post, weren’t you around $300? That’s a big difference.
Pasadena, that is the very question I am posing to myself.
Shaun, I did ask LenderLady for a 30-year fixed. My original idea was to hold onto the property for 5 years then sell it, take that equity along with other properties and move up to a bigger multi-unit.
Kenric, you are correct, the first mortgage sucked. My credit score is stellar, but I fear shopping around too much because no creditor will give me firm numbers until they have run my credit. Each time they run my credit, the score drops.
The $6700 is actually a credit on my part. So rather than paying $18,000 at the close of escrow, I would pay $12,000.
The cashflow started out at $300, then went to $195, then down to -$100, then maybe up to $100/month. Yeah, it was all over the place.
I have to agree with “Pasadena” and the two REI bloggers. To succeed in real estate investing, you need to educate your agent on your minimum acceptable overall rate of return and your cash on cash return. That person should understand not to bring you deals that don’t meet the requirements.
You should form a relationship with a reliable lender in the area and be pre-approved before you write a contract. The terms being quoted to you are ridiculous. The lender figures you really want the property so you will accept the offered terms.
Don’t be like the amateurs that chase properties and not returns. Your pro-forma cash flow on this one is down to nothing. All the maintenance expenses not in your calculations will drive this deal negative.
Can’t wait to read what your mentor said…