Saturday, February 12, 2011

Transaction #1 of 52 in 2011- Contract Sale with Credit Partner Bank Loan Cash Out, Retaining Ongoing Cash Flow and Equity Participation

I committed in my last blog to go back and write about our first four transaction of 2011. (A transaction is a purchase, sale, refinance, or loan.) A transaction allows Clear Day to make a profit- now or in the future.

We started the year selling a Clear Day Capital property (two houses on one piece of land) on contract to a credit partner who used his credit to get us cash so we could pay off our underlying loan. This was a foreclosure property and we sold it for more than we lent on it. If it had been a traditional sale we would have had a break-even or loss due to price discounting and transaction costs, especially a 6% real estate agent commission.

Here is how it worked:
  1. We spelled everything out in a real estate purchase contract.
  2. Our investor/financial friend went onto title to give us joint interest in the property. He also signed a re-conveyance that went to an escrow company in case everything fell apart or something happened to him we could take him off title.
  3. Since he was on title, he was eligible to get a credit union equity line of credit for 65% of the property value.
  4. The credit union loan paid bought out our interest in the property. It didn't quite pay off the loan, so Clear Day Capital took back a 2nd mortgage, behind the credit union, for the balance owed from the sale.
  5. At close we also established a lien for one half of the cash flow and one half of the equity in the property.
  6. Clear Day Property Management leased the property from our investor/financial friend who has no desire to manage properties. CDPM's management fee is 5%, which is low because this is an "in house" deal.
  7. Money will be set-aside each month for vacancies and repairs (5% for each) to build up reserves.
  8. Clear Day Capital will split the cash flow with our financial friend every quarter (after reserves) and eventually split the equity when the property is sold.
  9. Our financial friend get's a the other half of the cash flow and equity. He also receives the depreciation that offsets the income from the property and may help offset his other income as well.
That's it! Pretty simple when it is laid out in writing. Questions? Comments? Let me know!

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