Hello, I'm Carlton Sheets and I'm pleased to be able to provide the
full-length video to you at no extra charge. This video covers chapters 11
through 15 of your system, which are all of the No Money Down techniques in
their entirety. I've arranged to provide these chapters on video because over the
many years of personally teaching this material in seminars all across the
country, I learned that people found it very helpful to be able to see these
techniques presented live. With this video you can now learn them in three
ways, in written form, on audio tape, and now also on video tape. Experts in
cognitive research and learning tell us that the more ways we can internalize
a concept the better we understand to retain it, but we also know that the best
way to truly internalize all of this material you're learning in the
course is to actually go out and use it in the marketplace. Now incidentally if
you find that having these five chapters on video is helpful and would like to
obtain the remaining 19 chapters on video, they're available through the
Professional Education Institute for a very nominal price. As you see me present
these creative financing techniques, keep in mind that they're offered as
possible solutions to a particular set of circumstances involving you, the
seller, and the property. None of them are set in stone. You'll inevitably find
yourself altering them to fit situations you encounter in your investing. The
overriding principle here though is to remember that you are a creative problem
solver. Now let's learn some ways to help you solve a seller's problems by buying
his or her property no money down.
Chapter 11, buying properties with no money down using some simple techniques.
This is an exciting chapter for me and I think for you as well probably you're
going to be as we go through these techniques saying, aha that might have
worked for me or aha I could use this with something I'm working on right now.
I'll be the first to tell you that the creative no money down financing is not
a real new area. As a matter of fact I can trace it back some 50 years to
William Zeckendorf who would use creative real estate financing to add
value to properties that he purchased. For example he was the one that put
together a partnership to buy the Empire State Building and then once he bought
it he split off or spun off the land underneath the personal property inside
the building, the air rights, the building itself and he would he would sell each
of those to an investment group and he was creating a tremendous amount of
value by doing that. Other people have used creative financing techniques
throughout the years people like Trammell Crowe a very successful real estate
investor, Don Trump has used the creative financing techniques. I'd have to say that
Ted Turner is also very much into using this take these techniques as he tried
to do not too long ago when he was acquiring one of the major movie
studios. What I will take a little bit of credit for though is taking these
techniques down to a level where people like you and me ordinary people and in
conquest of better things financially can use them to buy single-family homes
and small multi-unit properties so that you can buy no money down and you can do
it if you've got no cash and you can do it if you've got no credit. Now most
people think that when you're buying property no money down and we're talking
about creative financing techniques that it only involves seller financing. Look
if you will please at the at the list on this page the seller is listed as number
one but there's a lot more the property itself. Remember in the last chapter when
I was talking about creative problem-solving how one of my students actually
sold the trees on a farm in in advance of buying the property and was able to
generate the cash for a down payment that's a good example there. Other
investors this is how I got my start back in the early 70s when I had no cash
and I had no credit in the very first course that I took on creative real
estate investing had to do with partners and I didn't even want to go to that
course and I said to them don't you have a course on any other subject relating
to real estate and they said no this is the only one we offer and I often look
back and I think if that first course had been on mobile homes or or on lease
options I probably would have been very much oriented in that direction but it
was on partnerships so I began to put together partners to buy property and
made an enormous amount of money doing it. Number four partners number five
tenants number six real estate agents and brokers using their fee or their
brokerage commission as a down payment. Your own services and skills existing
loans on the properties can certainly help you buy it. Unsecured paper and
secured paper on equities that you might have. Now equity by the way is nothing
more than the value of an item minus what you owe whatever is left is your
equity if you have a single-family home that you're living in that cost
$80,000 and you owe 50,000 on it your equity is 30,000 and finally
last but not least but deliberately last the role of institutional lenders like
banks and savings and loans. Here's some misconceptions about no money down
financing and that is first that the seller gets no cash. In many cases when
you're buying a property creatively creatively no money down the seller
will actually walk away from the closing with cash in his or her pocket. The point
is it just doesn't come out of your pocket. Number two the seller must be a
down-and-outer and I commented on that earlier that many sellers of properties
are flexible sellers independent of their financial situation and some of
the most attractive transactions I've ever done have been with sellers who are
quite well to do but sellers who desperately wanted to get rid of their
property for one or more reasons. Number three the techniques will not work
with inflexible sellers. Some sellers are inflexible and it's more difficult to
work with them but if we can give them cash on the front end it really doesn't
matter whether they're flexible or not does it. The important thing to remember
here too is that when we're dealing with sellers that we think are inflexible
today remember that sellers needs and wants constantly change and so an
inflexible seller today may be very anxious to sell their property in a way
that is flexible in a week or a month or three months. The no money down
techniques. I encouraged you earlier to use that cog chart that creative options
grid that comes with a course because every single one of the techniques that
we're going to be describing in detail here are included in that cog chart and
it's nothing more than a reminder to you that there's more than one way as I said
to skin a cat. Do any of you fly airplanes any of you pilots in the room?
Well okay good one or two of you. We use it we use a the cog chart the way a
pilot uses a checklist and if you've ever looked at or probably you never have
but I will tell you the checklist of some of the 747 and 1011 aircraft are
that thick you can't afford to leave anything out so that's what that
checklist is all about. Let's look at technique number one. Obtain a new
mortgage to pay off existing loans and provide down payment money. Now this
technique works best when a seller owes nothing on the property when the
property is owned free and clear and the or when the or when the seller owes no
more than 40% of the value of the property. Look at that next paragraph. For
example assume the seller of a $50,000 house as an existing loan of $12,000 and
is looking for a $15,000 down payment. He's willing to carry the financing for
the balance of $23,000. $50,000 less $12,000 existing mortgage less $15,000
down payment would equal $23,000. Simply obtain a new first mortgage for $27,000
which can pay off the existing $12,000 mortgage and give the seller $15,000.
Next give the seller a second mortgage in the amount of $23,000. The $27,000
first mortgage plus a $23,000 second mortgage gives the seller his total
asking price of $50,000. What if any problem do you see in that technique?
Tom? Yeah the bank may balk. I mean you're trying to borrow a relatively small
percentage of the total value of the property but the bank may say wait a
minute where's your down payment? Now I gave you one way around that which was
what? Sir? Sure put mortgage on another property Kirby another property that you
have equity in the other mortgage job the mortgage that we're giving back to
the seller could be on that property that may very well satisfy the bank but
you don't have any other property with equity in it what could you do? What
about finding a partner with a property with equity in it? Or what about now
listen to this going to a mortgage broker who will loan up to 50 to 60% of
the value of a property he represents or she does private private investors and
all you've got to do is fog up the mirror. Did you know that? Mortgage brokers
will frequently represent private individuals who want to loan money on
real estate will take back mortgages up to 50 to 60 percent of the value and and
it doesn't matter whether you declared bankruptcy yesterday they're willing to
loan the money. Are the terms difficult? Yes they are. For example you would pay
anywhere between 14 and 16 percent interest and you would probably have a
balloon from three or maybe even two to five years but if the property has an
exceptionally good return for you does that matter? No. For example real quickly
here we're giving the we'll get a mortgage from a mortgage broker for
$27,000 and that's that's a first mortgage and we're giving a mortgage to
the seller for $23,000 that's a second mortgage and I told you that the
interest rate here might be 15% which is going to be four thousand help me out
twenty four thousand fifty dollars a year but what if the seller was willing
to take a second mortgage now keep in mind we're offering the full asking
price right if the seller will take a twenty three thousand dollar second at
five percent the blended rate you can eyeball and see is going to be about
ten point five percent and many properties will support a hundred percent
financing at ten point five percent. You all understand how to figure a blended
rate? I won't do the math right now but if you've got a fifty thousand dollar
mortgage at fifteen percent and you got a fifty thousand dollar mortgage at five
percent you can very easily see that the blended rate there is ten percent. Here
again be creative you know these techniques are not set in stone they're
there to be modified and molded to fit the situation and if we talked about
the barriers that people who are successful had to cope with and it's
very easy for you to say well Carlton talks about going out and getting a bank
loan for $27,000 and I don't have the credit to do that fine use equity in
your property you don't have that fine bring in a partner be creative there's
got to be ten different ways to solve this problem. Technique number two lower
the price raise the interest rate. Look at the second paragraph here. A seller has
a property for sale at an asking price of a hundred thousand dollars. The
property has an existing assumable mortgage of fifty thousand payable the
rate of four hundred and fifty dollars per month. The seller wants ten thousand
dollars cash at close and will extend you a loan of forty thousand dollars in
the form of a mortgage at ten percent interest. Offer the seller ninety five
thousand dollars with no money down. Agree to take over the loan of fifty
thousand dollars and pay fifteen percent interest on the remaining forty five
thousand for a period of five years. The result is a monthly interest payment of
five hundred and sixty three dollars which is nothing more than forty five
thousand times fifteen percent interest divided by twelve months. You will pay
five hundred and sixty three dollars per month for interest then the entire principal
amount of forty five thousand will be due in five years. If the total monthly
payments for the first and second mortgage of a thousand thirteen dollars
per month four fifty plus five sixty three result in a negative cash flow
restructure the second mortgage so that only a portion of the fifteen percent
interest is paid monthly. The balance would accumulate but not compound.
That's important. Underline that but would not compound and would be due along
with the forty five thousand at the end of five years. Then at the end of five
years refinance the entire debt using your equity as a down payment. I bought a
piece of property once was on the market for two hundred and sixty five thousand
through negotiations with the seller I finally got the price down to two
hundred and twenty five thousand. I wanted to get it lower but that was as
low as he would go and then I realized the person was a was not an investor he
was a dealer because he had built the property and anything that he made would
have to be treated as ordinary income to him. So he agreed to take back financing
and I said what if we do this what if I pay you not two hundred and twenty five
thousand dollars but I'll pay you a hundred and sixty five thousand but I'm
going to pay you eighteen point three six percent interest which really gave
him his asking price of two hundred and twenty five or two hundred and thirty
five thousand and he agreed to it. It didn't matter how he received the money
whether it was interest or in capital gain because it was all ordinary income
but it made a big difference to me. Why? Because that high interest rate really
allowed me to get a partner in the form of whom? Uncle Sam. Uncle Sam helped me
make that that down payment on the property. So be creative. The only thing
you've got to watch out for in trying to induce the seller to go along with you
by offering high rates of interest what do you have to be careful about? Negative
cash flow. That's why it is so important to do a cash flow analysis of the
property so if you can buy it no money down give the seller what he or she
wants that you don't have a negative cash flow. You know it's amazing what
people will do when they are emotionally disenchanted with their property. I was
in a stationary supply store a few years ago a young man saw me he worked there
saw me pull up and I had kind of a nice-looking car and he said is that your
car and I said yes and he said that's mine right next to it and it was a
little red sporty type car and and I said really I said that's a nice-looking
car. He said well it's for sale. He said that car has a value of $6,000. He said I
owe to the bank 8,000. Does that ring any bells to you? Talk about destructive
assets or depreciating assets and he said if I were to pay off the loan at
the bank obviously you would get a little bit of a discount he said it would
cost me $7,000 and I said what's interesting I said my son is looking for
a car and I said he's got a he's got a budget he's got to work with but I said
I believe that if you would pay him $1,500 cash he would take over those
monthly payments which were like I don't know 267 bucks a month or something like
that it was ridiculous. I said I believe he would take your car. Well you'd have
thought I'd called his mother a bad name. I mean he could not have been more of
he said $1,500 cash for my car and I said yes and he said well I'd never do
that. Well I had a charge account at that store where he worked. He called me one
week later and he said I got the $1,500 when do you want to pick up the car.
Isn't that amazing? Two things his needs and wants had changed and he got back in
touch with me to tell to tell me that that he was willing to take the offer.
Don't be afraid to make offers that embarrass you. Technique number three
wraparound mortgage. Look at the first paragraph assume the following situation
a seller has a property with a fair market value you'll sometimes see that
abbreviated as FMV $50,000 with an existing
assumable mortgage of $30,000 at 8% interest with payments of $245 per month
the seller's equity is $20,000. Here it is diagrammed.
$50,000 property got an existing first mortgage on it of $30,000 and the
seller's equity is $20,000. A classic yet really conventional no-money-down way to
buy the property would call for the buyer to assume that $30,000 mortgage
and merely give the seller $20,000 second mortgage for their equity. Maybe
with an interest rate of 10% it says in the next paragraph with payments of $200
per month but look at the next paragraph after that to avoid the cost
and liability of assuming the existing mortgage offer the seller a $50,000
wraparound mortgage in some states known as an all-inclusive trust deed AITD
payable at the rate of 10% interest with payments of $445 per month on the
surface it appears to be the same proposition but it is very different. What
is a wraparound mortgage? It is a mortgage that wraps around existing
financing on the property but is subordinate to that financing. If we
offered the seller a $50,000 wraparound mortgage that means that we
would pay on that $50,000 mortgage as if that's the only mortgage on the property.
Now while I think about it a wraparound mortgage or an all-inclusive trust deed
must state that right on the face of the mortgage. It must say in bold type at the
top this is a wraparound mortgage or this is an all-inclusive trust deed. If we
give that seller that $50,000 mortgage with interest at 10% we are going to be
paying $445 a month for the property for that mortgage rather. The seller
in turn must pay the underlying mortgage payment of $245 meaning that after that
underlying mortgage is paid the seller gets to pocket $200. You may say well
it's six of one half dozen of the other but it really isn't and here's why.
Number one the seller has got more control. If you were to buy the property
from the seller and just give the seller a second mortgage how does the
seller know that you're making those first mortgage payments and that's very
important to sellers to know that. Of course on the other hand if you're
making those payments of $445 a month to the seller and you're expecting the
seller to make the $245 a month payment on the underlying mortgage how do you
know that he or she is making those payments? You don't. So what we do is use
an independent third party like a bank, a title company, or a lawyer to collect
the check and then disperse the payment on the first mortgage but here
is the real beauty of this technique. Right now you can see that the existing
mortgage is $30,000. The wraparound mortgage is $50,000. What is the
difference between the two? Answer $20,000. But down the road approximately 20 years
the underlying mortgage is going to be paid off to zero and the wraparound
mortgage which will then become a first mortgage on the property is going to be
paid down from $50,000 to $33,000. Meaning that for 20 years the seller has
received a 10% return and has a growing equity. I mean that's like putting
$20,000 in the bank getting a 10% return on your investment or on your
savings account or CD and going down to the bank at the end of
20 years and saying give me my $20,000 back and being told that it has grown to
$33,000. Who do you think might have an interest in a technique like this? Does
anyone fit the profile? Anyone come to mind that might be interested in this?
What kind of a seller? Okay, a motivated seller. How about someone who is elderly?
Someone who's not a kid and they're looking for a good safe return plus the
growing equity. It's an ideal for older sellers. Seller says wait a minute you're
still buying no money down I'm taking back a mortgage right over here for the
whole amount a wraparound mortgage for $50,000 I need more security. Keep that
question in mind because in a very short while we're going to be getting into how
to give the seller more security. Question, if we do this would it activate
the due on sale clause in the first mortgage? The answer is yes it would. That's
why in this particular example it says that the first mortgage is assumable. And
any mortgage is an assumable even though you don't assume it. If it is
assumable there's no due on sale clause to activate. Thank you for asking that.
Please go through these techniques again on your own. We're not going through them
word for word and there's an example here where we summarize the terms and
the and the procedure and read those on your own please but you at least get the
basic basic idea of how these work. Technique number four. Using equity in
one property to buy another. Let's say this represents a property and that
property has equity in it. Equity is what is owed subtracted from the value of the
property and you might have equity in a timeshare a piece of vacant land that
you bought before you ordered this course. You might have equity in a home
and your personal residence. You might have equity in a whole lot of things.
Let's look at the second paragraph. Assume that you have located a two-family
property that is on the market for sixty thousand and there's an existing
twenty five thousand dollar mortgage. The seller's equity is thirty five thousand.
Total value minus what is owed is the equity. Create a promissory noted mortgage
in the amount of fifteen thousand dollars secured by equity in one of your
assets. Use that as a down payment on the two-family property and ask the seller to
to take either a twenty thousand dollar second mortgage or a forty five thousand
dollar wrap. Now here's the property you're trying to buy. It's a two-family
we said that is worth sixty thousand. It has a twenty five thousand dollar
mortgage existing on the property and the seller's equity obviously is thirty
five thousand dollars. What if our equity and whatever this mythical asset is
whether it's a timeshare or vacant land or travel trailer or maybe your own home
is we'll say five thousand dollars. Why couldn't you use that as a down payment
on the property actually giving the seller a mortgage secured by that
equity. By taking that equity out of property that you have and then getting
the seller in the amount of five thousand dollars and then getting the
seller to take back a thirty thousand dollar second mortgage. Can you see how
you are immediately buying a property and you've got equity in it. Is that
clear? There's an existing first mortgage of twenty five thousand. The seller's
equity is thirty five but you're saying to the seller look I don't have five
thousand dollars cash but what I do have is equity in an asset. I'm going to give
that equity to you as a down payment. You could just deed the property to them
couldn't you? I mean if it was a timeshare or something that had very
little value you could deed the property to them or go down to your stationary
supply store and get a note mortgage. Mortgage that equity give them that as a
down payment and then ask them to take back a mortgage for the difference. In
this case the mortgage would be thirty thousand dollars. Now what might be
attractive to a seller about that especially if the seller did not need
cash? It's a little bit safer for the seller isn't it? The seller is getting
equity on an or is getting a down payment consisting of equity in another
property and you in the seller's mind have more at risk. Can you see that?
You've got more at risk. Imagine if you will that this is your own home. Be
careful with this but you have equity of ten thousand dollars in your home. Here's
property A. You're going to use that equity in your home to buy property A.
Once you complete the transaction how much equity will you have in property A?
Ten thousand won't you? You've got ten thousand. What about using the equity in
property A to buy B and B to buy C each time using equity in another property
as a down payment on the property you're trying to buy. Now obviously you're not
going to be very happy about having your own personal residence 100% mortgage so
what you could do would be to take that last equity you have here because every
property you're buying you're creating equity for yourself and merely move this
mortgage to that last property you buy which in turn creates equity back in
your own personal residence. What would you need to do to be able to move that
mortgage? It would require that the mortgage have a substitution of
collateral clause in it and our basic contract form that's in your book my
form to buy real estate has a substitution of collateral clause in it.
It is so powerful.
Technique number five the blanket mortgage. This is an easy one to
understand. The blanket mortgage is merely a mortgage that encumbers more
than one piece of property. Just think of a blanket here is this blanket
encumbering multiple properties. Now remember a moment ago when we were
talking about buying a property with a wraparound mortgage 100% financed
remember that? I said that the seller has a we're giving the seller a $50,000
wraparound mortgage. The seller's got the best of all worlds they're getting a
10% income from the mortgage plus the equity is growing so that at the end of
20 years it's gone from 20,000 to 33,000 remember my saying that? Then I said what
if the seller has an objection to that? The objection being look you're buying
this property no money down you have nothing at risk. I said pay attention
I'll have an answer for you the answer is in a blanket mortgage. A blanket
mortgage could encumber another piece of property you own. It could be an
automobile. It could be a boat. It could be a diamond ring that you inherited
from your grandmother. It could be anything designed to give the seller
some degree of confidence and some security that you're going to do what you
say you're going to do. Now if you're going to use a blanket mortgage make
sure that you get a release clause which would allow you to release whatever it
is you're encumbering with that mortgage allow you to release it out from under
that mortgage after you have a history of timely payments like for example once
you make 10 or 15 or 20 payments on time then you get to release that out. Buy
low refinance high. I've repeatedly said that not every seller is going to take
the offer that you give them and just because you're prepared to close with
all cash not every seller will sell their property at a big discount but
that is what I insist if I'm going to pay all cash to a seller with a quick
closing. Let's assume that you've got a property that's on the market for a
hundred thousand dollars. You might say to the seller because you have cash in
the bank or because you have partners look I'll give you $80,000 for the
property that you're asking a hundred thousand for I'll give you 80,000 and
I'll close in five days and by the way it is not difficult at all to close in
five days especially if you're paying cash. Will a seller take that offer? I
don't know they certainly won't if you don't make it. You would get perhaps one
out of five one out of ten perhaps it would that were a seller would take an
offer like that. Why would we ever pay cash even though we're going to get a
big discount like that answer because we are then going to go to a bank or to a
partner and refinance it based on its appraised value which is really a
hundred thousand dollars. You ought to be able to get an 80% loan from a bank
which is $80,000 and so you can buy that property then put financing on it put
the entire $80,000 back into your pocket or in your pocket in your partner's
pocket. Some of you I know in this room have cash. This is a great opportunity to
buy property at big discounts by using that cash. If you're going to use a
partner here the partner might say well wait a minute if I put up 80,000 bucks
even if you give me 18% interest we're only going to own this property for a
month or month and a half before we refinance it. You know 18 divided by by
12 is a percent and a half that's no return for me for the time I've got my
money tied up. What have you said to the partner we're going to show you this
again in the partnership chapter. Look I'll give you a 50% ownership in the
property that way you'll not only get your money back but I'll give you cash
flow, equity build-up, tax loss, appreciation. Oh by the way I'm going to
charge you a 5% management fee for managing it. Is that a win-win situation
for you and a partner? Absolutely it is and this is real world stuff. By the way
on that last technique I did that it's not been too many years. I bought a
single-family home it was in Delray Beach an old kind of a Florida cracker
home with a very high gable roof and and a wood exterior and had a little cottage
behind it and the people that had owned it for so many years would invite people
down during the winter and they put them in the cottage. Well they were asking
about 68,000 bucks for that property and I bought it all cash for 48,000 and I
went out within 30 days and went to a bank and was able to get 100% of my cash
back out of that property. So it was a no money down deal if not right away
certainly within 45 days it was. Stan is saying that he did one of those and he
actually put cash in his pocket $5,000 you bet. Now someone will come up to me
and they'll say you know I tried that technique with a bank and they want you
to own the property one year and you know what they were right for that bank
others don't care some banks will do this if you've owned it a day all they're
interested in is an appraisal to show the value. So if you go to a bank and you
find out that they want you to have owned it for a for a year then go to
another one and go to another one there are a lot of banks out there in every
area there are some banks that are far more liberal than other banks you just
got to find out who they are. Okay technique number seven a home equity
loan I don't know whether there's anyone today that does not know about home
equity loans if they own a home. What they may not know though is that home
equity loans differ tremendously from one institution to another. If you've got
equity in your home you can go to a local financial institution a bank or
savings alone and get an equity loan allowing you to take cash out of your
property very inexpensively. What you'll want to do is check with banks and
savings and loans in your area to see what their terms are in making these
loans. Some of them are five-year amortization some are 15 years some will
require an appraisal and a credit report and all the things you'd go through if
you're originating a loan with them others are very almost superficial and
what they will require. They are second mortgages and they can be a ready source
for cash particularly small amounts of cash if you need to to to have immediate
access to funds to buy a property or to fix up a property. The nice thing about
it is you can put a home equity loan on your home and not receive any money all
they do is record a mortgage and they give you a checkbook and anytime you
need money you just write it write a check against that home equity loan. How
many of you have ever used a home equity loan to buy real estate have you done it
George good for you and you too Bill worked out well for you very good home
equity loans may not be an immediate thought to people that have equity in
their properties but if not perhaps it should be and I'm not suggesting that
anyone put their properties in jeopardy by getting a home equity loan that's not
the purpose I'm not suggesting that you put your financial well-being in jeopardy
by buying any piece of real estate that's why we keep emphasizing over and
over again the importance of doing an accurate financial analysis and a what
kind of analysis cash flow analysis exactly right technique number eight
bank loans and other sources for down payments. I hope as a result of the
credit pursuit strategy that you're going to be able to develop a line of
credit with local banks a line that may allow you to borrow a thousand or fifteen
hundred or even five thousand dollars merely by picking up the telephone. If I
didn't make it clear when we were talking about that part of the credit
pursuit strategy where I suggested that after you have paid back the three banks
you immediately go back in and borrow money unsecured if I didn't make it clear
once you get your first unsecured loan and you have paid back that loan to the
bank at least every six to eight months you should go back into that bank and
borrow that much money at least or more so you've got a you've got a borrowing
history if you will and a history of timely paybacks. Any questions or
comments on home equity loans or bank lines of credit? Kind of interesting I
met a gentleman in Chicago not too long ago and he had a property for sale that
he had fixed up and I was interested in buying it. We met at a Denny's in a
suburban location and I said to him I said how many of these things do you do
a year? He said oh I try to do a couple three of those a year. He was very
willing to talk with me when he realized I was a real estate investor and I said
where do you get the money to buy these properties and fix them up and he said I
have a hundred and fifty thousand dollar line of credit with two different
suburban banks and I said that is fantastic. I said how many of these can
you do a year? He said oh usually two or three and I said well I would think with
a three hundred thousand dollar line of credit you could do eight or ten or twelve
and by the way he told me that he tried to make about twelve to fifteen thousand
dollars for property and he looked at me and he said no I just don't have the
time. He said you see I'm a school teacher and I'll never forget that
conversation it took place many years ago but I thought to myself here is a
school teacher who is pretty much confining his activities to buying and
selling and fixing up properties during the summer months who had developed a
three hundred thousand dollar line of credit. You know I can talk all you all I
want to about going in for five hundred a thousand fifteen hundred dollars be
very aggressive and very be very ambitious in your contacts with banks
and trying to develop lines of credit can be very helpful to you. Any other
questions? What is the difference between a real estate dealer and a real estate
investor? A dealer is one who owns real estate as holds real estate an inventory
for reselling. A real estate investor who is one who owns property with an intent
or for investment purposes for the return that can be obtained from the
ownership of that property. In other words a dealer buys and sells buys and
sells much like a shoe store owner. A dealer is one who bought I mean a
investor is one who buys and holds on. What if you do both? Well you could
potentially have a problem. They could come in and then say well I
don't care whether you buy half your properties and hold on to them and the
other half you buy and quickly sell we're gonna classify you as a dealer. How
can you avoid that? Number one by by using a corporation when you're buying
and flipping properties that would be the big thing to take it under a
different name or using a trust and so you say well what is the big deal if
they declare you a dealer? Well number one no installment sales. If you buy a
piece of property and you sell it over a long-term installment sale period you've
got to pay the entire profit in the year that the sale occurred. Number two you are
subject to are you ready for this FICA taxes just as if you earn that money
working for a corporation. It's amazing. Number three you cannot take
depreciation on any property. No depreciation deductions. Number four you
can't exchange. You can't exchange. Okay let's review chapter 11. The basic and
underlying principle here is creative financing or using the principle of
leverage. Leverage is making a little bit of money usually someone else's money by
a large amount of property. When the leverage is a hundred percent or no
money down it means getting other people's money to do everything. Now there
are lots of places to find other people's money. I've identified ten in
this chapter such as the seller, the property itself, other investors, partners
and so on. Your creativity and common sense will tell you which one to use and
when. The cog chart can also be a tremendous tool for you. On it I've listed
your situation, the seller's situation and the situation of the property and by
matching along the side and top you can determine which no money down technique
is right for you. Now keep in mind no money down doesn't mean that the seller
gets no money. Just not any of your money. Also the seller needn't be a down and
outer for these techniques to work and don't think that these techniques are
only for flexible sellers. They'll work for inflexible sellers too because often
the seller gets all the cash down payment he wants. The first eight
techniques described in this chapter are fairly basic but you should work through
the math until you understand and are completely comfortable with them. Your
understanding of these beginning techniques will serve as building blocks
for the following chapters and techniques. Keep in mind that although
these chapters, these techniques are numbered, each one is really the essence
of a plan for buying real estate distilled down to its simplest form so
it's easier for you to understand. Each one of these techniques could give rise
to dozens of other techniques as they are molded and modified and combined by
you with other techniques to satisfy a particular seller's problem. Now in
chapter 12 we'll go through eight more somewhat advanced techniques to continue
building your arsenal of creative problem solutions. Here are 16 deals
Carlton that I've done in the last two and a half years. I don't even look at a
property unless I can make $25,000 at least. Maybe you'd like to buy a
property, do a little clean and fix up, then sell it for a quick profit. Well
since getting my course Mike and Francine from New Jersey have done that
16 times and improved their net worth over $838,000. Mike I think what
you've done is just amazing. Let's just look at a couple of these for example
here this one $52,415 profit in three months. Here are the checks. I think this
is the Baldwin property isn't it? That you made $50,194 in eight months.
Here's another one $21,000. You made $44,071 profit on this in two
months. Am I reading right $53,000 profit in two weeks? Yes this one's amazing.
I've only used a few of the techniques that you show in the course. And what
about your monthly positive spendable cash flow? It's hovers right around
eight thousand dollars a month positive cash flow. Eight thousand dollars a month
of spendable cash. Yes I know people that have master's degrees and don't make
that kind of money. I never in my wildest dreams thought I would own two homes. My
parents only owned one home at a time and they you know struggled to even get
that first house and here we are I think we own nine houses. After the first
one it was a piece of cake. Chapter 12 more exciting no money down
techniques. You know it's funny I had a call from a student that I've gotten
to know as a matter of fact the lady is in my in my television show and I really
considered her to be very proficient with the use of the no money down
technique. She's bought literally hundreds of thousands of dollars worth
of property and she called me and she said I got a problem. She said I bought a
piece of property that had an assumable mortgage on it. She's in the state of
Washington. She said the seller took back a very sizable second mortgage and she
said the property with my help is going up in value considerably and she said
I've got all this equity and she said I want to get it out and I said well why
don't you talk to the second mortgage holder the seller about letting you
bring in a new first mortgage on the property and he would still take a
subservient position and she said well I'll talk to him about it and she did
and he agreed to continue in his second mortgage role and I believe he wanted
a little cash maybe five or ten thousand dollars out of the property but it
turned out she was able to get a new 60% first mortgage what they call a no
qualifying or non document non no doc loan they call it. The seller continued
to have a second position in the property and she put about thirty to
forty thousand dollars cash in her pocket and it was kind of reminder to
me that even though this is one of the no money down techniques that I teach
and she was very very proficient in the use of my book my manual and buying
property that she had completely overlooked that that possibility. What
am I saying? I guess that there's a constant need to refer to that cog chart
that comes with your book to make certain that you really have considered
all of the alternatives that are available to you in buying property or
perhaps refinancing and that's what technique number nine is move a private
mortgage from a senior to a junior position. By the way a mortgage does not
have second mortgage written on the top or first mortgage or third mortgage a
mortgage becomes a second or third or fourth mortgage or a second or third or
fourth deed of trust depending on the state in which you live based on the
order of filing in the public records. So Stan could loan money to me to buy
property and I would give him a mortgage and he does not record that mortgage
rich comes along a week later and he loans more money to me for that property
perhaps to fix it up and rich is given a mortgage also rich goes to the public
records and records that mortgage who's got a first mortgage rich does even
though the money that he loaned and the mortgage it was taken back occurred at a
later date than the one that Stan has so it's in based on the order of filing in
the public records. Let me read this consider the following situation a
seller has a property in the market for $60,000 there's an existing private
first mortgage on the property in the amount of 30 approach the private
mortgage holder to see if the mortgage can be moved from a first position which
is a senior position to a second position which is a junior position if
you pay $10,000 in cash agree to pay the cash after a new first mortgage is
secured this will reduce the mortgage from 30,000 to 20,000 next put a new
$40,000 first mortgage on the property 10,000 of this will be the cash that
goes to the private mortgage holder and the other $30,000 40 less 10 will go to
the seller this no money down technique works well when the private mortgage
holder is not willing to discount the mortgage in return for a complete payoff
now this is a little bit of a different situation in that the and that the the
mortgage that the seller held is a first mortgage but still the principle is the
same we're asking them to put that mortgage in a second position now are
you going to offer to pay the private mortgage holder $10,000 immediately in
return for them doing that no I see a lot of people shaking their hands of
course not what you would say is I would like to I would like to have you move
from a first position to a second position they may say what are you going
to do for me and what are the alternatives what could we do for them
let's think about it what what are some of the what are some of the bonuses that
we might be able to give that private mortgage holder and return for doing
that Tom buy down the second mortgage by paying them cash like we did in this
case yes sir higher interest rate exactly right and what else an earlier
balloon a greater amortization of the mortgage what else one of the techniques
we talked about earlier pardon yeah sure a blanket mortgage he feels that he or
she does feels that they have less security because the mortgage is in a
second position and maybe now accounts for 100% of the equity of the property
so we say sure give them a balloon mortgage good for you Brad this is the
kind you know I'm so grateful for your responses this is the kind of creative
thinking that you need to that you need to employ in a situation like this let's
go to technique number 10 the FHA 203 B loan this is one of the most simple
frequently used of all of the government loan programs a 203 B and I know some
people listening to this right now who may be living in an apartment have
never really seriously considered the idea of homeownership are not familiar
with a 203 B loan and so I want to talk about it from two focuses if you will
one is telling you about it if you're not now familiar with it and the other
is a little known opportunity where you could actually get money back after you
buy a property with a 203 B loan mortgage on it because of insurance
premiums that have been paid the government will ensure a 203 B loan so
the lenders will not bear any risk in the event of default up until 1984
insurance was paid to the federal government actually through the local
lender but eventually to the federal government to insure these loans and it
was paid on a monthly basis the premium was one-half of 1% of the outstanding
balance of the loan if any of you incidentally have a 203 B loan on a
property right now and that 203 B loan accounts for 80% or less of the value of
the property you can apply to have that insurance waived you don't have to you
wouldn't have to pay it in fact that is a true that is true with private
mortgage insurance as well if you've got a property if you've got a mortgage
rather on a property where you're paying a private mortgage insurance premium
because originally the loan exceeded 80% of the value of the property apply to
the lender to get that to get that private mortgage insurance waived after
1984 that insurance was paid in one lump sum at the time the mortgage was
acquired generally the down payment for an FHA 203 B loan is 5% and effective
December 15th 1989 you must qualify to take over an FHA loan and in doing so
you must occupy the property as well so it's not an ideal thing from an
investor standpoint but here's the other other aspect of this that I mentioned
earlier and that is if you buy a property with a 203 B loan on it after
you have owned that property for six months and you have assumed the mortgage
if that mortgage is paid off you are entitled to a refund of the insurance
premiums paid now up until 1984 those were called distributive share your
portion of the insurance was called a distributive share after 1984 it is known
as a OT MIP a one-time mortgage insurance payment so once that mortgage is paid
off you can actually apply to HUD and receive a lump sum distribution of that
insurance of the insurance monies that have been paid now at the present time
the distributive shares are being withheld by the federal government
because they do not consider the the mortgage insurance to be actuarially
sound sounds like a government word doesn't it actuarially sound means
they're close to going broke but in the case of one-time mortgage insurance
premiums you can actually get those back that is ready any mortgage is put on
property after 1984 you can get that back in one lump sum and that frequently
will run fifteen hundred to two thousand dollars so if you're buying a
property that has a mortgage an FHA 203 B mortgage on it you're going to pay
that mortgage off then make sure that you apply for that that refund will the
government contact you they should but there's not a 100% guarantee when you
pay it off that they will it's kind of a reminder to me also to remind you before
you pay off any money due any money due to any person always ask for a discount
well that wouldn't apply to banks would it yes if it's a real old fixed-rate
mortgage in the five and a half to six percent range even some banks have been
known to accept a discount if you will when mortgages are paid off but almost
always private lenders will do that it's a very important tool and I it's funny I
talked to one of my students not long ago and he said I I can't believe the
number of mortgages over a period of time that I paid off and have never asked
for a discount and he said now I am doing it all the time and he said the
the results of that are just startling he said I saved little literally
thousands of dollars HUD customer service number is given in your book
that's who you would contact about that mortgage insurance premium number 11
borrow the Brokers Commission do you remember we talked about how you might
have a broker representing you as a buyer's broker now whether it's a formal
relationship or whether it's an informal relationship makes no difference but the
point I made then is that if you go if you're in your neighborhood and you see
a home on the market for sale and it's got a sign in front of it meaning that
the listing broker who took the listing would put the sign in front of the house
are you better off to contact that broker directly or would you go back to
the broker that you've been working with who is your buyer's broker and we
suggested it is probably more appropriate that you contact the broker
who has the listing on the property why because they're going to get the full
commission if they list and sell the property so let's say that you do that
and let's say that a property is on the market which if it is sold by the
listing broker will yield a $5,000 Commission so the listing broker is also
going to sell the property and the total Commission is $5,000 now a listing
broker who is also acting in the capacity of a selling broker is not
willing to loan a portion of the Commission to you you might suggest to
him or her that you are working with a another broker who is a buyer's broker
and they're very willing to take their Commission in the form of a note that
may result in the listing broker taking all of their Commission in the form of
a note or at least one half of it so this broker has a $5,000 Commission and
you ask the broker if they will take their Commission in the form of a note
I've had all kinds of responses a sales agent will say I'm sorry my broker
doesn't permit me to do that now that's blaming that's that's the the the power
of the third party probably not true but that's what she told me at the time or
my broker refuses to do it but I would take my share now remember we've got a
broker involved here and we've also got a salesperson if they both list and sell
the property how much will the salesperson make they're gonna make half
aren't they normally they're gonna make half which is 2,500 the broker will make
2,500 the last time I did this I said to the salesperson would you be willing to
take your Commission in the form of a note and she asked me about the D the
details about how this would work and I told her and I'll explain this to you in
a moment and she said I will but I don't know whether my broker will so we went
to or she went to her broker and her broker did agree to take his Commission
the form of a note what I told her is that I would be willing to pay a
reasonable rate of interest which I suggested was 8% it was a plucked from
air figure I could have said 5 I could have said 7.6 I chose 8% and she got
back and when the broker agreed to take his share in the form of a note they
agreed that they would have to charge 10% interest and and I readily agree to
that so what I told them is that I would pay them 10% interest but I would make
payments of 1% a month so every month I would make a $50 payment to the broker
and to the salesperson 50 times 12 months is $600 but the interest rate is
only 10% and 10% times 5,000 is 500 so if I'm making a payment of 1% a month or
in this case $600 you can see that $100 is going toward reducing the amount
that I owe which is $5,000 everyone clear about that can you imagine if you are a
an active salesperson or a broker and you find someone like one of us to work
with and we are actively buying properties maybe at the rate of oh I
don't know three four or five eight properties a year that if you're getting
between 50 and $100 a month coming in from all of those properties over a
period of several years this could be a substantial income for you I mean you
could have an income every month of 1500 to $2,000 now this broker when they
finally agreed to do this he said the only way I will do it is for you to give
us a mortgage as well as a note I agreed to do that so they are actually a
mortgage holder on the property now sometimes I have and by the end I'll be
very honest with you this has never worked for me but I have asked a broker
if they would be willing to go into their pocket not only to loan the
Commission to me but to put additional money in and I've never had a broker
willing to do that but let me say this as a result of my asking and my telling
all of you and all the people who are listening to the tape to do this I know
that one of you will be successful in doing that you say Pete you know this is
such an excellent deal you know that it is I appreciate your loaning your $5,000
Commission to me and taking a note and mortgage back for that since it is a
good deal how would you feel about going into your pocket for another ten
thousand dollars or another five thousand dollars and either taking an
equity position in the property or you can take that at ten percent interest in
the form of a mortgage and if you've got a little bit of extra cash it's not a
bad deal is it so barring a broker's Commission can can be a an effective way
of cutting down the amount that you may be required to come up with at the time
of close may result in no money down how many of you have ever seen an ad in a
newspaper run by a broker that says XYZ property ten percent down have any of
you ever seen that look at the hands I mean three-quarters of you have of course
what are you reading when you say that when you see that there's no money down
deal to the seller isn't it the seller saying look I want to get rid of this
property all I want is enough money to pay the broker's Commission and to cover
the cost of closing so if you see an offer a see a an ad with ten percent
down run by a broker there's an excellent possibility that you'll be
able to buy that property absolutely with zero down yourself notice that each
one of these these techniques have an example summary at the end and I think
that's so valuable as a way to help you follow through if you've got any
questions at all about how the how the technique works create a note sell for
cash technique number 12 there's an example in your book here a specific
example involving numbers that you can follow through with but I think is a way
to help you better understand this and also to also to give you a little bit of
a different perspective I want to tell you a story about a man who was a part
of one of my challenges in Chicago number of years ago we had a challenge
through the Chicago Sun-Times newspaper that I could take anyone totally
unfamiliar with real estate someone who had never bought property I could teach
them in one day all of the techniques for buying property no money down and
they could then go out and buy a good piece of property no money down that
would bring in a $100 per month positive cash flow well I received as you can
imagine many many hundreds of letters wanting to be a part of that challenge
and I arbitrarily picked a young man probably about 33 who was a factory
worker in Chicago living hand-to-mouth he did not have bad credit he had no
credit he was trying to support a paying child support to a to an ex-wife and he
was living at home with his parents so I spent one day with him and then I turned
him loose and I said you know the best way for you to find a piece of property
is going to be to look at the local newspaper and try to find evidences of
sellers being flexible in the ads they have run remember we are talking about
that earlier running looking at sellers ads and newspapers how many other ways
are there to establish yourself as a seasoned investor remember the number of
ways we talked about nine different ways weren't there well that's just one of
the nine so he did that he went to the Chicago Tribune of the Sun-Times and he
started circling ads and he got on the telephone and he had a number of
properties that he followed up on one in particular he found was in a suburb of
Chicago and the property was on the market for $38,000 a two-bedroom townhouse
it had an existing 28,000 roughly dollar mortgage which was an FHA mortgage and
the seller was looking for $10,000 what do we call that $10,000 equity what the
property is worth minus what they owe he was looking to get that money out in the
form of cash which of course they all are that FHA mortgage at that time was
assumable the property did have an appraised value of $38,000 and my
student made an offer on the property for 32.5 agreeing to take over the $28,000
FHA mortgage and offered the seller $4,500 in cash contingent upon being
able to get a second mortgage for that entire $4,500 is that a long shot you
know I've seen some experienced investors shaking their heads yeah sure
that's a long shot but you know if you're out making many many different
offers and you've got contingencies in them doesn't matter would anyone
knowingly loan $4,500 knowing that that $4,500 coupled with the existing first
mortgage would account for 100% of the value of the property all the answers
maybe when you loan money to anyone or when you invest money there is always a
balance of two factors and what are those two factors risk and reward sure
risk and reward now here's what happened he knew from my course that he should go
to the financial services of the section of the local classified classified ad
section of the local newspaper and he did that and if you'll look in your own
newspaper all over the country you'll find a similar section financial services
or money to loan or whatever and he started calling people and their first
question is he told him he was looking for $4,500 cash and they said well how
big is the mortgage that you're trying to sell and he said well I'm creating a
mortgage and he finally found a CPA who was representing a pension and profit
sharing trust who said to him fine let's sit down and talk about it so they met
the man ran a credit check on my student it wasn't good but it wasn't bad he saw
an appraisal of the property and he agreed to loan $4,500 and here were the
terms of the loan he said I will loan you $4,500 cash if you will give to me a
$6,000 note interest only at 12% with a balloon payment in five years and my
student agreed to that because that property with the FHA mortgage with
management with maintenance with taxes with insurance and with a how large a
monthly payment on this $6,000 $60 a month right you with me on that the $6,000
payment is payable 12% a year that's 1% a month or $60 a month he still had a
positive cash flow of nearly $100 a month so he bought the property now let's
let's review here for a minute do you think a 32.5 offer on a $38,000 asking
prices outlandish no not at all not at all especially when it's going to be an
all-cash deal now would someone who made that loan to my student would they have
to be out of their out of their minds to do that no let me tell you why number
one it was a loan from a pension and profit sharing trust and I'm not going to
get into details on the on the law here but if a pension and profit sharing
trust ever loses money to the extent that it loses for the year it can be
funded pre-tax to compensate for that loss they knew that secondly in a worst
case scenario what could happen the pension and profit sharing fund would
foreclose on the mortgage it would end up owning a $38,000 townhouse for in
effect 30 for in effect 30 $32,500 now we talked about risk reward what kind of a
reward was that CPA obtaining for the pension and profit sharing plan this is
a little camera shop owner that had this pension and profit sharing plan plan and
he had said to the CPA let's see if we can get a better return on our money
well now let's see my student paid seven hundred and twenty dollars a year you
with me twelve percent of six thousand seven hundred and twenty dollars a year
for five years that's thirty six hundred at the end of five years he had to pay
back the pension and profit sharing fund six thousand dollars but he had only
received forty five hundred dollars to begin with the difference of fifteen
hundred dollars was also profit to the pension and profit sharing plan so that
totals five thousand one hundred dollars and if you divide that by the five years
you can see that they've got an average return of about one thousand twenty
thank you one thousand twenty dollars a thousand twenty dollars a year as a
return on a forty five hundred dollar cash investment you can see that that's
well over twenty percent isn't it well over twenty percent so again win win
win for everyone seller got the cash they were looking for my student got the
property for no by the way the closing statement and I used to carry it I wish I
had it now nine dollars and eighteen cents that's what his out-of-pocket
cost was for the property and the person who loaned the money was able to get
about a twenty over a twenty percent return on their investment you want to
hear what's happened at that townhouse the value of that townhouse since then
you know we we it's so easy to read the newspapers real estate flat properties
not going up like it used to go up and I told you like they used to go up and I
told you yesterday that that properties have gone up over the last 20 years
almost five percent compounded well that little two-bedroom townhouse in a
suburb of Chicago is right now worth about eighty thousand dollars between
seventy five and eighty thousand so he had wonderful appreciation on top of the
fact that he bought it no money down with a positive cash flow satisfy the
seller's needs technique number 13 if you can somehow determine what the
seller is going to do with any money they receive you may be able to satisfy
the seller's needs either by charging on a credit card or perhaps by using your
own skills or services that you could provide to satisfy their needs one of my
students has a carpet company with his with his parents they own a carpet
retail operation and he was able to sell a person to whom he was from whom he was
buying a property carpet for a new home in lieu of a portion of the down payment
if a person is going to buy furniture maybe you can buy the furniture or let
them charge it to your charge card and pay for it over time I was talking to a
seller some years ago and I said what are you going to be doing after you sell
the property said well I'm going to take whatever cash that I get out of here and
go back to my native Greece and I said would you allow me to pay for all your
airline tickets and associated expenses and moving your in moving your
household and your personal effects back to Greece and stuff got no problem with
that he said whether you pay for it using a credit card or whether you give
me cash and I pay for it makes no difference so it just opens up another
possibility for you life insurance policy loans look at the second paragraph
let's read that let's say you need a ten thousand dollar down payment to
purchase an investment property you've got no whole life insurance of your own
contact a life insurance agent to learn if he or she has a client with a policy
that has a cash value of ten thousand dollars the policyholder could borrow
the ten thousand loan it to you perhaps at one to two percent more interest than
he or she would currently have to pay you could use this ten thousand dollars
as a down payment perhaps even getting the life insurance policy owner a ten
to fifteen percent ownership interest in the property is a bonus sometimes we
forget that we have whole life insurance policies and could borrow on them for a
very low rate generally in the four to six percent range well if you don't have
a whole life insurance policy does that render this technique useless no if you
know an insurance person that that handles life insurance you could ask
them if they've got any clients that have whole life insurance policies that
they might be willing to talk to on your behalf to see if they could borrow money
from the policy and loan it to you at maybe a one to two percent spread now
let's see you're the life insurance agent and you're you're hearing someone
say to you look I'm trying to generate twenty five thousand in cash see if you
can find a whole life insurance policy owner that's willing to loan me twenty
five thousand dollars cash they're gonna be paying four percent or five and I'm
willing to pay him seven or eight does that sound attractive yeah I don't think
so does it what's the problem if you're borrowing money against your life
insurance policy aren't you in effect reducing that dent death benefit by that
amount of money sure you are so there's got to be something more in it if you
will for the one who has the life insurance policy what could that more be
pardon sure ownership in the property give them a ten to fifteen or a twenty
five percent ownership in the property what else could it be it could be that
you would buy a term life policy on their life very low cost for the amount
of what you're borrowing or maybe you would also buy a term life policy on
your life for the amount that you are borrowing is this a long shot yeah kind
of but you know it's just one more technique in the arsenal you have to
solve problems something you might not think about if it were not mentioned I
happen to have a small life insurance policy that my father bless his heart
and I mean that took out on me when I was 14 or 13 years old and it has a
little bit of cash value and from time to time when when my economic situation
is required it these are years ago I would borrow in that life insurance
policy for about four and a half percent so it can be done and it is one more way
to generate cash that doesn't come out of your pocket technique number 15
deposits rent credits and real estate tax credits I'm gonna let you read this on
your own but I'm going to summarize a technique that has major consideration
in the acquisition of Mollie family property and Tom up here in the front
who just bought a fairly large apartment complex in Texas about which I'm aware
is shaking his head because he knows this is a big factor look at this today
many many sellers of income properties Mollie family properties will have a
last month's rent now that last month's rent is meant to apply to the last month
of the lease so if you're renting in a typical apartment building that has that
and your and your lease starts May 1 the last month's rent that you pay we'll
just assume it's $600 applies toward April of the following year the last
month it's a way to give more security for the landlord because if you move out
before April guess what happens to that last month's rent it's forfeited well if
you've got a 30 unit apartment building we multiply 30 times 600 that's 18,000
bucks oh and also we've got security deposits now we're going to be talking
about management a little bit later and you will hear me emphasize that the
security deposit should never be the same amount as the rent you are charging
and I see some people whether they've learned it from my course or whether
they've learned it the hard way which is it good good for you it should never be
the same so this this seller has $400 in security deposits from each of the
units which is $12,000 in addition there are tax credits on the property
depending on when you buy most taxes in almost every tax jurisdiction are paid
in arrears so if you're buying the property mid-year you're going to have a
tax credit for that portion of time that you did not own the property and will
assume the tax credits in this case I'm just going to pluck from air are $10,000
all of these credits at closing are going to total $40,000 now I don't know
what you're going to pay for a 30 unit apartment building but except for
certain high-cost areas of the country it's going to probably run somewhere
between 30 and 40 thousand bucks a unit and you're going to say oh I know some
of them are 50 or 60 so you've paid you've paid nine hundred thousand
dollars for this property at thirty thousand dollars a unit and look at
this we've got almost five percent of the total cost of that unit covered in
those credits but there's one more now let's say that you do indeed close on
the last day of the month so you're the owner of record as of the first of the
month and all of those rents for that first month are going to come to you now
we've already established that the rents are $18,000 for the month what kind of an
out go are you going to have during that first month zero you're gonna owe you're
gonna have no expenses no out go for anything even unless you're on a salary
basis with a manager where you're paying every two weeks generally a management
company who's going to charge you anywhere between six and ten percent to
manage the properties they're going to be figuring based on last month's rent
that's going to be collected in the following month so you're going to have
no expenses add that $18,000 to the 40,000 and I don't like to run this
close but you sure could $58,000 in literal credits in buying that property
you have no expenses the first month because all the utilities are going to
be transferred for example to your name effective the first of the month so the
bills won't come in until the until the middle of the next month or early the
next month in addition any mortgage payments that are due are always paid
in arrears so they won't be due until the first of the following month and
there there are just no other expenses obviously your insurance payment that
probably would be prepaid but that would be the only thing and that would be
handled at the time of close sir yeah the last 18,000 comes from the rents
that you're going to be getting for the first month of ownership for the first
month of ownership because you've closed on the last day of the month all the
rents coming in for the following for the for the for the upcoming month will
go into your pocket I've got a I've got a property right now that I'm getting
ready to put on the market and in doing my own financial planning and I'm willing
to sell this property for very little money down it's a 14 unit apartment
building and in doing my own budgeting and my own financial planning I was
sitting down and calculating what I'm going to have to get to give to the
purchaser at the time of close and someone probably could literally buy
that property and walk away with cash in their pocket I'm waiting for you all to
rush up here you're not doing that but that's true as you become more and more
successful as you have more and more financial wherewithal do you still try
to use other people's money or are you willing to put cash in yourself and I
would say my goal is to make the is to make the acquisition as financially
attractive as possible and if it means in my case drawing on a line of credit
and paying all cash I will do so ever most of the offers I make though are no
money down offers keep in mind though what we said earlier and that is that no
money down for me may very well put cash in the in the seller's pocket because I
am utilizing a line of credit you know no money down does not literally mean
zero money zero dollars down out of your pocket it means no money down out of
your pocket it means two or three or four percent out of your pocket sometimes
it means that you buy property and you actually walk away with cash at the
close no money down I think is really a concept where we talk about buying
property creatively with as little of our money as possible and this whole
program is aimed not only at that people that have a little bit of wherewithal
income borrow money but also predominantly at people that have no
cash have no credit and are desperately trying to improve their their financial
situation in life and don't know how to do it so I would say it's whatever the
situation might dictate but it's a very good question obviously the need to buy
property no money down zero down out of my pocket is not there like it was many
years ago question is are there any legal requirements in handling the last
month's rent as well as the security deposits to my knowledge there is no
requirement by any state law in how those last month's rents are to be
handled there there it's your money to do with as you please on the other hand
almost every state has a law relating to the disposition or the handling of
security deposits and generally what they will say is that it must be put into
a into a escrow account something that's that's away from you it's not
commingled with your with your funds and if it earns interest you've got to give
the tenant three-quarters of the interest earned so you need to find out thank you
for bringing that up Kirby you need to find out what the law is in your own
state regarding the handling of security deposits you know I just mentioned to
you that I have a property that I am thinking about selling and could be that
someone will buy it and walk away with cash in their pocket what might my
motives be in offering a property for sale creatively this is going back to
Ryan your question you know obviously my financial situation is different today
than it was a quarter of a century ago but what might my motives be in offering
a property creatively practically no money down to someone yeah let's yes sir
very good I'm making the property available to a larger marketplace
therefore I can get rid of it quickly this no money down techniques will give
it will get a seller a little bit of a higher price and I'll yes one more Pete
very good that's what I just gonna say it reduces my tax liability by selling
that property on an installment sale reporting method I can spread out the
tax liability over a long period of time and also if I'm providing the financing
I'm probably going to get a premium I just sold some property not long ago
took back a blanket mortgage on them and I'm getting about ten and a half percent
which is fairly attractive so if I've got any extra money to to put it put
into an investment right now I'm hard-pressed to find something that's
going to yield ten and a half percent so all of these things go into into my
decision to sell the property that way now let me ask you a question you're on
the buying side and here's the question do you think that every seller will sell
their property no money down I see a few people saying yes and a few people
saying no let me tell you every single one of them will bar none every single
seller will sell their property that way and I mean sell their property and not
receive any cash at the close there's not a seller that would not agree to
postpone receiving cash 24 hours if that note was secured by US government bonds
that's an extreme example but that really answers the question doesn't it
there's not a seller that wouldn't be willing to do that on the other hand how
many sellers are there that will sell their property no money down and take a
30-year mortgage for money that is due them not many but they're there like I
just bought a piece of property not long ago an 86 year old man living in New
Jersey in poor health had a home in Florida basically a no money down deal I
bought the property he took back a 37 year mortgage literally a 37 year
mortgage the term was never discussed but the interest rate and the amount owed
and the monthly payment put into a financial calculator showed 37 and a
half years so I just want to implant that firmly in your mind that every
seller will sell no money down the question is can we can we strike an
agreement or or agree to terms that will that will be satisfactory to that seller
technique number 16 a rental participation technique by the way this
is an oldie I was first exposed to this technique when I bought a 72 unit
apartment building in Tampa and I went to a an insurance company in Tennessee
to get financing for the property and the insurance company basically
calculated the value using the income approach to determine value and gave me
literally nearly 100% financing gave me and my partners 100% financing on the
property but they had what they called an equity kicker in the loan that meant
that once the rental income exceeded a certain amount they began to participate
and in their case it was 20% or 15% I forget which doesn't make matter 15 to
20% of all of the income beyond a certain level now why would they call a
rental participation which I have labeled my technique here why would they
call that equity participation kind of a kind of a deep academic question
remember I said as the net operating income can anyone define that for me the
gross income minus expenses is the net operating income as a net operating
income increases with multifamily properties what does it do to the value
of the property it increases the value exactly right and remember we said
equity in a property is defined as the value of the property minus what is owed
that is your equity and if your net operating income does indeed increase
then your equity increases right but wait a minute there's a problem here it
doesn't increase as much as you would think it would because of this
insurance company that's nibbling away every single year at some of that equity
doesn't reduce your equity it just doesn't allow that equity to increase as
much as it would they're really participating in the equity if you will
and that's how it that's how it got its name back then more accurately today
it's called a rental participation technique where you give someone a
certain percentage of the gross or net rental income are you better off with
gross rental or net rental net you're much better off with a net operating
income a percentage of the net rather than a percentage of the gross who
might you use that with a seller some of you are in business for yourself I'm
sure some of you may own a company that someday you'll sell and the buyer is
going to look you right in the eye and say wait a minute Anthony how do you
think your company is worth that kind of money I mean you single-handedly have
created with your charm and your personal contact with a customer you've
created that business if I take it over there's no reason to think that I'm
going to do as well and Anthony says I'll tell you what take my word for it
you're going to do as well I'll even hang around for a year or two to make
sure that that happens what you're doing is in effect guaranteeing a certain
price for the business there's all kinds of names for that earnouts and and and
that's reason by the way many many corporate small corporate owners are
kept on to make sure that the business business does not lose its profit does
not lose its momentum same thing here mr. seller I think that I think that I can
do well with your property and if you'll take back a mortgage for all of your
equity in the property I'll let you share in the profits as if you still
owned it what a deal right no management headaches no nothing at the end of every
year you're gonna see my return to the to the IRS schedule II and whatever that
net operating income is I will give you 10% of that just as if you were a 10%
equity partner that's a good deal now let's review chapter 12 you learned
eight more techniques each of which I or one of my students has used in a real
life situation to put a deal together a word of caution here oftentimes when you
bring a technique like some of these that you've learned here to a seller he
or she will immediately reject it because they don't understand it when
this happens you will play the role of a teacher slash problem solver keep them
focused on how your proposal solves their problem and sells their property
also keep it simple don't overwhelm the seller or his broker you'll learn a lot
more about how to do this in chapter 16 when I discuss win-win negotiating now
some of the techniques in this chapter are complex that's why I've included the
accompanying video but remember this you don't have to become an expert on all of
them in fact I've had many students who perfected one technique and used it to do
hundreds of deals like a like a cookie cutter the next chapter chapter 13 is
broken down into two parts part one includes four more acquisition or buying
techniques and part two shows you where you can find government help in real
estate financing what is your net worth now John about eight hundred thousand
dollars all from real estate all from real estate and what period of time a
year and a half in a year and a half almost a million dollars yes
congratulations I wouldn't have it if I hadn't about your course in one year of
investing using my course you now have a net worth of an extra about a million
two about a million two hundred thousand dollars yes sir and a monthly income
spendable cash about sixty eight hundred dollars six thousand eight hundred
dollars a month yes sir congratulations it's wonderful we say thank you we can't
thank you enough discounted bonds have any of you ever used discounted bonds to
buy or sell property I have heard of them being used in a variety of ways in
fact I've got a friend who flips properties I just learned about this two
weeks ago very creative he will he will sell a property on a contract for deed
and you would think that the terms that he would be able to negotiate with
someone to buy the property in a contract for deed would be enough of an
incentive for that person to go ahead and do what they said they were going to
do if it's a 20-year payout I mean presumably the property is going to go
up in value and and they're going to be losing something if they if they if they
leave the the deal but he says I don't want to leave the deal I want him to stay
in I don't want to have to resell the property so he says what I do is tell
them that in 20 years I'll give him ten thousand dollars with the bonds just as
a gift for having completed the deal well what a ten thousand dollars were
the bonds cost if you buy them today well if you don't know anything about
bonds and you probably wouldn't have an answer to that and I'm going to tell you
a little bit about bonds right now but it'll cost you roughly twenty five
hundred to three thousand bucks bonds are really nothing more than promises to
pay that are issued by governments and corporations they generally bear
interest but not always they are issued in $1,000 denominations and if Julie up
here has a company and she is issues a $1,000 bond and it's going to bear
interest at 7% that bond is going to trade for more or less than a thousand
dollars based on the interest rates today I mean if she issued that bond five
years ago and interest rates today are 10% not eight the bonds going to be
trading for a premium or a discount a discount good for you it's going to be
trading less than a thousand dollar face value some other things that are going
to affect the the amount that that bond sells for would be the rating that it
has with standard and poor with Moody's bonds are rated triple a double AA
triple B double B B triple C now we're getting by down into what we call junk
bonds you've heard that term triple C double CC depending upon the quality of
the bond the rating between the strength of the maker the age of the bond all of
these factors come together to determine what the bonds bonds are selling for
it's kind of fun if you've never had any exposure to bonds at all to go to the
newspaper look at the bond section do that tonight and just read what bonds
are selling for and you'll see some of them are selling at a premium which
probably means that they were issued a number of years ago when interest rates
were very high and some of them are selling at a deep discount which means
that the company issuing them may be in trouble or the interest rate is very low
bonds are always always shown in two digits so in the newspaper you'll see
ninety eight and a half that's done really as a as a measure to save room
in the newspaper that's all since bonds are are issued in thousand dollar
denominations and you see a bond ninety eight and a half what is that bond
worth nine hundred and eighty five dollars exactly right so all you do is
add a zero and you'll get the you'll get the value of that bond now some bonds
do not bear interest they are called zero coupon bonds and they are designated
in the newspaper with a ZR ZR and they trade for way less than the face value
of the bond in addition some zero bonds are issued by municipalities and
governments state governments and not only do they not bear interest but if
you are a holder of one of those bonds you do not have to pay tax as you would
if you held a corporate zero coupon bond and I'll never forget a few years ago
Tampa Electric Company issued a zero coupon bond due in 30 years guess what it
was selling for $70 you could buy this bond due in 30 years for $70 zero
interest and have no tax to pay on in the meantime well 30 years a long time
away but I can see you can see to a degree for a state planning that these
bonds could have could play a part how does this relate to real estate let's
take an example let's say and in this technique is going to work best where
the mortgage on a property is generally 35 to 40 percent of the value of the
property or less let's say a seller's got a property it's on the market for a
hundred thousand dollars it has an existing twenty five thousand dollar
mortgage meaning that the seller's equity is seventy five thousand dollars
now I know when I go through these examples people are saying there he goes
again talking about an assumable mortgage I can't find any of those or
there he goes again talking about a property with a very low mortgage on it
I can't find any of those believe me they are out there are you aware that
fifty percent of all the properties in the United States of America are owned
free and clear let me say that again fifty percent of all the properties in
the United States are owned free and clear now I'm talking about vacant land
I'm talking about government tracts of land you know that's not the case in a
given subdivision but if we take all the aggregate of all the properties that is
true how about people over the age of 65 60 percent and maybe it's higher that
was the last figure I read 60 percent of all the properties owned by sellers over
the age of 65 are owned free and clear there are all these there are a lot of
opportunities out there that we that we may not remember or appreciate because
of our blinders we're looking at only at a specific area where we live or in a
particular neighborhood here's what you're gonna do you're gonna go out to
a bank or savings alone and you're going to get a 75% loan on that property which
is $75,000 I don't have credit you tell me and I say fine get someone to co-sign
with you get a partner get a partner to put up the $75,000 do what I'm going to
tell you to do then once you own the property then go out and put a mortgage
on the property we got $75,000 lying here on the table what are we gonna do
well 25 of it has to be used to pay off that first mortgage that leaves
fifty thousand and we've got $75,000 that we've got to give to the seller but the
seller wants $10,000 in cash at close so we give the seller ten thousand dollars
at least forty thousand lying here on the table now the seller's equity to
begin with was $75,000 right we've given the seller ten thousand dollars cash we
still owe the seller $65,000 don't wait this is all presuming that at the time
we were negotiating with the seller we said rich rather than taking a mortgage
on the property I'm buying from you would you be willing to take a note and
mortgage secured by good quality municipal bonds and he agrees so what
I'm going to do is I'm going to give him $65,000 in bonds that are due in nine or
ten years and those bonds are going to cost me $35,000 and I'm going to end up
putting $5,000 cash in my pocket what have I really bought the property for I
really bought the property for $75,000 haven't I that is my basis in the
property the moment I complete this transaction I immediately have $25,000
worth of equity plus I put five thousand bucks in my pocket now get your creative
juices flowing rich says wait a minute that's nine to ten years down the road
what about interest if I can't get him to agree to zero interest and I'm
certainly going to try we finally agree that I'm willing to pay seven or eight
percent interest which says how are you going to secure that I mean I want to
know that you're going to be paying seven eight percent interest on those on
those bonds if it's a seven percent interest in the bonds forget about what
they cost me the bonds are worth $65,000 that's about 4,500 bucks a year how do I
know I'm going to get that so then we say Brad what a blanket mortgage I'll
give you a blanket mortgage well I've got an idea mr. seller why don't I give
you additional bonds if we multiply ten years times the 45 hundred dollars a
year that that I owe you that's 45,000 why don't I give you additional bonds to
cover up to say half of that amount or a quarter of that amount can you see all
the techniques interplay with each other there's a lot of different ways that you
could you could appease him and satisfy his need for some security relative to
the payment of that interest can anyone tell me what the problem here might be
in doing a zero coupon bond deal well rich it's long term you're saying I
thought someone was going to say well the problem is maybe the property will
not support the mortgage payment on $75,000 plus the interest on the bonds
before you ever try to use this with a seller just pick up the telephone and
call your local stockbroker and say can you tell me what what zero coupon bonds
you have going out about ten years and what price you have on them you're going
to find you're going to be paying today about roughly 60 cents on a dollar if
you go out nine or ten years now the problem is you know a confused mind
always says no and we talk about all these sophisticated ways to buy property
and I don't want you to ever forget that if you're if you're going to overpower
the seller with something that makes him or her uncomfortable it's beyond their
comfort range they're going to say no I don't want to get involved that is the
biggest problem I was going to buy a motel on siesta key right off of your
Sarasota in Florida and using this technique I was going to put in my
pocket a quarter of a million dollars but remember I said yesterday you could
buy a piece of property no money down but in doing so you might have a what
negative cash flow that's exactly right so that's why I said we anytime we buy a
piece of property no money down we want to be able to afford it and with this
with this property that I was going to buy it would have a negative cash flow
somewhere around 60 65 thousand bucks a year and the argument from the broker
who realized he had a lot of stake here he said you got the seller to agree
you're gonna put a quarter of a million dollars in your pocket he said you know
that you can take a portion of that quarter of a million dollars and fix up
the property raise the raise the rents and you'll very quickly have a
breakeven cash flow and that was enough to make me say thank you I'm gonna I'm
gonna decline and which I did there is room for this technique in some aspect
of your real estate investing it is so creative I know some of my students have
used it and rather than thinking in terms of you're putting a lot of cash in
your pocket which you can or thinking about using this to buy a huge huge
property which you can think of it more as a way to buy a property at a discount
being able to pick up in this case because you're really only paying
seventy five thousand dollars for the property pick up maybe twenty five
percent of the equity at no charge technique number eighteen land contracts
or agreements for deed or contracts for deed there are certain ways that you can
acquire an interest in real estate that will not give you legal title you get
legal title when someone gives you a deed on the property you get equitable
title when you buy a property under the terms of a lease option or under the
terms of a contract for deed now in some states about which I'm familiar namely
Illinois Wisconsin Michigan contracts for deed are very very common in the
state of Florida a contract for deed is almost unheard of but nonetheless they
are legal in all 50 states if you're going to buy a property under a contract
for deed you would do so primarily to give the seller added security this way
technically the seller does not have to foreclose if you go into the default now
if you were to ask an attorney about that an attorney would say no no if you
bought a property into the terms of a contract for deed for five years and you
leave the the seller of the property really should file a foreclosure action
against you in order to extinguish your interest but that is all theory I've
never heard of that being required in the terms of a contract for deed
generally the person buying it if they leave they just give up their rights many
times a seller would ask them to file a quick to sign a quick claim deed which
further extinguishes their rights but a land contract or an agreement for deed
is a financing tool it's just like a mortgage except that legal title does
not pass remember we said earlier that if a property has a mortgage with a due
on sale clause the one thing that will will alert a lender to the fact that
that property the legal title the property has been transferred is the
fact that insurance will name the the new owner as co-beneficiary obviously
with a land contract that doesn't happen because the insurance policy stays in
the name of the seller of the property if you're going to enter into a contract
for deed with anyone but let's I'll take an example rich here has a property I'm
going to buy the property in the terms of a contract for deed that means that I
must make a stipulated number of payments maybe for a year maybe for five
years or ten or twenty years before he is finally going to turn that title over
to me can you see any danger in paying on a piece of property but not owning it
for five years what are some of the things that could happen yeah for
example he might die Richard you mind laying down here on the aisle I'm kidding
he might die he might become mentally incapacitated the property may burn down
and all the proceeds of the insurance would go to him and you could cause you
a problem there if he files bankruptcy or if he has an income tax lien this is
why I would recommend if you're going to do a contract for deed have a contract
for deed that least on your first when you get a lawyer involved secondly you
record the contract for deed or a memorandum of it on the public records
and finally you address these questions about what happens if there is a
bankruptcy or a liens put on the property many times to be ultra safe an
attorney will say well rich what we want you to do Carlton and I is for you to
sign a deed over to him right now and we will hold that deed in escrow pending
performance on Carlton's part until he agrees to do what he's agreed to do then
that deed will be put on the file of the public records if I'm going to buy a
piece of property from rich though before I ever signed the contract for
deed what am I going to do am I going to go to the title could go to a do a do go
to the courthouse and do a preliminary title search absolutely I am I want to
make sure that I know the status of that title before I ever buy it so you can
see a contract for deed can be very good for the seller because it provides
seller protection sellers protection and it also provides them with a stream of
income it's good for the buyer because it makes it easier to negotiate a no
money down deal with a seller you can you can buy a piece of property so you
can have a positive cash flow on it and I'm not concerned other than other than
the need an awareness of the need to protect myself I am not concerned about
not having title until I pay for the property if you'll jump ahead three
pages to the example summary on technique number 18 at the top of that
page or right above the example summary in that big paragraph there beginning in
addition it talks about all the things that you need to address in that
contract for deed and this is why I recommend that you have an attorney
involved at least in your first one fire insurance condemnation divorce
bankruptcy mentally incompetent dying you should address all of those things
and that is one good reason to have the seller execute a deed technique number
19 to for a portion of the purchase price the purpose of this technique is
really to serve as a reminder to you that even though we talk frequently
about having a mortgage and a note on property one mortgage can secure a
number of notes one mortgage can secure multiple notes and most people who are
entrenched in a traditional way of buying property don't even think about
that in other words I say to Monica who's a seller of property Monica I'd
like to buy your property take over your mortgage and I'd like to have you take
back a mortgage and note for me perhaps at an agreed upon rate of interest with
no payment of any interest at all for a period of time and then I'll kick in and
make more payments down three four five year and money God stop it she says I'm
not interested in that well maybe we can find a way to make that more palatable
palatable for her and that's what this really really is talking about let's say
well beginning at the beginning at the second paragraph of that technique
assume a seller has a three-bedroom two-bath home on the market for
$95,000 there's an existing $46,000 mortgage on the property which means
that the seller's equity is 49,000 in return for obtaining his or her purchase
price the seller is willing to carry back a mortgage for the balance at the
going market rate of interest the fair market rent rate on the property is 750
you offer to assume the first mortgage and give the seller a second mortgage
with two notes now here's a mortgage for 49,000 with two notes one for $25,000 at
an agreed upon rate of interest and another note for $24,000 also at a
agreed upon rate of interest but with the interest deferred for five or six
years I think here it says six years at that time both of the notes plus the
unpaid interest will become due and again in the next paragraph third line
down you see the two words make sure it is not compounded as a matter of fact to
show you the effect of compounding in a six-year period on an on just a small
note of $24,000 interest on 24,000 at 9% per annum for six years is
$12,960 if it is compounded monthly at $17,100 isn't that amazing and that is
in a period of just six years so here we're paying on this and deferring this
so this is well I like the idea that first note being you're paying on that
first note but I need to get some additional money toward that second
note could you then say well I'll tell you what let's do some sort of an equity
participation or rental participation to give to give you a extra money is kind
of a little sweetener I'll give you 5% of the net operating income to the extent
that it exceeds the amount that we've we've shown in the projections what we
talked about being creative sit down and and think about what what what could we
do to make this work and I'll be the first to tell you that the big problem
there are two problems connected with creative finance I don't think anyone
could come up with them anyone have any idea what they are boy you're sure head
in the right direction sellers fears in terms of not understanding what we're
doing or not understanding why it's such a departure from the norm they don't
understand that so they say no and you know what the other part is and I hate
to say it how many are real estate brokers here yeah that's the other side
real estate brokers you know how in the world that just adds to the problem I
mean here here we've got we've got a seller that's potentially going to be
confused and we talked to a real estate broker who's living within that small
box and we can't we don't have a chance to sit down with a seller and I know
Julie up here in the front is a real estate broker but she's also an investor
and and bless your heart for being here my thank you very much and for all of
you who are real estate brokers but that is the biggest problem is getting
through to the seller and being able to sit down and and going through here are
the benefits you know this is a selling job we've got to sell the seller on why
the offer we're making to him to him or her is good for them as well as for us
multiple notes one mortgage a pledged asset mortgage I want to read this first
paragraph I'm kind of proud of this while bankers seldom come up with
creative alternatives to buying a property no money down several banks in
the United States have done this very thing well I have been teaching this
technique for years and recently bought a property using it a pledged asset
mortgage is finally beginning to get some recognition among real estate
bankers and is being reported by real estate journalists here it is in a
nutshell I'm an investor I want to buy this property that's on the market for
$100,000 I want the banker to loan $80,000 to me the banker insists on my
putting 20% down on the property and I say no I don't have the 20% down to put
on the property or the seller is willing to carry 20% secured by another property
the banker doesn't like that either so I say to the banker what if I get a friend
to put $20,000 in your bank with a CD and pledge that against the mortgage and
this is what bankers are more and more now willing to do amazing I mean it
looks pretty safe and straightforward to us doesn't it but believe it or not
until very recently this was not being done what is really interesting about it
is that I'm the buyer of the property the CD is in riches name how much of my
own cash do I have in that property zero why is that any different than if that
property if that hundred thousand dollar property could be bought for 80,000
asking the bankers alone the entire 80,000 it's no different is it Albert
because my my upfront risk is exactly the same but the bankers maybe maybe this
is the first tiny baby step toward coming around to to to to being a little
bit more liberal in the way they they approach institutional investor lending
yes is there any rest to the person that puts a $20,000 up absolutely there is if
you go into default on the mortgage they're going to they're going to their
the bank is going to take the $20,000 CD and they're also going to take the
property there is indeed a risk yes Renato how long would they keep the CD
in the bank he's saying that would be negotiable it could be until the mortgage
of 80,000 has been paid down to 60,000 or some portion of that but that would be
negotiable I mean it's like I would like to say to a banker look I've got a I've
got a 40-foot yacht that's paid for I'll give you title of that as a pledged
asset in lieu of a CD I know what they'd say no thank you oh we'll loan you money
on the $40,000 yacht they would say but we won't allow you to pledge that asset
or I've got a timeshare or I've got vacant land or whatever they haven't gone
that far yet but I bought a piece of property a year before last and I and
the seller remember I told you every seller will sell their property no money
down every seller will provided they are at a adequately collateralized and
number two can live with the time that's the key I bought this piece of property
and I talked to seller about taking back a mortgage no interest I by the way I
never talked to the seller one time not once I've never met him I wouldn't
recognize him all through a lawyer and fortunately a good one at any rate I
said what about a purchase money mortgage no no interest and finally I
said just as a long shot I said what about taking a note secured by a letter
of credit from a bank and I he said I would do that if you can get a letter of
credit well then I went to my bank went to a number of banks as a matter of fact
and I said would you give me a letter of credit to secure the payment of a note
due in 15 months one bank said we've never done it we never will another
bank said I'll take it to loan committee and we'll talk about it another bank
said fortunately the one I deal with said I think we could do that he said
generally letters of credit are issued by us to to guarantee payment of notes
made by corporations that have a highly cyclical business like for example
corporations that that can fruit or the canned vegetables where the in some
parts of the year their their their businesses is nil other parts of the
year they need a tremendous amount of cash and he said we usually secure a
letter of credit by inventory and I got thinking well what's my inventory my
inventory are equities that I have in property so I said would you issue a
letter of credit secured by equity I have in a property and he took it to loan
committee and got back to me in one day he said we'll do it so I got a letter of
credit from a bank it cost me one half of 1% the mortgages were filed that
cost me a little bit of money but not much and I did something that the three
banks had never heard about I don't think this is far as I know is probably
new every place but it just shows you that there are some creative ways to
solve a seller's needs for security and because of that letter of credit I was
able to negotiate zero interest for 15 months we were talking a moment ago
about a pledged asset mortgage when someone asked the question if you're
pledging a CD or a friend is or whatever to compensate for the difference between
the value of the property and what the bank is loaning on it who gets the
interest on the CD the answer is that would either accumulate with the CD or
it would be paid monthly whatever the arrangement is with the bank but it
would be the interest would be paid to the person who owns the CD putting
government programs to work for you sometimes we will find a property that
needs to be rehabilitated and maybe we have the financing needed to acquire the
property but we're concerned about how we're going to get the property rehabbed
after we buy it I can recall in one case where I that very thing happened to me
where I bought a piece of property and in fact it's the one that that I was able
to borrow money and pay cash for and then went out and refinanced put a loan
equal to what I paid for the property and in essence had bought it no money
down within 30 to 45 days after my original acquisition but then the
property needed to be rehabbed so hearing that there were some government
programs available I went to our City Hall in the town where it was located
and I just said do you have any programs available for rehabilitating property
and they said as a matter of fact we do where is it located and I told them and
they said yes that fits within the boundaries of the area that is targeted
for this program and I believe from what I was able to understand then that it
was 100% federal money that was funneled down to cities and towns throughout the
United States on a 50-50 proposition it was up to $7,500 per unit I had two units
I had the home and then a cottage behind it so I was entitled to get $15,000 for
those to rehab those properties but it was on a matching basis so if the cost
for the two for rehabbing both units had run $14,000 even though the maximum
amount that they would have been willing to loan me was 15 I would have only
gotten seven because I had to match the amount of money that was going into the
units well the total amount as I mentioned they would loan or grant was
$7,500 per unit a total of $15,000 there were three ostensibly three bids that
the that the city employee had made on the property they took care of
everything and would it surprise you to learn that the three bids came in
between 29 and $30,000 isn't that just probably just coincidence right these
companies that are bidding on that they were all wired they knew exactly how
much they could spend and so it cost $29,800 and I put up 50% of it could I
have had that work done on my own yes I sure could have and I could have paid
for it on my own and I would have estimated based on what I saw and the
work that was done that it would have cost probably in the range of 19 20 21
22 thousand dollars to do so I know there was a premium paid but I still
only cost me just a little bit under $15,000 out of pocket what this chapter
is designed to do is to remind you that there are many many government programs
out there available to you if the property you have fits within certain
parameters or if you as an individual fall within certain guidelines every
state in the United States has some sort of a housing program and as I say in the
first chapter that can run from four housing programs in a couple of states
up to 25 programs in California and Wisconsin I literally counted for every
state and the least had four the most had 25 housing has been a very important
part of the agenda of state and federal and even local governments for a long
long time these programs are designed to help people that fit into the category
listed there on that page for example you would qualify for one or more of
these programs if you are a first-time homebuyer a low or moderate income home
buyer a disabled or handicapped person a minority a woman American Indian
property with an environmental hazard if you're elderly if you're delinquent on
mortgage payments if you want to build low-cost rental units if your
neighborhood needs revitalization that's where my property fell in that category
if you're a migrant farm worker if you live in a mobile home rental park you
want to make more make your home more energy efficient if you live in a home
with dysfunctional plumbing or live in property with lead paint or like to own
a family farm I mean can you but is there wouldn't we all qualify at least
for one of those if there's any problem it is that many many of the government
fund government programs while they are not defunct are not regularly funded and
as the government cuts back on spending Congress says well we're gonna leave
that program intact but we're not gonna fund it this year or we're not gonna
fund this program this year so you're gonna have to do a little bit of
research to determine which programs are active and which you might qualify for
what I would do would be to begin by looking at the telephone directory for
your own city or county government and look for anything that says housing in
it and just call them and say do you have any special housing programs and
they'll say in regard to what say any housing programs at all either for
first-time purchasers or rehabbing properties or whatever just begin there
you could also get call your telephone company and get a directory for the
state capital and ask them to send you that directory and go through and check
your state capital to see if they have any any any real estate programs there
look at the list of federal government programs I'm not going to get into these
some of them are funded some of them aren't and probably since this printing
there may be more that have been added rural rental housing rural rental
assistance rehabilitation mortgage insurance 203 K let me just point out
before you leave that particular entry there that the 203 K program can be used
to buy properties that need to be rehabbed and the program will also
provide money for the rehabbing check out a 203 K program yes question is can
you also use a 203 K program after you purchase that the answer is yes what
they will do if you're buying property for me Albert and the property needs to
be rehabbed they will appraise the property it's not truly an appraisal but
they will estimate the properties value as of its fix up after it's fixed up
and they will loan you money to buy the property and also loan you the money
necessary in one mortgage to to fix up the property mortgage insurance
construction or substantial rehabilitation of condominium projects
mortgage insurance for homes there's a 203 B program mortgage insurance homes
for low and moderate income families mortgage insurance homes and urban
renewal areas mortgage insurance manufactured home parks purchase of
units in a condominium rental housing rental housing for moderate income
families in the elderly rental housing for the elderly rental housing in urban
renewal areas supplemental loan insurance multi-family rental housing
mortgage insurance for the purchase of refinancing of existing multi-family
housing projects housing for the elderly are handicapped government
development block grants and entitlement loans community development block grants
for small cities program now Stan just asked whether there are some programs
that actually are forgivable and this happens to be the one that I got that is
forgiven at the rate of 20% per year so if I sell that property prior to five
years having elapsed then I will owe the pro rata the remaining part that has not
been forgiven obviously I'm not going to do that I'm going to wait for five years
and then I'll then I'll sell the property section 8 low-income rental
assistance we'll be talking about that a little bit later many banks will handle
these mortgages that generally is the that is the primary source for dispersion
of these funds although mortgage brokers are involved as well Ronaldo as a matter
of fact that reminds me to tell you that you could contact a local mortgage
broker in your area who is active in loaning money that is insured or
guaranteed by the federal government and ask them what loans they have available
the 203 K program that I just mentioned has been around for some time I tried to
use it about six seven years ago and one bank was making loans available through
that program only one in the area and here's a good example if I go into
another bank they said we don't handle that because it's just it was so
cumbersome and as I got into the loan I could see why it was so cumbersome the
paperwork and and all the requirements that they placed on me as a borrow I
finally said to heck with it well about two years ago our president said we want
to make the 203 K program more more readily available to investors and owners
throughout the country so all of a sudden it was loosened up and it's now
easier to to get the 203 K loan
again that chapter or that portion of that chapter is just a reminder not to
overlook just I mean there are five hundred million dollars I believe that I
heard for some programs that that are going unclaimed just because people are
not aware of the programs and not taking advantage of it so just just tuck that
in the back of your mind and be aware that there are many many programs that
you might not hear about you know it's kind of interesting that the government
tries so hard to provide monies for all of these different classifications of
people and once they do how do they get word out that that money is available
well that's that's a problem advertising that the that the money is there so you
might have to do a little bit of research on your own to to determine
which programs are going to be applicable to what you're trying to do and
what you're going to be available in your in your area okay in summarizing
chapter 13 I'd again like to emphasize that while it's not crucial to master
every one of this these techniques you should go back and review them until
you've gained a comfort level with the with the thought process behind each one
also keep in mind that it's possible that you may never use any of these
techniques exactly as I've outlined here but try to understand the creativity
involved in solving a specific problem that you may be confronted with
remember you are now a creative problem solver consider it a reality that no
seller has a problem that through your creativity would prevent you from
finding a way to buy his or her property in a win-win transaction realize
however that there are many properties that you would not or could not choose
to buy but don't let that stifle your ability to offer many solutions to the
problem we also learned that there are some really great ways that all levels
of government can help us as real estate investors all states have agencies and
programs designed to meet the various housing needs of the American people and
after all these programs are paid for by us so why shouldn't we take advantage of
the opportunity to participate simple research is a key to locating programs
best suited to your needs for a more expanded treatment of government
programs I suggest that you consult my video getting your share using government
programs for guaranteed profit which is available through the professional
education Institute now let me ask you how would you like to buy a property no
money down and see that the seller walks away with cash in his pocket better yet
how would you like to buy property no money down and see that you the pyre
walk away with cash in your pocket it's not difficult and in chapter 14 you'll
learn all about it we rented all of our lives almost I know what it feels like
to rent Jean Benson is a minister from Louisiana he and his wife have used my
course as a vehicle to supplement their income and further benefit their
ministry well we've had the course for five months our net income after
expenses is $700 a month we've got about $120,000 plus money we didn't have
before we've got started on this no money down I have not taken money out of
my pocket to do it I did this figuring up the other day and my net worth 18
months ago was negative and I could even native net worth and my net worth right
now today is nine hundred and two thousand six hundred and forty seven
dollars almost a million dollars that's unbelievable I never had a million net
worth my whole life chapter 14 converting paper to cash and taking cash
out of closing now some sellers are not able to sell their property unless they
receive some cash that comes as no surprise we face that every day and I'm
talking about not want are not not want but need they need cash so are there any
ways that we could help them generate cash even though we might buy no money
down well converting to paper converting paper to cash may be an
alternative for them now most people know that if you have a promissory note
from someone that that note can be sold for cash if Stan owes me five thousand
dollars and it bears a reasonable rate of interest can I go out and sell that
note for five thousand dollars well I could legally do it but would I be able
to do it from a practical standpoint no way could I get a buck for it knowing
Stan probably not now sure I could could I get three thousand dollars for I don't
know it's whatever the market will bear someone's gonna say well who's this Stan
guy and they're gonna say well how seasoned is it how many payments is he
made what is the interest rate when is the due date all of these things are are
going to go into a determination of whether the note is readily convertible
to cash and how much this is the one that most people know about selling
paper at a discount but look at number two collateralizing the paper you might
be able to go to a lender private or institutional and say look I got this
five thousand dollar note from Sam from Stan I want to use this as collateral to
borrow money and I would bet that there are some hard money lenders that might
do that the beneficial finance type people number three use the paper as a
down payment to purchase real estate this is probably one of the best ways to
use a note that there is because many times you can use a note at full face
value I'm amazed at the number of times that people do not think about using
dead equities to buy property dead equities that you have in the form of a
boat or travel trailer or a fancy automobile that you can't get rid of or
a or a timeshare or vacant land get it appraised how many of you had of a dead
equity right now other than wives or husbands or am I in trouble let me see
your hands again how many have a dead asset look around there's 50% of the
room you mind my asking what would tell me what they are a camper a boat timeshares
in where in Cancun okay vacant land someone said you know all of these
things people say why in the world did I ever buy that and now I can't sell it
get it appraised use it as a down payment on property it is a very best
way to get rid of it number four create multiple notes using one note as
collateral if you had a note for a million bucks would that be easily
saleable what did it what if you sold it if it was a good strong note and you
sold it a discount of 40% for 600,000 is that readily a sale of readily
saleable well you say yes but how many people have got 600,000 bucks what if
you created 500,000 notes for two bucks apiece a lot easier isn't it has this
ever been done you bet let me tell you what some of the big
wirehouses some of the big stock brokerage companies are doing they're
buying huge amounts of federal paper United States government paper they'll
buy five hundred million dollars worth of paper and those that five hundred
million dollars will then go into it into a vault and they in turn will issue
paper using that five hundred million dollars of security and they'll go to
rich and me and Ronaldo and they'll say would you like to buy a bond of a for
thousand bucks secured by all that paper they're doing it every day you've heard
of cats and stripes and tigers that are issued by national stockbrokers a cat
is a certificate of a cruel Treasury security and they have their own names
to it and what they do is earn a spread they get a spread between the five
hundred million pay what's paid on that and what they have to pay you on the on
the stripes and the Tigers very and very creative you know when you're dealing
in just hundreds of millions of dollars just a just a fraction of a percent can
can amount to a whole lot of money I mean look at the Fidelity Fund and some
of the other huge mutual funds that are there they're working with three eighths
of a percent a half a percent in terms of management fees and overrides and oh
it's literally millions of dollars when we talk about a point in connection with
a loan or borrowing money in real estate one point is equal to 1% so one point on
a hundred thousand dollar loan would be $1,000 points are further broken down
into what they call basis points 100 basis points equals one point so a basis
point is really 1 one hundredth of 1% and finally sell income from the note
this is very frequently used we're going to be talking about this and we get into
the chapter on mobile homes a powerful way to generate cash if you have a
particularly high yielding high yielding note sell a stream of income to someone
you've got a you've got a note that is payable a hundred dollars a month for
60 months five years if I've got a hundred dollars coming in tomorrow
literally and I've got some history to that borrower in other words I know that
the borrower's guts is paid on time in the past and I need I need money today
will anyone give me a hundred dollars for that note that's due for that
payment that's due tomorrow probably not but I bet I could get 98 or 97 dollars
for it what if I want to sell tomorrow's payment plus the payment due a month
from tomorrow well using a financial calculator how many of you have a
financial calculator you know I I existed without a financial calculator
for years and years and you don't need one but I think you might find it helpful
so I have developed a course which includes a financial calculator if any
of you are interested in getting one it's a real quick way to figure out
amortization and monthly payments and what the return on investment is it's
available through the assistance of the Professional Education Institute but
using a financial calculator you can determine very quickly that that if Tom
here is looking for a 20% return on his investment we've got a stream of income
coming in a hundred bucks a month for the for the next indefinite period of
time how if and I want to sell 20 months of stream of income in other words 20
payments of $100 each and he's looking for 18% return on his money what's he
willing to give me for that well you can figure it out very easily so these are
different ways that you can convert paper to cash taking cash out at closing
how many of you have ever bought a piece of property and taken cash out at the
time of closing would you look around please leave your hands up one two three
four five six seven eight nine ten eleven twelve people in this room that
is fantastic you know we are programmed to believe that you can't buy real
estate without putting 20% down and without having great credit and it's a
hard enough job to get across to people that you can buy real estate no money
down when you talk about buying real estate and taking cash out at the time
of close it blows their mind oh how can you do that well there are a number of
ways you can do it and I'm not going to insult the intelligence of anyone by
telling you that you can take cash out of a closing with every property you buy
it doesn't happen that way it happens with me on an average maybe maybe once
maybe twice a year but the point is if you don't know what to look for and you
don't know how to how to question the seller and how to structure it to do
that it'll never happen I bought a piece of property year before last I took
fourteen thousand dollars out at the time of close right after that I bought
a property and took twenty some hundred dollars out at the time of close it can
be done if you know how to do it now most of the techniques the no money down
techniques we've gone over already can if structured the right way allow you to
take cash out of close some of them will allow that but let's look at a couple of
different ways that specifically are aimed at taking cash out of close seller
rebates at closing out of curiosity those of you that raised your hand is
this how you were able to take cash out at the close seller rebates no okay you
Tom okay here's the essence of this technique I'll read assume you find a
hundred thousand dollar two-family property with a mortgage balance of
thirty five thousand that means that the seller's equity is sixty five thousand
go to a lender and request a fifty five percent mortgage or in this case fifty
five thousand dollars is it easier to get a fifty five percent mortgage and it
is one for ninety absolutely it is absolutely as a matter of fact many
lenders now have what they call no doc I think I mentioned that no doc or no
qualif no doc no documents required or non qualifying loans for loans up to 60%
or less of the value of the property so you can get a loan like that and
generally they will check your credit but they will not verify employment they
will not do all of the due diligence that they would do if you were going in
for an 80% loan so we're suggesting here that you get a fifty fifty five thousand
or fifty five percent loan these mortgages fifty to sixty percent of the properties
value are relatively easy to get they're frequently called no doc loans the bank
does not verify or document the information you give them instead they
rely only on your credit report and your equity in the property the seller agrees
that once the underlying mortgage of thirty five thousand is paid the
remaining balance of twenty thousand that is fifty five minus the thirty five
that you pay equals twenty will be split fifty fifty now here it is we go to the
bank and we get a fifty five percent mortgage which is fifty five thousand
dollars we're going to pay off that existing thirty five thousand dollar
mortgage leaving twenty thousand dollars lying on the table and we've read here
that the seller is willing to split that with you fifty fifty the seller now has
relief up here at the overhead from the thirty five thousand dollar mortgage
plus the seller has also gotten ten thousand dollars hasn't he or she what
was the seller's total equity in the property answer sixty five thousand since
they've already gotten ten thousand dollars in cash what is the remaining
equity fifty five thousand dollars we're going to give that the fifty five
thousand dollars to the seller in the form of a second mortgage on the
property so when the smoke clears you have bought that property for a hundred
and ten thousand dollars is it okay to pay more than the seller is asking for a
property sure depending upon the terms as we said many times you've paid a
hundred and ten thousand dollars for the property a fifty five thousand dollar first and
the seller is taking a fifty five thousand dollar second but in reality
you only paid a hundred thousand because you put ten thousand dollars in your
pocket as the buyer and I have done that I've done it in several ways
I've done it as an outright gift I've done it as what Jane I'll bet you've done
this for haven't you for fix up and sometimes the the fix up doesn't cost
ten thousand dollars any questions on that now I can guarantee you no seller
is going to sell their property to you and say let's see you're going to get a
fifty five mortgage we're going to pay off the first that's going to leave
twenty thousand dollars you give me the twenty thousand they'll say and I'll take
back a forty five thousand dollar mortgage and if you didn't know any
better you'd say okay rather than saying why don't we split that twenty thousand
dollars give me ten you keep ten and I'll give you a mortgage for fifty five
thousand is a seller really in any worse position I mean not much not much
property still a still a hundred percent financed basically again recognizing a
situation or recognizing a seller might do this is an important part of of this
technique technique number two this is a unique approach to a bank-owned property
as you know when banks loan money they will take back a mortgage on the
property that they're loaning on and we also know that when the property goes
into default if it does the banks are going to take back that property as an
REO meaning real estate owned they will foreclose on the property if you would
go into a bank today almost any bank and you said what kind of REO properties do
you have they're going to have probably a whole variety but which properties of
all the kinds that they loan on are generally going to be the most difficult
for them to sell vacant land would certainly be one partially completed
condominium projects would be another one partially completed commercial
projects what Bob partially completed commercial right I mean if you go to a
bank and you talk to him about REOs you would love to have him say well we got a
great little three-bedroom home in a suburb and it's got two baths and and
it's a bread-and-butter property for 65,000 but that just doesn't happen it
really doesn't in fact I became very irate I heard of a I heard of a
condominium in Charlotte North Carolina that was on the market it had a value of
about 60 to 62,000 and an REO it was taken back as an REO by a savings and
loan and I called the I called the lender and I said what are you asking for
it he said well we don't know he said what are you willing to offer so I faxed
him an offer it's going to require about four or five thousand dollars work and I
faxed him an offer of forty one thousand seven hundred and eighty dollars and I
didn't hear from him I finally called him back and he said well we've got to
take it to committee and one of the people's are sick called him back again
and he said now we've got a problem with someone traveling it was like this for
two or three weeks finally I called him he said oh we got a better bid I said I
wasn't aware that I was bidding he said well yeah we got a better bid we sold it
for forty nine thousand eight hundred would I have paid forty nine thousand
sure I would have just one of those one of those matters of communication that I
lost out because I wasn't local and because I wasn't aware of the
circumstances under under which I was bidding I I would probably have gone in
at a higher price and even ask them for financing but I I figured with a
potential fifteen thousand dollar profit with a little bit of fix-up it was worth
doing it the way I did it anyway if you go into a bank and you ask them about
the REOs that they're having the greatest amount of problem getting rid
of it's probably going to be vacant land now here's what you got to remember
when a lender a bank loans money on vacant land they generally will not loan
more than 50% of the value of vacant land unless it is an approved subdivision a
lot in an approved subdivision then they will go up to 75% so if they've got
attractive land whatever they've got in that probably represents about 50% of
the value of that property now here's another fact that most people don't know
and that is that banks when they take back an REO will have that property
appraised immediately to determine its value for their books they always have
it appraised so if you can determine that a bank has a piece of vacant land
let's assume that they've got $60,000 I think this corresponds with the figures
in the book $60,000 in a piece of vacant land it would not be unrealistic for you
to ask the bank what the appraisal showed and it should show a fair market
value of a hundred and twenty thousand now let's say that you said to that
banker we're not going to do this because we don't like vacant land but
let's say that we said to that banker would you be willing to loan $60,000 on
that piece of vacant land if you will I will buy it from you the chances unless
you were an extremely credit worthy borrower the chances of them loaning
$60,000 to you are very remote because they've been through a foreclosure one
time they don't want to do it again but we're not going to even try that I was
just going to put that in as an aside what I want you to do having identified
a situation like this I want you to go to your buyer's broker and tell them to
go through their multiple listing book and see if they can't come up with a
larger property for example a multifamily property that might be on the
market with a fairly low mortgage and so they find one here's this multifamily
property that's on the market for two hundred and sixty thousand dollars it's
an apartment building there is a one hundred and fifteen thousand dollar
mortgage that may or may not be assumable the seller's equity is a
hundred and forty five thousand dollars what you do is offer the seller of this
property you offer to buy it for two hundred and sixty thousand you tell them
that you will give them no you tell them that you're going to assume the first
mortgage if it's not assumable you'll make a contingent upon financing you're
going to give them the piece of vacant land as a down payment on the property
if they will sell you that way sell sell the building that way contingent upon
you getting getting the vacant land what you would then do would be to go back to
the same bank and the book here contemplates in order to make it a little
bit sweeter for the seller of property you're even willing to give them a
premium of two hundred and seventy five thousand for their apartment building if
you have to do it you certainly wouldn't start out that way you go back to the
back to the bank that has the piece of vacant land and you say I will buy that
piece of vacant land from you for your full asking price of sixty thousand
dollars provided you will give me a new first mortgage or a second mortgage can
banks make second mortgage loans sure they can or a second mortgage on an
apartment building that I'm about to buy now here's this apartment building for
two hundred and sixty thousand as an investor how much can you borrow from a
bank on an apartment building Tom what's your experience
yeah sometimes 80 let's assume that you borrow 80 80 percent 80 percent times
two hundred and sixty thousand is two hundred and eight thousand dollars if my
math is correct that right two hundred and eight thousand dollars now watch
this this is presuming by the way that this mortgage here is not assumable to
a degree some of these figures correspond with what's in your book but
we're pretending in your book like the mortgage is assumable and we're also
pretending like in order to make it sweeter for the seller we're willing to
pay a premium for the property and give them two hundred and seventy five
thousand let's let's in this case take a worst-case scenario and say that the
mortgage is not assumable we got two hundred eight thousand dollars lying
here on the table how are we going to use it number one we're going to pay off
the non-assumable first mortgage of a hundred and fifteen thousand when we do
that that's going to leave ninety three thousand dollars left you with me this
ninety three thousand dollars will then be used to buy the land from the bank
that's going to leave thirty three thousand now in our offer to the seller
we said seller you've got a hundred and forty five thousand dollars equity in
the property we're going to give you the vacant land at full appraised value as a
down payment and we now owe you twenty five thousand bucks if you've gotten an
eighty percent mortgage on the property and you've paid off the first mortgage
and you've bought the vacant land from the bank that's going to leave you with
thirty three if we pay twenty five thousand dollars to the seller we've got
eight thousand left that we can put in our pocket win-win situation here I know
there are many people who have properties on the market for sale that
are not selling that would love to have an offer for a full price or even a
little bit of a premium and would take vacant land in trade I've been in that
position where I would have what have you really paid for this property what is
your cost of this property
the mortgage amount of two hundred eight thousand plus if you subtract from that
the cash you're going to put in your pocket remember we got to give the
seller twenty five thousand we had thirty three thousand left after buying
the vacant land and after paying off the mortgage we got thirty three thousand
left we got eight thousand in our pocket we really paid two hundred thousand
dollars for that property everyone okay with this technique you understand I
borrowed eighty percent against the purchase price of 260 that's two hundred
and eight thousand the two hundred eight thousand is lying here on the table a
hundred and fifteen went to pay off the old mortgage ninety three thousand was
then left I used sixty of the ninety three to pay to buy the land from the
bank that left thirty three thousand I gave the seller twenty five of the thirty
three that left me eight thousand dollars cash that I put in my put in my
pocket now when the smoke clears I owe two hundred and eight thousand dollars in
the form of a first mortgage to the bank so two hundred eight thousand minus the
eight I put in my pocket is two hundred thousand dollars am I right but still if
that's the case I bought the property for about seventy five percent of value anytime
you can use something at full face value whether it's a dead asset whether it's a
zero coupon bond whether it's a piece of vacant land you're buying from a bank
that's in foreclosure I mean an REO property and can convert that to equity
in an income property or you're in great shape very good Tom thank you that is an
excellent idea he said he has used that with realtors before giving them a dead
asset in lieu of a commission if they're not willing to loan the commission to
you at least would you take my sailboat that's worth about five thousand dollars
and that happens to be the brokerage commission that is do you and they say
yes good point thank you Tom rich is saying what is the owner what in the
world is the owner going to do with that piece of vacant land that really is high
priced well I don't know rich let's look at it this way if it appraises for a
hundred and twenty thousand based on comparable sales in the area and that's
what the bank determined then is really not overpriced it is at retail price
what's he going to do with it or what she going to do with it I don't know
we've got to presume here that the owner of this apartment building wants to sell
the apartment more than he is not willing to take the vacant land and
trade and if you understood that you are a lot better person than I am the need
to sell is greater than the resistance that they might have for a piece of
vacant land I love the thought of taking cash out of closing and it doesn't happen
a lot as I've said but it'll never happen if you're not tuned in to the
techniques that will allow you to do that recently I developed a videotape
taking cash out of closing that if you're interested in pursuing more
techniques or or developing a kind of an expertise in this area this video is
available through the assistance of the Professional Education Institute how to
take cash out of closing when you buy property a little bit of a recap of all
that we've been over for the last four chapters or three chapters I guess on
creative financing and that is that it is so important to repeat what I said
already that you that you do everything you can to understand the situation of
the seller the situation the property and that you know your own situation
well that sounds like something silly didn't I mean you stand up and say you
know your own situation but but Janet do you know what you know what the
value of your whole life insurance policy is you know what the equity and
this property is worth you know what this debt equity is worth do you know do
you know you know you really really understand your own financial situation
and so that is important what is the situation of the property will it rent
for 550 is the seller says or can you really get 600 will it really rent for
650 is the broker says or can you only get 600 and what can reasonably be
expected with regard to the expenses of the property how much how much net
operating income will you really have and how much positive cash flow will the
property generate and how about the seller what is the seller's real
situation we only know it because of what the seller put into the listing
sheet where it says motivated seller make all offers and we only know what the
real estate broker has been kind enough to to share with us and they've got to
be careful because they got a fiduciary relationship with the seller and and
they can't disclose anything that might ultimately harm the seller if we can
possibly make contact with the seller ourselves whether brokers involved or
whether they're not it certainly helps us but brokers do not look kindly on
that on that thought once you learn all those things then go to that creative
options grid that cog chart and look for all of the all of the possibilities all
of the of the possible techniques that you can use in buying that property and
none of these techniques are cast in stone they are meant to be shortened
abbreviated expanded combined molded change to fit your situation and the
more and more you use them this way the more creative you're going to become and
the more property you're going to buy questions well I've been saying if you
put 20% down on a piece of property for example a $50,000 property where you're
putting $10,000 down would it be wise to go to a bank and immediately try to
refinance a property pulling that out so you could go into another property yes
if that's what it's going to take for you to get another property or to free
up some cash in other words if if you have if you are thoroughly acquainted
with your own financial situation and you said I'm going to take $10,000 which
I fortunately have and I'm going to commit that to my real estate investing
and you find a deal you can't pass up that really requires all that ten
thousand would you then go to a bank and try to get that out the answer is yes I
think but on the other hand I can see that if some of you had ten thousand
dollars to put into a piece of real estate and and and you bought a real
estate and you bought the property absolutely conventionally I mean you put
ten thousand dollars down and you went to a bank to borrow forty thousand and
the property generated a $200 a month positive cash flow even though that may
be a strict departure from what I've been teaching here is that a bad deal
no way I mean a $200 a month positive cash flows 2,400 a year on a ten
thousand dollar investment that's 2,400 bucks so again that the thrust of this
course is to help people that don't have cash that don't have credit not to help
wealthy people like you Albert or is it your wife that has all the money I
okay let's review chapter 14 don't be overwhelmed by the terminology of
converting paper to cash it simply means taking an IOU and finding someone to
give you money for it the beauty of it is that by merely writing on a piece of
paper that you will pay someone money at a later time you can actually get money
now for it recognize that the power in this is that you can buy property no
money down and the seller can still actually get a down payment the five
techniques that I've outlined to do this as in all creative no money down
techniques can be combined expanded twisted reverse whatever simply by using
your creativity remember you are a creative problem solver now taking cash
out of a closing is really exciting for people and it happens all the time in
fact I get lots of letters and students tell me that telling me that they've
they've left closing tables with 10 20 even $50,000 I hope you'll write me when
you do it too let me share another very simple way that many students leave the
closing table with cash and it's called a simultaneous refinance you can use it
when you buy a property at below market value then at the same time arrange with
a lender perhaps the same lender is making a loan on the property you're
purchasing to refinance the property or you can put an equity line of credit on
the property perhaps secured by this and other property you own I call it a
simultaneous refinance but sometimes you may have to wait a month or two before
the bank will do the refinance any cash that you take out on a close like this
is actually tax free at the time you don't pay any income tax on it it's just
a loan know also that the more financing you put on a property the less your
positive cash flow will be but there are many ways to increase your positive cash
flow through smart property management and I'll be going into that in detail
in chapter 21 we've discussed three ways here to buy property and take cash out
at the closing I believe that this has become a fairly popular area of interest
because I've received letters so many of my students sharing different ways that
they've done it so I put together a video which contains 10 more techniques
to obtain a copy of how to get cash at closing when you buy real estate contact
the Professional Education Institute we've gone through many creative ways to
buy property with no money down but perhaps the best way is yet to come in
chapter 15 we'll discuss it it's called using options we're causing on our third
property that we invested in we left the closing table with a check of forty
seven thousand eight hundred and eighteen dollars ninety five point we
also have another property that that we purchased that we left the closing table
with thirty three thousand two hundred and twenty eight dollars that's over
eighty one thousand dollars with just two transactions I've basically bought
twenty twenty one units at with no money down and I've pulled out a hundred and
sixty two thousand dollars cash at the closing hundred sixty two thousand
spendable cash and spendable cash at the closing tables I get about a thousand
dollars a month positive cash flow on my rental properties that's misleading
though because within the past year or so I have pocketed sixty thousand dollars
cash just by buying property let's talk about options oh this is so powerful how
many of you have ever bought a piece of property using an option technique isn't
that amazing only one and I'll tell you you're too good you are you are missing
such an incredible opportunity generally buying property using an option technique
is a no money down zero interest deal and the nice thing about it is if you
structure it right and I'm going to show you how to do that right now you can
really get multiple pay periods if you will out of a lease option how an option
works in its simplest form an option is nothing more than an agreement between a
buyer and seller where the seller gives the buyer the right to buy a piece of
property at a predetermined price and predetermined terms or formula for price
and formula for terms for example Bob up here in the front may say I will give
you the right to buy my property for sixty five thousand dollars for a two
year period and and if you elect to do that by putting five thousand dollars
down I will take back a mortgage at 8% interest for the balance that would be a
predetermined price predetermined terms or Bob may say I will give you the right
to buy my property anytime up for a period of three years and at the time
you elect to exercise your option the property will be appraised by three
appraisers and an average will be be used to determine the selling price or
we will plug in a base price right now and we will apply a consumer price index
increase to that price I don't like formulas for price I like
predetermined prices an option contract is a unilateral contract binding binding
only on one of the parties and that is the seller the seller has no choice but
to sell if we wish to buy but we as the buyer can walk away if we want to and
elect not to buy a real estate contract where there's an agreement between a
buyer and a seller to buy and sell property is a bilateral contract binding
on both if I'm trying to buy Renato's and Ronaldo's property and I've got a
written contract to do it and Ronaldo changes his mind I can go into court and
file a suit for specific performance in the court it's going to say Ronaldo
you've got to sell to Carlton they'll make him do it on the other hand if I
elect not to buy if we've got a contract generally the contract at least ours
does as you'll see in a little while we'll say that in the event that the
buyer fails to purchase the property is contemplated in this contract then the
deposit this day page shall be forwarded to the account of the seller so that
really is a liquidated damages clause if I default as a buyer he gets my deposit
and he can't make me buy the property but again an option is a unilateral
contract meaning that if back to Ronaldo if he's a seller and I say
Ronaldo I want to buy up and he gives me the right up to two years he's got to
sell I can enforce it in court but if I elect not to buy then I can just say buy
I'm not going to buy the property I'm just I'm just going to drop my option
kind of interesting there was a case in court involving an oil company that had
a two-year option on a piece of property it was one of the majors and they had
agreed with Roger the owner of the property that they had a two-year right
to buy the property I think they gave gave Roger 10,000 bucks they had a
two-year right to buy that property for a predetermined price and sometime
after about 15 months had gone by someone in the company said we're not
going our marketing plans have changed we are not going to buy that property so
they sent Roger a letter saying we are not going to exercise our option
between that period of time and the 23rd month the whole area had just blossomed
and even though the marketing plans of the company had changed suddenly the
prospects of making a quarter of a million dollars by exercising the option
on Rogers property were very attractive so they reapproached Roger and they said
we are going to exercise our option he said no you're not you sent me a letter
nine months ago saying you were not going to do it guess how the court real
ruled rule in favor of the oil company they said that you had an option to buy
the property for two years and you're sending that letter to the seller did
not relieve the seller of any obligation to sell to you if if you chose to
exercise it isn't that amazing
could you negate the option I think absolutely you could but it would have
to be done with a formal agreement good question you could probably negate it
with a formal agreement between signed by both the seller and the potential buyer
does anyone know what we call the seller here option or the giver of the option
and the option a if we signed it yeah I'm sure it could be legally negated but
the way it was done with a letter we've decided not to exercise wasn't enough I
thought that was interesting when you learn more about an option you'll see
that at first glance the benefits of an option seemed to accrue to the count of
the buyer but that's not true an option is good for both parties as we're going
to see here as a matter of fact if you look at the next page or a summary of
benefits to the seller generally the property can be sold at or near the top
of the of the market value range option money received is tax deferred the
seller does not pay tax on that money until the option is either exercised or
dropped if the rent is not paid on time assuming it is a lease option then the
option is forfeited the tenant has pride of ownership and an incentive to take
better care of the property the rent including option payments is usually set
at or above the fair market value rent let's go to the next page and look at
the summary of benefits to the buyer risk is reduced while financial leverage
is increased option consideration is small compared to the value of the
property if the property is not worth more than the option price the buyer can
walk away from the contract the buyer usually receives control and possession
of the property I said it earlier that any time you see a property advertised
in the newspaper lease option or rent to own you are certainly looking at a
flexible seller because most people would prefer I think to to to sell
outright than they would to lease option by the way from my own history from a
practical standpoint if I am trying to sell a property that way I will not put
in the paper lease option rather than I will use rent to own more easily
understood by the largest number of people if you see a property advertised
in the newspaper lease to own and I'm on under the subheading now lease option to
purchase a personal residence any of you renters in this room any of you paying
rent we got a few there is there's absolutely no reason I mean if your goal
is to buy a home there's no reason that you can't within the next 50 days move
into your own place there really isn't and do it no money down people say well
I've got a I've got a contract I mean I've got a lease contract on my property
if you're in a if you're in a lease renewal don't worry about it most states
will not look unkindly from a credit standpoint on your breaking a lease
that's been renewed yes but what about the last month's rent I've got in the
security deposit well that a thousand or twelve hundred dollars that you may have
put up as a last month's rent in a security deposit is peanuts compared to
what you can make by immediately begin beginning to to accrue credits in your
own property that you're buying under the terms of a lease option you look at
a newspaper and it says lease with option to buy or sometimes it'll say for
sale or rent to own and the property will be advertised for sixty thousand
dollars or they will say we will rent the property to you for five hundred fifty
dollars a month and we will give to you a credit of fifty dollars every single
month for one year toward the purchase price and there are people I guess who
have heard that lease options are not a bad way to go not a bad way to buy their
own property who would look at that and say wow that's not bad that is terrible
that is terrible don't ever get caught up in a lease option like that what I
would rather have you do is say look I'll give you your sixty thousand
dollars are you not paying retail for the property they're asking sixty it's
worth sixty that's what you're offering you bet you are and I and I the last
figure I heard was that a the average property on the market for sale sold
through through realtor sold for about nationwide about 92 percent of the
asking price that's almost 10% off so anytime I look at a piece of property
it's on the market for sale I think in my mind well that property if it's if
it's if I'm an unsophisticated buyer without knowledge that I probably still
could buy that property for eight to ten percent less than it's asked they're
asking for it so if I'm offering sixty thousand dollars I know that I'm paying
at the high end of the of the market value range what I might be willing to
do though is even go to sixty five thousand but here's what I'm very
interested in is term and credits in return for my paying that sixty
thousand dollars or perhaps sixty five thousand dollars I want to get a longer term minimum three years
I knew an individual who got a three-year lease option on property in a in an area where the values were rapidly escalating and this is probably about eight or nine ten years ago and made two hundred thousand dollars and never took title the property
two hundred thousand dollars there been areas in California where you could easily have have done that a few years back so three years five years would even be better and I would like to get a fifty percent credit and they'll say wait a minute the fair market value
rent on this is five to five fifty I'm not going to give you a fifty percent credit say fine I'll pay you six hundred but I want a three hundred dollar credit toward the purchase price what if they said well all right six fifty and two fifty credit and you're on would I go along with that probably that's not bad what I'm trying to do is give myself time number one to arrange for financing if I need to do that
and number two to accrue significant credits toward the purchase price and three years will generally give you that ability for example if I if I do that if I've got a three hundred dollar credit if they offered me six fifty and two fifty I might say what about seven and three and I think there's a good reason to do that
because even though we're splitting dollars here I think it's going to have more credibility with the lending institution down the road if we have to show them the contract but at any rate I got a three hundred dollar credit times twelve months is thirty six hundred dollars times three years is ten thousand eight hundred dollars toward the purchase price so even though I paid five thousand dollars more a premium if you will just plugging in the number we mentioned earlier that properties are going up at the rate of about five percent a year
compounded nationally five percent of sixty five thousand dollars is three thousand two hundred and fifty times three the property should go up to about seventy thousand dollars at the end of three years should be worth about that and I've got a ten thousand eight hundred dollar credit toward that which means that the cash I'm going to have to come out of pocket with is considerably lessened.
Even though we're not talking about a formula here we're talking about specifics in relation to this example only do you all get the idea longer term greater percentage credit toward the purchase price.
Now look at the page there where it shows the seller situation and the buyer situation figures are a little bit different here but no they're not either.
Now you're paying six hundred dollars a month rent you've got no other payments other than that you're getting a credit toward the purchase price of three hundred so your net monthly cost is three hundred dollars and as a matter of fact if you
plug in appreciation on the property you might find that your net out of pocket cost to have lived in that property for those three years was more like one hundred and fifty to two hundred dollars very very low cost housing even though you're saying well I'm going six into my
pocket for six hundred dollars a month it's like putting six hundred dollars on the table three hundred dollars is going to go to the bank and the other three hundred dollars is going to go to the seller. What we have to look at is not is assuming the
affordability is not an issue what we have to look at is the net out of pocket cost.
Let's look at the seller situation mortgage payments three eighty eight real estate taxes eighty dollars insurance twelve dollars maintenance expenses forty five they got four hundred seventy five dollars so the monthly rental income is six hundred they've got a hundred and twenty five
dollar cash flow. What if someone said to you as they have to me well what about you picking up all the maintenance costs and in some cases I have agreed to do that up to a certain figure like up to one hundred dollars and that keeps the nuisance maintenance off their
hands but they would still be responsible as owners of the property for something like a major air conditioning or furnace replacement. Those of you that have experience in options what has been your what has been your history in terms of picking up
maintenance costs. Jane I know you've you've had some lease option experience.
I usually pick up the first fifty dollars in her case and they do anything above that. I certainly wouldn't. I don't think I would mention that in your initial negotiations but if that turns out to be an issue be willing to do it. We're not talking about
fifty bucks a month. We're talking about any cost up to fifty dollars. Let's look at the buyer situation on the next page. Actual property value is seventy thousand. Your option consideration is sixty five in your option price is sixty five. You've got an option
credit of ten thousand eight hundred dollars. You're only going to have to come up with fifty four thousand two hundred dollars. You say fifty four thousand two hundred dollars with a value of seventy thousand dollars on the property. That's less than an eighty percent loan if you had to go out and get financing.
Now what do you do if you're lease optioning a property today that has non-assumable financing on it. You may be able to work out a situation with the seller where at the end of three years the seller would be willing to to take back a wrap around mortgage or would be
able to would be willing to sell it to you on a contract for deed or a lease for further the lease option or whatever. But if it's your plan to buy the property and put new financing on it you better satisfy yourself concerning the
assumability of the mortgage. You might say well my credit's lousy now in three years I don't think it's going to be any better. I would I would want to take over that mortgage. Talk to the bank about it. Go to the bank today and say I'm thinking about buying a property where there is a mortgage with a non-assumable
non-assumability feature. What is going to be required for me to qualify to take over that mortgage. And I think we've already discussed the fact that some banks have only modest qualifying requirements and some banks if you don't tell them about it and you have a timely timely
payments representing six or eight months they'll let you do it. But it's not 100 percent certain you should check with the bank and see what their policy is regarding that especially again if you're going to be taking over that mortgage in three years when the when when the lease option
expires in order for an option to be valid for it to be legal. There's got to be option consideration. The law does not dictate what that consideration should be. I think we'd have a hard time in court determining that the option I had on this hotel to buy it for 25
million dollars was adequately secured by 100 dollars in option consideration. That just is not enough. We have to look at case law for that and a lawyer can probably give you some guidelines. An attorney can. But I can tell you that if you're trying to lease option a
single family home a hundred dollars options iteration would be enough. But what if you don't have a hundred dollars or what if the seller says no I want a thousand or I want five thousand dollars. What form can option consideration take. Let's take a look here back in
your book. Go back if you will please to where it shows examples of option consideration a few pages back. Number one it can be money. Number two it can be mortgage a mortgage on property you already own. Like if you've got a property with equity you say Mr. Seller I'll tell you what. I'll give you a mortgage on that property and I'll make you monthly payments on the mortgage make monthly payments to you and we'll use that as consideration.
It could be an unsecured promissory note just a promise to pay 500 bucks at the time the option is either dropped or exercised. You would owe 500 dollars. It could be equity in a debt asset. You've got a timeshare in Florida or timeshare in Cancun worth 4000 bucks or eight thousand whatever. Give that to the seller as option consideration. It's a good way to get rid of a debt asset.
And number five fix up the cost of fix up. If you're going to buy a piece of property and it's going to need to be rehabilitated in some way and you estimate that cost is three or four thousand dollars then you might say to the seller look I will promise to pay up to three thousand dollars or a minimum of three thousand dollars to rehab the property. And that's like putting cash in your pocket because if I don't actually have the money I'm going to have to pay you back.
Then you're going to get the property back with all those improvements having been made and it's good for you. It's good for me. So that option consideration can be very powerful and I've used that.
OK let's jump ahead if you will please to where we left off. Sublease income property for a profit. There are a number of ways to do this limited only by your own imagination.
Let's go back to the same example we had a moment ago where there's a sixty thousand dollar property. Let's say we agreed to pay sixty five thousand dollars for it and we're paying six hundred dollars a month in rent with a credit of three hundred dollars.
The moment you have that lease option could you in turn sub lease the property. Sure you could. You could lease it to a tenant just like you would if you owned the property. You could lease it to them for five fifty. Wait a minute. Would that make good sense. You're paying six hundred dollars. I see some people saying yes and people saying no.
I think if you could afford the negative cash flow that that is not a bad deal. I mean every month you're putting three hundred dollars in the bank. And so even though you're you've got a negative cash flow each month of 50 bucks meaning you're paying to the seller or the option or fifty dollars more than you're receiving I could make a case that that could be a smart a smart situation.
What if you saw least sub optioned the property or as we say sublease option the property. You're paying sixty five thousand you could find someone to come along and give you seventy for it.
And you tell them you will give them a 30 month lease option. I would never make it longer than the option period you have and preferably a few months shorter. You could get you could have a real problem if it runs consecutively.
And the and the option period expires on the same same day. I would say look I'll lease option the property for seventy thousand dollars to you for 30 months and your rent is going to be seven hundred and fifty a month.
But I'm going to give you a credit of three seventy five. Now those figures are plucked from air but I think they would still work. I mean you're getting a credit of three hundred you're giving them a credit of seventy five dollars more.
But that's only going to be that's going to be less than a thousand dollars and you're making a five thousand dollar profit on the on the property. You see the you see the range of opportunities that a lease option gives to you.
Lease option sublease or lease option sublease option. Could you sell your lease option to someone for seventy thousand dollars on a contract for deed.
You really could. It would take some very careful structuring on the part of a lawyer but you have an interest in that property that can be conveyed to someone else as long as there's no fraud involved and as long as you can deliver what you've promised.
Then there's no reason you can't do that.
There are really three pay periods in a lease option sublease option. When you sublease that property to someone else the one you've got a lease option on the property is going to be a lease option.
There are really three pay periods in a lease option sublease option. When you sublease that property to someone else the one you've got a lease option on the first pay period is going to be the option consideration.
No reason why if you paid a hundred dollars in option consideration you cannot get a thousand on the front end. Absolutely. That's not a lot of money today.
That's not a lot of money today. Number two pay period is the payment spread. You are getting seven hundred dollars a month in income and you are paying out six hundred dollars under the terms of your own lease option.
And of course the final pay period number three is the differential between what you're buying for and selling for.
And I'll tell you why people like to buy into the terms of lease option. And that is because many people cannot qualify for a mortgage.
We talked about that earlier. You know even though interest rates have gone down a little bit from what they were years ago people still cannot qualify.
Too much consumer debt. So this is a painless way for people to buy property a home to live in and you'll find them very receptive to buying property under the terms of a lease option or for that matter a land contract.
The question is could I give you some idea of how I would respond to a seller who would be reluctant to establish a price three years down the road.
Dave I would find it difficult. I really would because it's a case by case basis. For example if I were if I were negotiating with Anthony on a sixty thousand dollar property says boy I hate to attach a figure.
I don't know what's going to happen over the next three years. My first question would be well what's happened over the last three years and see if you can come up with some sense that he has an understanding that property has gone up a little bit over the last three years.
And Anthony I know that you're asking sixty thousand dollars for the property. Certainly you would enter into a lease option if I agreed to give you one hundred thousand in three years.
And he says oh in a minute. Well obviously I can't do that because we both know the property is not going to be worth that in three years. Why don't we do this. Why don't we why don't we try to try to project ahead what it's going to be worth based on the last two or three years and see if we can't come to an agreement there.
And I'm not going to go wild with that. Believe me I'm not going to let him name a number and let me have me go along with anything he suggests. But I think I would approach it. I guess what I'm saying is kind of a common sense.
I think I've got no. Let me ask those of you have done lease options. Who are you in the room. OK. How would you respond to that. What Jane has said is very powerful and it certainly is worth repeating. She said number one in my negotiation with Anthony I'd say Anthony if I were to pay you all cash you'd take a figure lower than sixty thousand. What what might that be.
And he says well maybe fifty nine or he might say 50 who knows and say Anthony the other thing is I want to buy your property and you want to sell it. This is what Jane is saying. These are good arguments. I want to buy it. You want to sell it. Obviously if we pick a figure that's going to be too high at the end of the three year period I'm going to walk away and you in turn will have had your property tied up for three years and that's not what you want and not what I want either. Again a common sense approach but very too very powerful arguments. Good for you. Thank you Jane.
Yes. Any thoughts on your part Albert. He's making a good point too. He said it doesn't make any sense going blindly down a road and maybe maybe he'd be willing to go up to three thousand. But you've got to understand this is on a case by case basis isn't it. I mean if I believe that his property right now is worth sixty five thousand dollars and he's only asking sixty for it then I might be very willing to say fine I'll give you sixty five thousand dollars at the end of or more at the end of three years. On the other hand if he's asking the very top of the of the of the market value
range then what Jane said is so true. Look if I were to come in and pay you cash and close on it tomorrow you certainly would give me some discount and I would even add you know some sellers will discount as much as 10 to 20 percent for an all cash quick quick purchase. How do you feel about that. I might say I appreciate you bringing that up Dave. I think it's a good discussion. Yes sir. He said if you sub lease option a property that you have a lease option on is that
going to upset the seller. Not to be cold hearted about it but I really don't care provided Larry I've got the legal right to do it and we're going to be talking about that right now. Let's talk about how to protect yourself. Number one the option should be recorded. If you don't record the option at least record a memorandum of option. We have a memorandum in your legal forms portfolio.
The right to sublease if you don't have that specifically spelled out in the contract in some states they could legally deny you the right to sublease to someone else. They meaning the seller.
The next page right to assign you should have the right to assign the contract to someone else. I mean here here I have in my example that I've been using all along. I've been paying a six hundred dollar a month payment I'm getting a three hundred dollar a month credit times 36 months is ten thousand eight hundred dollars. The property is going up to seventy thousand. I've got a right to option it. I've got an option on it for sixty five thousand.
I got ten thousand eight hundred dollars in credit. I need fifty four thousand two hundred dollars but I decide not to option it. Why because I'm dead because I'm moving out of the area because a whole variety of reasons I don't want to option it. Many people not knowing the difference will walk away and lose potentially hear how much money.
Not ten thousand eight hundred fifteen thousand eight hundred dollars. So you should have the right to assign which is another word I mean sell the contract. Now can I find someone to buy it readily for fifteen thousand eight hundred dollars. No I couldn't. Can I find someone to buy it for a buck. You bet. Some place in between there that is going to be readily readily saleable.
Plus I may have put in three thousand dollars in improvements and that was my option consideration and the sellers giving me credit for that. So all of a sudden I only I only have to come up with fifty one thousand two hundred dollars. So you can see that there can be considerable value that builds up over a three year period with a lease option. That's why you need a right to assign a right to extend a lease option.
We've gone through all the negotiations rich. We've agreed to three years. We've agreed to the payment I'm going to pay you. We've agreed to the credit that I'm going to get. I'd like to do this rich. I'd like to have the right at the end of three years to extend it for one year. Now let's assume we're trying to put yourself in the situation of a seller.
What are you going to say to that. Rich just said drop dead. He said it's going to depend on the circumstances. Absolutely. But if you were a seller property and you were being asked for really something that's going to benefit me what might your response be. What's in it for me right.
What's in it for me. Well Rich I'll tell you what. Let me do this. Let me pay you. Let me have the right to pay you one thousand dollars in cash at the end of three years to apply and that will give me a right to extend for one year and will apply that one thousand dollars toward the toward the purchase price.
Yeah. Hard to decide how the rest of you feel. Wouldn't that be a good deal for the buyer. Rich what if Rich came back and said no way. You give me two thousand dollars and it won't apply to the purchase price. What do you say.
OK. OK. I mean if I can see number one I don't think I'm going to need that year. But number two if I can see that I'm going to be that I'm going to have credits of somewhere between 10 and 20 thousand bucks I'd spend two thousand dollars anytime in order to save or protect or earn 10 to 15 thousand.
You agree with me on that. I mean you've got to be reasonable if you said well 10 thousand I'd say no. At what point in time do I agree when it makes sense to you individually. Question is what happens if the seller that is the option or dies during the term of the lease option period.
What happens to it. It is then binding on the heirs on the estate. It's a legal contract entered into it would be binding on the heirs. Yes ma'am.
Yes ma'am. She says you also have a right to buy it at a discount if they need the money badly. I mean let's go back to my case with Rich here. Rich has given me three years to buy the property.
Then we negotiated the fact that he's got two thousand more dollars coming in if I want to extend it for another year. I mean potentially he's looking at a four year period at a predetermined price plus two thousand dollars if I decide to postpone it another year.
And all of a sudden two years goes by and Rich is in trouble financially. Or maybe I don't know whether he is. Maybe what I would do is go up to Rich and say Rich you know I've got an option on your property and I've been paying you every month.
I'm not ready to option exercise my option quite yet but I've come into some money and my attorney said that I mean my accountant said I should contact you. I'd be willing to buy the property right now if you would give me a discount.
And what is every single seller in the world going to say to you then. How much exactly right. How much. Well that's what we're trying to find out right now. What would you consider would be an amount that would be fair to you.
Get them always to name the first figure and if they come back say well I might be willing to take a thousand dollars less. What are you going to respond even if you don't like it. Are you going to respond. No no way. Or you're going to say let me think about it.
Let me go back and talk to my accountant. Of course you don't have an accountant. You're just buying yourself time. So you come back the next day or two and say well we've talked about it. A thousand just wouldn't do it but we could give you.
We would buy it at a five thousand dollar discount. Thank you for bringing that up. It's incredible. Any contractual obligation you have whether it's a note or a mortgage or whatever can potentially be discounted.
Don't ever forget that.
Now we've got a couple of pages later we've got an actual lease option.
That I want you to go on your own. This is a rental lease with option to purchase. We also have a blank form in the legal forms portfolio but it is all here.
Totally complete and I encourage you to go over this on your own as you look at the residential lease option to purchase.
You know I said yesterday as we went through a particular section I said there's going to be a lot of ahas of the has the whole area of lease option caused some of you to say inside.
Aha. Maybe this is an area I haven't been I haven't been concentrating on or I'd forgotten about the opportunities or whatever. Boy they're there. So powerful.
And if you're just getting started and you've got no cash or credit a great way to go if you're trying to buy a home to live in a great way to go.
Risk free low cost zero interest financing it was what it boils down to.
Okay let's review chapter 15. You know we've talked about a lot of creative ways to buy property no money down but in my opinion one of the most powerful ways is using options.
I really mean that. It's a wonderful way to buy income producing property like a single family home or even a multi family property and is a fantastic way to buy yourself a new or a bigger personal residence.
An option is nothing more than a seller giving to a buyer in exchange for some consideration some money the right to purchase their property at a predetermined time and at a predetermined price.
A lease option is where you as the eventual buyer pay rent to a seller with the right to buy the property at some point in time in the future.
The beauty of a lease option is where you get a portion of the rent payment applied to the future purchase price.
Another great part is when you and the seller agree now about the future purchase price and during the lease period you through an increase in rental income or improvements you make not only raise the value of the property beyond the option pricing you've agreed to but you're going to get a positive cash flow as well.
In essence by letting you live there or letting you sublease the property the seller is lending you your down payment at an extremely low interest rate.
I've spent many years and many dollars perfecting my residential lease with option to purchase agreement and I give it to you in this chapter.
It's an incredible tool in dealing with options.
One of the most important components of this pre-printed contract is that it gives you the lessor the right to assign the lease.
This means that you can do many of these transactions for investment purposes and believe me they do work.
You should become very familiar with all of the subsections in this lease and all of them as you may find necessary.
For your convenience this lease is included with your legal forms portfolio and feel free to copy it as much as you wish.
If you have access to a computer you may be interested in obtaining my real estate computer tool kit which contains this and many other of the forms which you can easily alter and print right out of your computer.
You can also do what if calculations and perform other real estate functions.
You can obtain this by contacting the Professional Education Institute.
Now that you've been exposed to all these ways to acquire property you're probably wondering how am I going to be able to talk to and convince a seller to sell me his property?
And how am I going to be able to convince him that I have chosen the best technique not only for me but for him as well?
And Chapter 16 is on how to negotiate a transaction and really how to negotiate for just about anything you may want or need in life.
It's incredibly valuable.
Carlton I watched you so faithfully for four and a half years and finally I realized that I can do it too.
Finally I got the courage to go ahead and order your course and since that point I have generated a net worth of $700,000 and we're doing about $9,000.
A $9,000 a month, over $100,000 a year. Are you a full-time investor?
Not yet, we're still working.
Don't you wish you'd have ordered it seven years ago?
Absolutely. I wish I had ordered it earlier but I'm very happy that I ordered it when I did.
I saw your course ten years ago and I wish I had gotten into it then.
I was laid off from my job at General Motors after 14 and a half years.
I ordered your course and it's really changed things.
I now own 12 properties. I'm up to a net worth of now of over $350,000 and I got a net income of about $2,800 a month.
I hope by hearing and seeing these techniques explained in detail, perhaps rewinding every so often to fully understand a particular concept,
you're beginning to reach a comfort level with the whole area of creative financing.
I urge you to go through this material as quickly as possible.
As I mentioned earlier, if you found these five chapters on video to be very helpful,
as a convenience to you, you can obtain the remaining 19 chapters on VHS videotape for a very nominal price.
Contact the Professional Education Institute.
I thank you for watching and congratulate and applaud you for making the decision to change your financial future by investing in real estate.
My very best regards to you and good luck in your investing.
Thank you.