Welcome to the Carleton Sheets Real Estate Video Series and this presentation
How to Take Cash Out at Closing and now your host, Carleton Sheets.
Thank you.
Thank you very much.
Thank you.
Well in this presentation we're going to go one better than buying property no money down.
We're going to be talking about how to buy property and actually put cash in your pocket
at the time of close.
How many of you here in this room have ever bought a property that way where you put cash
in your pocket when you have closed the property?
Wow.
One, two, three, four, five, six, seven of you, congratulations.
Actually this is not new, it's been going on for years but I think in the past the people
who were doing this were the so-called heavy hitters.
That is the people who had great credit, who had good banking relationships.
Basically builders and developers were the ones who bought property and took cash out
at the time of close and here's what they do.
They would go to a bank with their plans for a particular piece of property and they would
accompany those plans with what we call a pro forma and that is the anticipated gross
and net income from the property.
And the lenders determine the value of a large property how?
Based on the construction cost of the property or the income?
Based on the income, right?
So they would look at that income projection and they would say we would be willing to
loan X number of dollars based on what the property will generate in net income.
Let me give you a real example and this is a precise example that was done by a developer,
a friend of mine and it involved a 212 unit apartment building.
He projected a gross income from that apartment building of $1,370,000, plugged in 5% vacancy
which seems to be the standard and by the way I'll just comment this way that vacancy
does indeed vary around the country.
In some parts of the United States, particularly most of my properties are in Florida, I am
operating at very close to 100% occupancy right now.
As a matter of fact, because of forfeited deposits and because of rents going up during
the course of the year, I think probably last year I operated at about 101 or 102% of projected
gross income.
In some parts of the country even a 10% vacancy would not be fair, you've got to be realistic
about that.
But at any rate, he projected 5% giving an effective gross income of $1,301,500.
Vending he projected at $35,500, effective gross income then including vending would
be $1,337,000.
He projected his expenses at 47% giving him a net operating income of $708,600.
Companies use a capitalization rate in determining value.
I don't want to spend a long time about capitalization rate but if you had cash and you were willing
to pay all cash for that apartment building and you were looking for a 10% return on your
investment, how much would you be willing to spend?
Answer $7,086,000.
You with me?
If you gave him $7,086,000 then you would indeed have a 10% return on your investment.
And this particular bank that my friend went to used a 9.5% capitalization rate so based
on that they determined the value and loaned 80% of that which is $5,970,000.
But look at this.
The cost to build was about $26,000 per unit including the land.
So it was $5,812,000 to build it which included $300,000 in interest.
The cash out was $158,000 but more importantly he had $1,500,000 in equity on that property
and he did indeed sell the property within a few months of getting the final completion,
the final CO, certificate of occupancy and he put $1,500,000 in his pocket plus $158,000
cash out at the time he completed the project.
Well this was done some years ago when banks were a little bit more liberal or more lenient
than they are today but the point is it still goes on today.
And you may be sitting there thinking well fine how does all of this affect me?
I'm not a builder developer, I don't have great credit, I don't have any particularly
good banking relationships, I can't do something like that.
Well the answer is it doesn't matter.
You can do the same thing this builder developer did except do it on a small scale.
I want to hasten to add that I have bought more than 500 units in my investing career
and only a small percentage of them have been bought taking cash out at the time of the
closing but the point is I've done it.
I'm still doing it and every one of you can do the same thing.
The key is knowing the kind of properties and situations that lend themselves to taking
cash out at the time of close.
And number two, knowing the questions to ask the seller, knowing solutions to give the
seller which will allow you to put cash in your pocket and I can guarantee you it won't
happen unless you ask for it, unless you ask the bank for it or unless you ask the seller
for it.
Now here are some good candidates for properties that will allow you to take cash out at the
time of close or situations or sellers that will allow you to do that.
Sellers having problems with their tenants, problem tenants, properties that are being
poorly managed, properties that have deferred maintenance or perhaps properties that need
to be totally rehabbed, changing neighborhoods, a change in the financial situation of a seller.
Sometimes estates will allow property to be purchased with cash out, divorce, job transfers,
retirement, all of these are ripe if you just ask for it.
In your opinion would you guess that a in quotes rich seller or a poor seller would
be more likely to offer you an opportunity to take cash out?
A lot of people say poor and it's kind of interesting.
We associate someone who has money, someone who's wealthy with someone who's pretty
sophisticated, pretty bright, a good intellect.
But as a matter of fact many times a wealthy seller's impatience with wanting to get
rid of property and his ability to go into his pocket in one way or another to give you
cash will make that a situation that's ripe for taking cash out of a transaction.
What I want to do in this program is to suggest to you about a dozen ways that you can buy
property situations to look for where you can put cash in your pocket.
Many of the situations or techniques that I'm going to describe to you I will use actual
examples that I have done where I have done this very thing or where students have written
in and given me examples where they have put cash in their pockets.
So I want you to sit back, take a lot of notes, I would even suggest that you might review
this program two or three times until you really feel comfortable about it.
But I'll tell you one thing, you're about to enter a whole new world.
First thing I want to talk about is selling off part of the property.
I've done this a couple of times, in fact I just did it within the last six weeks.
I am constantly getting letters from my students around the country who are telling me that
they've done something like this.
Let's review how we might go about selling off part of the property.
Sometimes you'll buy property where there is machinery or equipment, a farm perhaps.
One particular example that I can cite to you is a dentist that came out of dental school
and opened up a practice in Colorado Springs.
Not a practice, a going practice from a retiring dentist paying something like two or three
hundred thousand dollars for it and as a way to get the agreed upon down payment, he sold
the dentist's equipment to an equipment leasing company and then in turn leased that equipment
back.
He was able to do that, put cash in his pocket and the out of pocket leasing costs on a monthly
basis were generated by the income from the practice.
So machinery or equipment sales would be one.
Couple of examples, I just got a call from a student in Cincinnati who said that he was
buying a farm that involved a lot of acreage and he was able to get a check from a lumber
company for forty thousand dollars prior to the close in return for them going in to cut
trees on the property after the close that had been red tagged prior to the close.
So trees might be an opportunity for you.
Antiques, one student said he found an old antique chest in the attic of a home that
he bought.
An old car, student rode in from Las Vegas, Nevada, bought a property, the seller had
an old Cadillac like a late fifties Cadillac and it really wasn't antique quality but
nonetheless he was able to put a few hundred dollars in it and get this car running and
it hadn't been running for twelve years I was told and made some money that way.
An attached vacant lot, sometimes properties, particularly single family homes will be sold
with a lot attached to the property and generally if there is a mortgage on the property the
mortgage will encumber not only the home but the lot as well.
If you are putting a new mortgage on the property or if you can get the existing lender on the
property to release that lot from the encumbrance from the mortgage then you could spin it off.
In the example that I know about, this happened in Florida, the lot was worth about eight
thousand dollars, the student was able to sell it very quickly for six thousand dollars
with a simultaneous close at the time he bought the property.
Furniture, I'll give you my own example here, I just bought a piece of property about five
weeks ago and the property was owned by a retired person in New Jersey whose ill health
prevented him from coming to Florida every winter like he used to.
He couldn't sell the property, in fact it was such a good deal I'm going to be telling
you a little bit more about it later in conjunction with another example but I bought it completely
furnished with linens and drapes and pots and pans and the whole thing and I made a
quick sale on all of that furniture that came out of that three bedroom home of twelve hundred
dollars.
It took me a couple of hours to sell it that way so that was cash that I ended up putting
in my pocket.
One other situation occurred and it's a technique in and of itself where I was buying a property
from an individual who was building a home and in anticipation of the home being completed
obviously put the property on the market.
I was able to buy it creatively, almost no money down, it was a fairly well to do seller
and then the seller wanted to stay in the property until his home was completed.
Well because the term of his occupancy was rather uncertain, he didn't know whether it
was going to be five months or eight months, it was a fairly large home that was under
construction, he agreed to pay a little bit of a premium rent and agreed to pay five months
in advance in one lump sum to stay.
That was money that I put in my pocket at the time of the close and then he agreed that
if it was beyond five months he would pay on a month to month basis again a premium
rent.
So sometimes a seller might stay on as a tenant prepaying rent for a period of time.
What happened in conjunction with a move, anticipate a job transfer or maybe a home
that they're building is under construction.
The next thing I'm going to tell you about is not truly a cash out at close technique
although I guess it could be construed to be one and that is to increase your withholding
allowances.
We call them tax exemptions.
Generally a taxpayer is allowed one exemption for each member of the family.
If that taxpayer though anticipates a reduction in tax due as a result of moving expenses
for example or loss from a trade or business, he or she can claim an extra exemption or
an extra allowance.
You know that when we buy real estate to rent out that is considered trade or business property
and ACRS accelerated cost recovery system or depreciation will allow us generally to
get a loss from that property, an operating loss.
Well if the losses are sufficient and by that I'm going to suggest to you that approximately
$2,500 a year and that changes a little bit year after year.
It goes up a little bit each year but if it's about $2,500 you can put in for one additional
exemption with your employer and immediately start getting more take home pay usually in
the $30 to $50 a month range depending upon your tax bracket.
Incidentally a little bit of a guide for you if you want to determine what depreciation
is and this is a quick and dirty example I've never heard a CPA use it but take the value
of the property you're buying and I'll use $100,000 for example.
If a property you're buying is $100,000 multiply that times 3.3%.
That will give you roughly what your depreciation is going to be.
Now is roughly good enough for the IRS?
No not at all.
They want an exact figure but for you to calculate what your approximate tax loss would be this
is where you would begin.
Multiply it by 3.3% then subtract from it the positive cash flow that you anticipate from
the property.
The resulting figure will be your approximate tax loss and that will be a guide as to whether
or not you can qualify for an additional exemption and thereby increase your monthly take home
pay.
Just be careful.
If you have too many allowances and you underpay substantially on your anticipated tax liability
there could be a penalty.
The next technique I would label lease option sub-lease option.
I think lease options are a great way to buy property.
You don't have any cash or credit.
A wonderful way to buy property.
What I'm going to suggest to you here is that when you lease option a property try to get
at least three to five years under the terms of that lease option contract and I go into
detail in great detail in this in my home study course so I'm not going to repeat it
right now.
How to protect yourself, some of the little tricks of getting an added return when you
get into a lease option but just for right now consider that a four year or three or
five year lease option would be ideal.
Then what I want you to do is turn around and sell that property that you don't own
under the same terms that you bought it.
In other words if I lease option a property from this gentleman I in turn would sub-lease
option a property to Bob up here on the front row.
If I've got four years with this gentleman I want to get four years with Bob.
Everyone clear on that?
Now let me give you a perfect example.
This is not mine but this came from a student in matter of fact one in Florida and I think
it's one of the most creative things that I've ever seen.
A property was on the market for $42,900 and that by the way was close to its fair market
value.
It had a second mortgage payable $100 per month.
The second mortgage was $4,500.
It had a first mortgage of $30,500 payable $325 per month.
If you add the two together $30,500 and $4,500 you come up with $35,000.
So the difference between $42,900 and $35,000 is the seller's equity.
The seller had $7,900 in the property.
Well here was the situation.
The property was owned by a young man and I don't know whether he had drug problems
or what but he was a down and outer.
He was unemployed.
Guess who was making the mortgage payments?
Mom.
And she was up to here with making those mortgage payments.
She couldn't sell the property.
So my student in Florida said I'll tell you what let's do.
I will lease option the property from you for four years for $35,000 exactly what the
amount of the mortgage is.
I will give you $100 as option consideration and I want to get credit for all equity buildup
over the four years.
After all I'm making the payments.
In return seller you will have no obligation to maintain the property whatsoever.
I will take it as is.
I will be responsible for any repairs or maintenance on the property and the seller agreed.
The thing I liked about it was that he said to the seller I'll buy it for $35,000 and
get equity buildup rather than saying I will buy it for $28,000 because in effect that's
what he did.
Here's why.
For four years that second mortgage for $4,500 was going to be paid down to zero.
The first mortgage of $35,500 was going to be paid down to $28,000 at the end of four
years.
So in effect what was his purchase price?
$28,000.
Everyone with me on that?
So what did he do?
He put about $1,800 in it.
He put in new carpeting, painted it inside and out, steamed cleaned the roof, put in
all new shrubbery.
I saw the property, turned out great and he sold it on what we call a lease option, sublease
option for $43,900 and the people that bought it thought it was a bargain, $43,900.
The people that bought it under the terms of a lease option under the terms of a sublease
option gave him $4,000 in cash.
They agreed to take the property as is for $550 a month rent for four years.
At the end of four years they will owe $43,900 minus the $4,000 that they paid for the sublease
option.
The first mortgage will be paid down to $28,000.
They will owe $11,900.
How did my student do?
Well number one, he got the seller out of a heck of a jam, didn't he?
The seller was making payments on an empty home that didn't show well and was sick and
tired of that money going out of pocket and no money coming in.
For himself, my student actually put cash in his pocket, $4,000 minus $1,800 to fix
up the property minus $100 that he gave to the seller as option consideration.
He put $2,100 in his pocket.
He had a positive cash flow every month because the mortgage payments were three and a quarter
plus $100 is four and a quarter and he was getting $550 and at the end of four years
he will get, this just happened this year, he will get $11,900 a very creative way to
buy property, lease option, sublease option.
One source of cash at close is from a real estate broker.
If you're buying property listed by a real estate broker, that broker is going to be
earning a commission on the property.
I don't need to tell you that generally a broker who lists and sells property makes
more than a broker who lists property when it's sold by someone else.
Generally a listing broker will get half of the commission.
I'm suggesting here that the commission is seven percent so the listing broker will get
three and a half percent, the selling broker will get three and a half percent.
That is why I prefer if I'm going to buy a property to always talk to the listing broker
because I've got a little bit more leverage than if I'm talking to another broker who
in turn will go to the listing broker and have to split the commission.
If I'm talking to a listing broker and that broker is lists and sells the property for
seven percent, I'm going to try to borrow that broker's commission.
It is easy and I'm not shy about saying this, it's easy to say to that broker I came to
you because I know you've got an opportunity to make more money than if I go to another
broker and you have to split the commission.
I'm not asking you to cut your commission.
What I'm asking you to do is loan part of your commission to me.
I'd like to get fifty percent of it, three and a half percent.
I'm willing to pay you monthly interest on that commission.
As a matter of fact, what I like to do is offer a fairly high rate of interest, nine
or ten percent, and pay them one percent a month toward the money that I owe them.
If I'm paying them twelve percent a year and the interest is ten percent then I'm reducing
what I owe by two percent, aren't I?
So I like to do that and if the broker says no then I would remind the broker that I have
no hesitancy going to my friend Jim over here who is a broker and say I will bring Jim into
the transaction, he will make three and a half percent because you're going to have
to split it with him and brokers understand that and he is willing to loan the commission
to me.
So I'm fairly aggressive when I talk to brokers this way.
If any of you have real estate licenses as a broker you can subtract your commission
from the selling price.
Actually reduce the selling price by the amount of your commission.
If you're a real estate salesperson generally the commission is going to have to be paid
to your broker but you could probably work out some sort of arrangement with your broker.
For example, one of my acquaintances who is also a student is a real estate salesperson
and she has negotiated with her broker that on ordinary transactions she will receive
I believe it's 50 percent of the commission but on anything involving property she buys
she gets 90 percent of the commission that comes from property she buys.
So again be aggressive in negotiating with your broker or with a broker who is handling
the transaction.
I came across one the other day and I was a little bit surprised.
I won't even admit to being creative enough to ask for this but I was buying a piece of
property that I thought was below market value.
The broker said to me I will actually loan more than my commission to you.
I'm looking for a good place to invest money.
I know the property because I listed it.
I think the property is worth more than you're paying for it.
I will loan five thousand dollars to you, take a third mortgage on the property and
I agreed to pay the broker 12 percent interest.
So that in turn became a good investment for him.
So there's a couple of ways to go.
Ask the broker to loan part of the commission to you or ask the broker just as an outside
investor would you be willing to loan money on this property.
I want to talk now about a technique that is so easy that it almost would not come to
mind but that is flipping a property before the closing date and I talked to a couple
of people before the program and I think several of you have done this.
Where you actually find a piece of property that is on the market below market value.
Why would a property ever be on available on the market below market value?
Anyone have any thought?
A foreclosure could be it's about to go into foreclosure.
What else?
I'm sorry.
Fund on payments of the threat of foreclosure is there.
Anything else?
A divorce or a need for a quick sale.
Yes?
Poor curb appeal.
The property is flat run down and it doesn't look good and it's not selling or finally
and that is sellers who don't know what the true market value of the property is.
I encourage you throughout my home study courses to know what property values are.
You don't need to go to an appraiser, spend a few weeks or a few months out in the marketplace
and you can learn what property values are so when you see a property you say that is
a good buy.
So all of these reasons would account for the fact that a property might be available
below market value.
Let's use an example.
Let's say you contract to buy a property with a fair market value and I'm just going to
pick $100,000 here.
The contract price is $89,000.
You put $1,000 into the cosmetics.
I can tell you from experience that banks and real estate agents will frequently overestimate
the amount of money needed to fix up a piece of property.
Frequently will do that.
It's amazing how much you can do and I'm not talking about structural changes but it's
amazing what you can do to improve curb appeal to really make the property aesthetically
attractive amazing what you can do with $2,000 to $3,000 or even $1,000.
So you put $1,000 into the property and then you sell your contract for $10,000.
Now wait a minute.
Would I ever put money into a property before I close on it?
Be careful.
If you're going to do that make sure you have a preliminary verbal title report run so you
know that there are no liens at the time you contract to buy the property.
Based on that and based on my willingness to buy the property if I can't flip it, yes
I will sometimes put up to $1,000 or $1,500 cosmetics into a property and then try to
flip it.
If you can't flip it for $10,000 could you flip it for $5,000 or $4,000?
Depends on whether you want to wholesale it or retail it but I submit to you that there's
an opportunity there but I caution you if you're going to use this technique make sure
that either you're willing to lose the money you put as earnest money plus the money you
put to fix up the property or better yet you're willing to close the property if you can't
flip it.
One of the real common ways to take cash out at the time of closing if you have bought
it no money down particularly is through security deposits, last month's rents and other credits.
The credits that you're going to be receiving at closing on a typical transaction are going
to be on an investment property any last month's rents that the tenants have paid, any security
deposits and any real estate tax credits.
You know at most jurisdictions that I'm familiar with that real estate tax credits are given
because taxes are due but have not yet been paid.
In Florida for example taxes accrue all during the year and at the end of the year they're
due.
So I don't care when you buy property whether it's January 2 or December 1st you're going
to get a credit at closing for taxes but some of the things that you may not think about
are prepaid insurance credits.
That's one of the what I would call non-essential contingencies that I put into every one of
my contracts.
Seller agrees to give buyer all credits including prepaid insurance credits.
Security deposits, generally you don't ask for these but if you did you might find you
be successful in getting them.
In all real estate transactions you're going to be getting the last month's rent, security
deposits and real estate tax credits if it is an investment property that is one that's
been occupied by tenants at the time you buy it but the thing that we so many times don't
ask for are other deposits.
For example prepaid insurance, as you know insurance is paid in advance at the closing
if you don't ask for it and you don't get it the seller is going to be receiving that
as a credit on his or her closing statement.
So ask for prepaid insurance, utility deposits.
Question was just asked a moment ago a very good question when do I close on property
and the answer is the last day of the month and I do it for two reasons.
In my area of the country by custom the day of the close belongs to the seller.
In the eyes of the Internal Revenue Service the day of the close belongs to whom, you
know, the buyer that's right.
So I can close on the last day I don't get any rents for that day but I get one full
month extra of depreciation because the last day of the month will give me credit as if
I owned it for the entire month.
That way when I buy the property beginning the next day on the first of the month all
of those rents that are going to be coming in are going to go into my pocket.
Why?
Because I've got no out go.
Mortgages will be stopped, cut off on that day, mortgage payments will not begin until
the first of the following month and really are not even due until the tenth frequently
of the month.
So I've got all of these last month's rents, security deposits, tax credits and frequently
other credits as well from utility deposits or prepaid insurance plus a full month's rent
that I can put into my pocket.
I bought an apartment building not too long ago, 40 units, got it for what I thought was
a very good buy with $50,000 down, my credits at closing amounted to over $30,000 and my
first month's rent amounted to over $20,000.
So I actually within 30 days put all of that money back in my pocket.
I want to talk now about a technique that from talking with several of you before the
program I have a feeling you've done.
I have and that is to buy a piece of property, put a new first mortgage on it and in effect
split the proceeds of the mortgage with the seller.
This is a type of technique that can be worked just as well with a poor seller as it can
with one who's rich.
If you're getting the mortgage yourself then the seller has no credit obligation under
the terms of that mortgage and maybe to sell their property they would be willing to share
the proceeds with you.
Let me give you an example of how that might work.
Let's say that there's a $100,000 property that's on the market, fair market value.
If you were to go in and pay all cash for that property you might be able to buy it
for $80,000 or $85,000 but $100,000 is not unreasonable.
There's a $40,000 first mortgage and the seller therefore has equity of $60,000.
What you would do would be to offer the seller $100,000 or maybe even as I suggested here
be willing to go to $110,000.
You put a new $60,000 first mortgage on the property.
I'm going to comment a couple of times that mortgages for 60 or 65% or less of the value
of a property are not difficult to find because they're more interested, lenders are more
interested in the property value than they are in your credit.
As a matter of fact, lenders who make mortgages that are 50 or 60 or 65% probably pray every
night before they go to bed that you'll default under the terms of the mortgage so that they
can foreclose and get this property back that's worth far more than what they've loaned on
it.
Okay, so we're talking about getting a new $60,000 first mortgage here.
We pay off the $40,000 existing mortgage that's on the property right now.
60 minus 40, there's $20,000 lying here on the table.
The seller agrees to split that $20,000 with you, gives you $10,000, puts $10,000 in his
or her pocket.
Now in order for the seller to get $100,000 for the property, if you have put $10,000
in your pocket, you really have got to pay the seller $110,000.
When I did this, I did not pay a premium for it.
The seller actually split cash with me, it was only about $4,000, but actually split
cash with me and took the hit himself, so to speak.
Everyone understand that?
I've got at least two people here in the room that have actually done a transaction like
that where they've had the seller split with them or they have in effect overfinanced on
a piece of property.
The next technique I want to share with you is one that I've used a couple of times,
in fact one as recently as three or four months ago, and that is where the seller pays you
to take a property.
How many have actually had that happen where they just bought a property and the seller
paid them to take the property?
Anyone?
Well, we've got one person anyway.
I've done it probably three or four times, again, once just a few months ago.
Here's the situation.
A property is on the market for $100,000, there's a $90,000 first mortgage on the property,
it's not selling, it's sitting there, maybe it's vacant.
The property I bought was not an investment property, but it was vacant, and the sellers
were going through a terribly bitter divorce.
Did I say bitter?
Terrible.
At any rate, the husband was making the mortgage payments on this vacant property that they
used to live in.
The wife was not willing to do it or couldn't do it, and he said, I've had it.
He said, I'm going to let the property go back to the lender, I'm not going to make
any more mortgage payments.
It was a condominium, they were delinquent on association fees, and she said, fine, go
ahead and do it.
She initially said that.
Well, I came across the property, and I said, I'll tell you what I'll do.
The property was listed with a real estate broker.
That helped.
As a matter of fact, any time you see a property that's on the market for 10% down, that's
listed through a broker, isn't that really a no money down transaction?
Basically, what the seller is trying to do is just get enough cash to cover the broker's
commission and the closing costs.
10% down is not going to allow the seller to put much cash in their pocket.
So that was the case here.
I said to the seller, I'll tell you what I'll do.
I will give you $90,000 for the property, and I will buy it on a net, net basis, meaning
that I will pay 100% of the closing costs.
All you have to do is pay me X number of dollars at the closing to take the property and your
problem off your hands.
I know that there are some people in this audience right now who have got problems,
health, domestic, children, family, whatever they are, job.
I know there are some of you who have problems that right now, if I could guarantee you that
I would take that problem off your shoulders and cure it 100%, you would pay me $10,000
to do it.
Am I right?
I'm absolutely sure of it.
And that is what the seller is willing to do.
In my case, it was not a $100,000 property, it was a $32,000 condominium.
Granted the property had gone down in value somewhat, it was worth, I think, probably
about $25,000 or $26,000.
The seller came to the closing table, the husband, ex-husband dead was $7,000, and the
wife was $7,000, $14,000 they paid me to take that property off their hands.
Would they have suggested that if I hadn't asked?
They have said, I'll tell you what, I'll pay you to take my property, probably not.
I said to them, the only way I would feel comfortable buying the property would be for
you to pay me $14,000 to take the property off their hands.
Now I will add that they were a little bit afraid that by my taking over the mortgage,
they were still going to have liability into the terms of the mortgage.
So I did agree in my particular case to go to the lender and assume full responsibility
for the mortgage, but that was my only obligation.
Don't hesitate asking a seller if you're in a situation like that, very little equity,
desperate seller, don't hesitate asking them to pay you to take the property.
Bank rebates occasionally on an REO will allow you to put cash in your pocket.
What's an REO?
It's for real estate owned by a bank, where a bank has loaned money on property, the payments
were not made, they foreclosed, they now own that property, it's called an REO, real estate
owned by a bank.
Banks always try to get the fair market value from a piece of property.
Sometimes they will take far less than that if they are very desperate.
I think I told you in my home study course about $125 million condominium development
that was bought by Don Trump and Lee Iacocca for about 50 cents on a dollar, all cash with
Citibank of New York.
Sometimes banks will do that, but believe me, banks would much rather work with terms
than they would with price.
If one of you is a bank president and you've taken back an REO and you've got $90,000 in
the property and it's worth $100,000, you're going to try to get $100,000.
But you'd like to, to save face, at least get $90,000.
I'm going to be much better off talking to you about selling that property to me for
$90,000 with very low interest rates, maybe 3% or 4% because those interest rates can
get lost in a huge portfolio than I would be to say, look, I'll buy the property for
$70,000 cash.
An actual example occurred to me verbally with a bank president that was in one of my
classes who said that he would have been willing to lease option the property.
He would have been willing to loan 100% on a property if he could get his asking price.
Bankers are wide open.
Here again, you've got to know how to approach them and what to say.
Let me give you an example of a actual transaction.
This occurred in Florida.
In fact, in my area, one of my students found an REO that was on the market with one of
the large national banks in Florida.
It had an after fix up value of $120,000.
Now the bank, remember, owns this property free and clear.
There are no liens on the property except for real estate taxes.
There are no mortgages.
The bank estimated the rehab cost to be $12,000.
So they subtracted $120,000 minus $12,000.
They were asking $108,000.
My student was very aggressive, as I tell all of you to be aggressive in your offers.
He offered the bank $92,000 for the property.
The bank counter offered at $104,000.
My student counter offered and said, okay, I'll pay you $104,000 for the property provided
you at the time of close, give me $12,000 cash.
And the bank said, okay.
So at the closing table, my student gave them a mortgage signed and a note for $104,000.
The bank gave him a cashier's check for $12,000, which represented the bank's estimate of the
cost to rehab the property.
My student actually rehabbed the property for $8,000 by doing a little bit of the work
himself, incidentally, and put $4,000 cash in his pocket.
But at the close, he actually had $12,000 cash.
Again, be aggressive in how you approach banks.
I approach them professionally.
I approach them reasonably, I think, in terms of how I would feel if I were sitting in their
chair, but I also am very aggressive.
And I'll tell you again, go for terms rather than price.
Now, if you leave here and say, and you've watched this video and you say, wait a minute,
he just told me never to offer $0.50 or $0.75, I didn't say that.
Sometimes that's appropriate.
If you've got a lot of cash, if you're willing to drop a line in the water and see what happens,
go ahead and do it.
But generally, banks are more receptive to offers involving terms than they are price.
Next technique I want to talk about is how to leverage an REO property owned by a bank
that is vacant land.
You know that when banks loan money on income properties, today they'll generally go what
percent?
Anyone know?
75 to 80, although it's kind of interesting.
I just talked to, I telephoned to a student in the Chicago area who called me and said
that they had found a bank that was making 90% loans for investors.
So it varies around the country.
But when a bank makes a loan on vacant land, the most they're generally willing to loan
is 50%, unless it happens to be a lot in an approved subdivision.
Then they'll go up to 75%.
Let's imagine this.
Imagine that you have found an REO owned by a bank that's attractive land.
I don't care whether it's 10 acres or whatever it is.
The bank has $100,000 in it, and we'll assume for the purpose of our explanation here that's
what they're asking for it.
You may or may not know that any time a bank takes back a property as an REO, after foreclosure,
they've got to have that property appraised by law.
Now they hope.
In the case of income property, the property is going to appraise for at least what they've
got in it.
But in vacant land, it's not unusual for the property to appraise for twice what they've
got in it because of their low loan to value loan policies.
So let's say it's a $200,000 property, the seller is asking $100,000.
What I want you to do is to find a property on the market with a large amount of equity.
We're going to assume here that you have found a $400,000 apartment building with a fairly
low first mortgage, $100,000, where the seller's equity is equal to or more than the value
of the vacant land you're looking at with the bank.
Everyone with me on that?
If the vacant land is worth $200,000, I don't care what the bank's asking for it.
If it's worth $200,000, then you've got to find property that has seller's equity of
at least $200,000 or more.
You find this property, the seller's got $300,000.
Let's go ahead and make an offer to the seller.
Offering the vacant land is a down payment.
Let's see, $400,000, $200,000 for the vacant land.
The first mortgage is $100,000.
We still owe the seller $100,000, don't we?
Right?
The seller's got $300,000 in equity.
The land accounts for two of it.
That leaves $100,000.
We still owe the seller.
The question that's got to become into your mind right now is, number one, where do we
get the cash to buy the vacant land?
And number two, where do we get the cash to pay the seller?
If you went to that bank that owns this vacant land and said, I will buy the vacant land
from you if you will loan me money to buy it, I can almost guarantee you the bank's
going to turn you down because they have already lost it one, I mean they've already lost one
time on it.
They've taken it back once in foreclosure.
They don't want to do it again.
But what if, what if that bank were told, I will buy the vacant land, you say, providing
you loan money to me on another asset?
And they'll say, what other asset do you have?
And you say, an apartment building.
I have found, you say, or I have, a $400,000 apartment building.
You know yourself that banks are willing to loan up to 80% on income property.
Some of them are.
Some of them more.
80% times $400,000 is $320,000.
Now listen carefully.
You put that first mortgage on the property of $320,000 and you've got $320,000 lying
here on the table.
Where does that go?
Number one, it pays off the old first mortgage of $100,000.
Number two, that leaves, by the way, $220,000, doesn't it?
You give the seller $100,000 for the balance of their equity.
That leaves $120,000.
You give the bank $100,000 for the property.
That leaves $20,000.
And you can put that $20,000 in your pocket.
That's a win, win, win situation.
I can guarantee you banks would be receptive to that.
They are ridding themselves of a debt asset, an REO, land.
They've got in its place a good asset, which is a mortgage, and that's what they're in
business to do.
The seller's happy because the seller has received the full price for the property.
I'll have to admit to you, and I thought about this when I was kind of preparing some notes
for this presentation, I thought, no, I won't tell them, but I will tell you.
I've got a property right now in a changing area, an apartment building.
If someone would approach me with a deal like this, I'd grab it a minute, because it would
be worth it for me in my mind to be able to get my price and to substitute all the problems
I've got with a changing neighborhood with a piece of vacant land that maybe I can get
$200,000 for, or maybe if I market it creatively, I might be able to get $2.25 or $250 for.
And finally, it's win-win for you, because you have put $20,000 cash in your pocket.
You now have an income-producing property.
It's going to more than enough, because you did a financial analysis on it, it's going
to more than pay for the first mortgage payment of $320,000.
It's going to kick out some cash to put in your pocket.
And finally, how much immediate equity did you pick up on that property?
You got any of your own cash involved?
No.
How much do you owe on it?
You owe $320,000.
It's worth $400,000, isn't it?
You got immediate equity of $80,000, $20,000 cash in your pocket, and an asset with a positive
cash flow.
Look for situations like this.
Talk to your banker.
You know, when we go to bankers to talk about REO properties, we have a tendency to say,
what condominiums do you have, and what three-bedroom, two-bath houses with nice shutters do you
have in good neighborhoods?
Talk about something like this, they're having trouble getting rid of these debt assets.
The next one I'm going to call divide and profit.
I've done a couple of these.
Somewhat complicated, and I can tell you it's somewhat risky.
But the friend in cash, as usually happens with something risky, can be what?
A lot more also.
You can put a lot more cash in your pocket.
I call it divide and conquer.
Here's what I did.
I've done this a couple of different ways.
This example here is somewhat made up, but it's a little bit like one I did.
Let's say you locate a 40-unit apartment building consisting of 10 units, each with four apartments
in it, right?
10 buildings.
See how easy real estate is?
40 divided by 10.
You've got a 40-unit apartment, 10 buildings, the purchase price is $1 million.
If we divide $1 million by 10 buildings, the purchase price is $100,000 per building.
Since there are four units in each building, the purchase price is, on average, $25,000
per unit.
The terms are the mortgage is still $800,000, mortgage is due.
That may be a first mortgage, also may include a mortgage taken back by the seller.
We agree to give the cash $200,000 worth to the seller, $5,000 per unit.
Here's what I'm suggesting you can do.
There's a couple of different ways to do this.
You can either form a partnership, or you can have the property resurveyed and sell
off the buildings individually.
What I'm going to suggest is the latter method.
If you resurvey the property into 10 separate parcels, with the pool being commonly owned
by all 10, you sell nine buildings to nine buyers, keeping one building for yourself.
The terms that you're going to be selling are $120,000 per building, which is $30,000
per unit.
We're going to tell them that each unit is going to be encumbered by $20,000 in mortgages,
so all they need to come up with is $10,000 cash per unit, or $40,000 per building.
Let me review it.
I see some people kind of rolling their eyes, and I understand.
You all understand that I'm surveying this into 10 separate buildings.
You all with me on this?
Now, I'm going to try to sell nine of them to nine individual investors, but I'm not
going to sell them for what I paid for them.
I'm going to sell them for more.
I paid $25,000 a unit, $100,000 per building.
I'm going to sell them for $30,000 per unit, $120,000 per building.
Does it make sense to you that if I went out to a paper supply company and I bought one
paper towel, then I'm going to pay more than if I buy $100,000?
True, right?
Things individually cost more than they do collectively or in great quantity.
That's what we're doing here.
We're telling them, we're breaking this cow down, if you will, into bite-size hamburgers,
because Dr. Dean up here cannot afford to buy that 40-unit property, but he can afford
to buy one building, and he likes the idea because I've told him, Dr., I will manage
that property for you.
So, he is willing to pay $30,000 per unit, $120,000 for the building, giving me $10,000
cash per unit, or $40,000 for building, you with me?
He's paying me $120,000, but only $40,000 of it's in cash, but let's see where you are.
If you do this nine times, times $40,000 in cash, you've got $360,000 lying here on the
table, $200,000 of it is gonna go to the seller, and $160,000 is gonna go in your pocket, and
that's just about what I made, maybe a little bit more than, I think I made $180,000 on the
one of these that I did.
What I did was not have them re-surveyed, I had them condominium-ized under the laws
of Florida, it was a Florida property.
I then went to individual investors and I said, hey, you want to buy a condominium?
Or two or three?
If you do, I'll take 20% down, and I have a takeout mortgage commitment from a local
savings alone for the other 80%.
I sold them like hotcakes, and I put about $180,000 cash in my pocket.
The only difference was there was a little bit of delay from the time I bought the property,
knowing that I was gonna do this, and the time that I condominium-ized and sold all
the units, it was about nine months, but I made about $180,000.
If this all seems complicated to you, what about doing it on a smaller scale?
Let's find a four family, two buildings, two units in one, two in the other.
Have them re-surveyed, so now you've got, in effect, two pieces of property.
Now, you've got to be careful about doing this because maybe there's a certain minimum
size lot required under your local governmental authority, whatever that is.
So be careful about that, but let's assume that there's no problem.
Have them re-surveyed, sell the left half of lot one in the pine subdivision, and the
right half of lot one you're gonna keep yourself.
And if you are buying that four family for $100,000, $25,000 a unit, you may be able
to sell one half of it for $30,000 a unit or $60,000 and keep the other one for yourself
and put cash in your pocket, depending on how you structured it.
Has anyone ever done this or anything like this?
Well, again, one person, congratulations.
But this is a very effective way of what I call divide and profit.
What is your downside risk on this?
That whatever money you put up as an earnest money deposit to buy the property would be
lost if you're not successful in finding the partners.
You'd have to know yourself whether you have that capability.
I have a home study course on partnerships, which I think is one of the best in the country.
I don't think anyone has ever written a course for partnerships aimed at people that don't
have licenses.
And I talk there about how to find partners and how to determine whether you have that
capability.
But this is something to plan in your mind, and if this is too strong, again, look at
the four units.
Aren't you really doing the same thing?
If you live in California and you find a townhouse or a home or a condominium with two master
suites and you say to your good friend, he and his wife or she and her husband, look,
my wife and I can't afford this.
Will you go in half with us on it?
Isn't that really the same thing?
Except you're not making any money.
You're just dividing it, making it a little bit more palatable for each of you to own
it.
What I'm suggesting here is go beyond that.
Make it easy for someone to own, but also get a profit for doing it.
Would a doctor, lawyer, businessman want to invest in something like this?
If they trusted you.
If they think you're going to be doing the management.
If they think, boy, I've heard a lot about real estate and what's happening and I want
to get involved, but I don't have the time to do it or the expertise, sure they want
to get involved in something like this.
Next technique I want to talk to you about is just using partners.
Forget about subdividing or resurveying.
Just using partners.
The first property I ever bought as an investor, I bought with the partners.
In fact, the first four I bought with partners.
Kind of interesting as I look back to see how my selling approach changed from my first
one to my fourth one, where I go to the seller and have my hat in my hand and say, Bob, I
think I've really got a good opportunity here and sure would like to have you think about
buying a part of this and if you do I'll give you 35% and I'm going to take a small percentage
ownership to put the whole thing together.
That was my first one and fortunately I was successful.
My fourth one, Bob, I found an incredible investment opportunity.
I'm selecting a few people to join me in this investment and here's what's going to happen.
If you and these four others join me, I'm going to take out $20,000 at the time I buy
the property and I'm going to own 15% of the ownership.
I'm going to manage it and I'm going to take a management fee.
But wait a minute, look what I'm projecting for us and go through the projections.
It's interesting, I was just as successful later selling that way, excuse me, as I was
before with the hat in the hand approach.
If you right now know a number of people that have a little bit of money and I'm talking
about maybe $7,000 or $8,000 or less, it's a big opportunity for you.
I'm not talking about buying 100 unit apartment buildings, I'm talking about buying single
family homes.
You remember a moment ago I told you about buying a property that had this furnished
and I took the furniture out and sold it and made $1,200 cash?
This is the property and I'll tell you what happened.
Property was on the market for $39,900.
I believe that it had a fair market value.
In fact, don't look at me for just a minute, I mean look at me not at the overhead.
Property had a $24,000 first mortgage on it, it had a fair market value I believe of about
$45,000 to $48,000 but it was run down.
Bushes overgrown, roof needed cleaning, lawn in terrible shape, cosmetic things that I
ended up correcting for as I recall somewhere in the $1,200 range.
$24,000 first mortgage, the seller was asking $39,900.
Why because he couldn't sell it at $47,900, couldn't sell it at $45,900, cut it to $43,900.
Finally, this poor old man in ill health in New Jersey said, sell it for $39,900, that's
what I went for it.
So here's what I did.
I owned a piece of property that had a lot of equity in it, in fact I own a lot of properties
with equity in it.
I used an equity loan and took out $24,000 out of that property.
I paid off the existing non-assumable first mortgage of $24,000.
That's gone.
I then said to the seller, you've got $15,900 in equity, would you be willing if I can pay
off the first mortgage to take back a first mortgage yourself for $15,900?
I'll pay you $100 a month, 5% interest.
He said no, I'll take $7 but $100 a month is okay.
And at that point in time, I didn't even know until I checked my computer or my amortization
book what kind of terms I got.
I only knew that I could live with them.
Do you know that that is a 35-year loan?
$15,900 at $100 a month, 7% interest, it was a 35-year loan.
So I now owe the seller $15,900 on the property and I have $24,000 in equity.
Is everyone with me on what I did?
I took cash out of one property, paid off a mortgage on the property I was buying.
Now it's free and clear.
The seller then took back a $15,900 first mortgage.
I bought the property, no money down.
I've got equity of $24,000 in it.
So the property that used to have equity of $50,000 now only has $26,000.
And I thought at the time, what an incredible property for partners.
Here's what I would have done if I didn't get greedy and want to keep it myself.
I would have said to the partners, this property will generate $600 a month.
Actually it turned out to be $6.25 but that's what I projected, $600.
Negancy at 5% is 30.
Effective gross income is 570.
Here are all the expenses, taxes, insurance, management, maintenance, advertising, miscellaneous.
That total is $155, giving us a net operating income of $415.
The first mortgage payment to the seller is $100, giving me spendable cash each month
of $315.
That's what I'm getting right now on that property.
No money down.
What I would have said to the partners is, look, you put in $5,000, I'm going to get
six people like this.
Six times $5,000 is $30,000.
In return for that $5,000, you're going to get a 15% ownership.
Some partner is going to say, wait a minute, 15 times 6 is not 100, it's only 90%.
You say, that's right, I'm going to get a 10% ownership myself for putting this together
and I'm going to get this ownership interest at no cost, free.
You've also got to tell them that you are going to owe the seller $24,000 in cash, you've
got to pay off that first mortgage for $24,000 in cash.
You're putting $6,000 cash in your pocket, required by law that you disclose that.
But is this a good deal for the partner?
Absolutely it is.
They're buying a property with an actual value of $47,000 to $49,000.
I will give them $250 per month cash, which times 12 is $3,000.
They're putting in 30, that's 10%, right?
Where can you get a better return on your money than 10% today?
Very difficult.
You are getting $6,000 cash at close, you're getting $30 a month from management, you're
getting $65 per month from the property because you're getting $315 a month cash flow, but
you're only paying out $250 and you get 10% ownership in a house.
Can you see this relatively simple technique of using partners with single family homes?
If you did this 10 times in a year, and I don't think that would be tough.
You could earn $60,000 cash and 10 times 10% ownership in each house is the equivalent
of putting $60,000 cash in your pocket and having a single family home free and clear.
Very good technique.
Next technique I want to talk to you about is using zero coupon bonds.
Corporations and municipalities issue bonds, which are really forms of indebtedness.
They're promissory notes in effect is what they are.
They're in $1,000 denominations.
I explained this to a degree in my home study course, my real estate home study course.
But they represent a wonderful opportunity to buy property and take cash out at the close.
I've done a couple of them and they work beautifully.
Here's the whole concept.
Let's assume that you find a property with a lot of equity.
That's very important because the equity should be at least 80% of the value of the property.
If it's not, this technique does not work that well.
So here we are, we found a property with a $60,000 asking price, a $10,000 non-assumable
mortgage and the seller's got $50,000 in equity.
What if we did this?
What if we go out and put a new first mortgage on the property for $45,000 or get a commitment
for it, which is 75% of the value of the property?
Not difficult to get at all.
You've got $45,000 lying here on the table.
How is that money spent?
Watch carefully.
Number one, you pay off the existing mortgage of $10,000.
That leaves 35 left.
You give the seller 5,000 cash.
That leaves $30,000.
You go out and buy $45,000 worth of bonds for $23,878.
Now where did I come up with that?
Today you can buy tax-free Wyoming state farm bonds, B1 rated, which is a good rating by
Moody's or Standard & Poor's, B1 rated, you can buy them for $530.63.
They are due in 11 years.
So to buy $45,000 worth of them will cost $23,878, giving you cash in your pocket of
$6,122.
The seller says, wait a minute, I've got to wait 11 years for those bonds to mature.
What about interest in the meantime?
I have bought property with zero interest, and I'm sure you have too.
But realistically, let's say the seller wants some interest.
I would start with bank interest, 4 or 5%.
What if you were able to negotiate 4% interest on these bonds that are not due for 11 years?
4% times $45,000 equals $1,800 a year times 11 years is $19,800.
Let's get creative.
Why don't we prepay a portion of that $19,800 in advance in the form of, guess what, more
zero-coupon bonds?
25% of $19,800 is roughly $5,000.
To buy $5,000 worth of zero-coupon bonds at $530.63 per thousand is going to cost $2,653,
leaving you in your pocket not $6,122 anymore, but $6,122 minus $2,600, which is about $3,400.
Will the property carry that debt?
You've got to do a financial analysis to determine whether the property will carry the debt.
And if it doesn't, then make a decision to go ahead with it, knowing you're going to
get a negative cash flow or to back away.
Let's look at a pro forma.
Let's say the property rents for $650 a month, 5% vacancy, giving us an effective gross income
of $617.
These are all the costs, net operating income $445.
The first mortgage, if it's 9% for 30 years, will be $362, giving us $83 lying here on
the table.
But wait a minute.
We promised to pay the seller some interest every month, didn't we?
We paid 25% of that interest in advance, didn't we?
But we still got 75% left to pay.
And that works out to be 75% of 4% interest only per year is $112.
That gives you a negative 29.
Well, if you're managing the property yourself and getting 30, it's a break even.
Maybe you think that the property, after doing some cosmetics, will bring in more than $650
a month.
Maybe you think that the other benefits of having bought property this way are worth
it.
For example, you've picked up cash at close of $3,500.
You've got equity billed up of approximately $400 per year.
And you've got $15,000 worth of equity in your property.
So you say, yes, in return for those things, I'm willing to accept a little bit of negative
cash flow.
Property I bought this way actually had a positive cash flow.
This technique can be used.
In fact, I turned down an opportunity to do this, maybe I mentioned in one of my home
study courses, with a motel in Florida where I could have put a quarter of a million dollars
in my pocket.
And it was just a little bit too risky for me.
I don't take risks anymore.
But something like this is relatively risk free.
We've gone over about a baker's dozen plus one, I think, a dozen techniques to take cash
out at the time of flows.
Some have used these techniques.
Some of you have here.
Some of you watching have.
Believe me, I know you're going to try very soon to use them all.
Some are quite complex.
Some are simple.
But I think all of them, to be used successfully, are going to depend upon how well you can
size up the situation of the property and determine the wants and needs of the seller.
Because I can assure you, no matter how illogical it may seem to you, that a seller would allow
you to buy their property and take cash out at the time of close, or even to pay you cash
to take the property at the time of close, it is done all the time.
I wish you good success in using these ideas, and I'd like to have you do me a special favor.
As you use these techniques and you're successful using them, please get in touch with me through
the Professional Education Institute, because I want to know about your successes, because
that's one tremendous source of pride and joy for me, believe me.
I read once that a man's mind, stretched by a good idea, never returns to its original
dimension.
I hope it'll be that way with you today.
Thanks.
Good investing.
Good luck.
Thank you.
Thank you very much.