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. 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 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. Generally builders and developers were the ones who bought
property and took cash out at the time of close. 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 will generate in net income. Let
me give you a real example and this is this is a precise example that was done
by a developer friend of mine and it involved a 212 unit apartment building.
He projected a gross income from that apartment building of 1 million 370
thousand dollars 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 a hundred percent 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 a hundred and one or a hundred and two percent 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 a million three hundred and one thousand five hundred. Vending he
projected at thirty five thousand five hundred. Effective gross income then
including vending would be a million three hundred and thirty seven thousand.
He projected his expenses at forty seven percent giving him a net operating
income of seven hundred and eight thousand six hundred dollars. Lenders 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 ten percent return
on your investment how much would you be willing to spend? Answer seven million
eighty six thousand dollars. You with me? If you gave him seven million eighty six
thousand dollars then you would indeed have a ten percent return on your
investment. Well this particular bank that my friend went to used a nine point
five percent capitalization rate so based on that they determined the value
and loaned eighty percent of that which is five million nine hundred and seventy
thousand dollars. But look at this the cost to build was about twenty six
thousand dollars per unit including the land. So it was five hundred and eight
five million eight hundred and twelve thousand dollars to build it which
included three hundred thousand dollars in interest. The cash out was a hundred
and fifty eight thousand dollars but more importantly he had a million five
hundred thousand dollars 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 a million five hundred thousand dollars in
his pocket plus a hundred and fifty eight thousand dollars cash out at the time he completed the 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 knowing solutions to give the seller which would 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 the
states 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 sellers 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 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 that they where they have put cash in their pocket. So I want
you to sit back take a lot of notes 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 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 I
can cite to you is a dentist that came out of dental school and opened up a
practice in Colorado Springs. Bought a practice from 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. A 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 prior to the close. So trees might be an opportunity for you. Antiques. One
student said he found an old antique chest in the in the attic of a home that
he bought. An old car. Student rode in from Las Vegas, Nevada bought a bought a
property the seller had an old Cadillac like a late 50s 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 12 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 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. If 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 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 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 the 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 fairly
large home it 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 it's 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 trader 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 thirty to
fifty dollar a month range depending upon your 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 a hundred thousand dollars
for example. If a property you're buying is a hundred thousand dollars multiply
that times three point three percent 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 three point
three percent 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 if 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. Now 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 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 of 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 forty two thousand nine hundred dollars and that by the way
was close to its fair market value. It had a second mortgage payable a hundred
dollars per month the second mortgage was forty five hundred dollars. It had a
first mortgage of thirty thousand five hundred dollars payable three hundred
and twenty five dollars per month. If you add the two together thirty thousand
five hundred and forty five hundred you come up with thirty five thousand
dollars. So the difference between forty two nine and thirty five thousand
dollars is a seller's equity. The seller had seventy nine hundred dollars 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 thirty five thousand dollars exactly
what the amount of the mortgage is. I will give you one hundred dollars as
option consideration and I want to get credit for all equity build-up 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
make 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 thirty five thousand dollars and get equity build-up rather than saying I
will buy it for twenty eight thousand dollars because in effect that's what he
did. Here's why. Over four years that second mortgage for forty five hundred
dollars was going to be paid down to zero. The first mortgage of thirty five
thousand five hundred dollars was going to be paid down to twenty eight thousand
dollars at the end of four years. So in effect what was his purchase price?
Twenty eight thousand dollars. Everyone with me on that? So what did he do? He
put about eighteen hundred dollars in it. He put in new carpeting painted it
inside and out. Steam 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 sub lease
option for forty three thousand nine hundred dollars and the people that
bought it thought it was a bargain. Forty three thousand nine hundred dollars. The
people that bought it under the terms of a lease option under the terms of a
sublease option gave him four thousand dollars in cash. They agreed to take the
property as is for five hundred and fifty dollars a month rent for four
years. At the end of four years they will owe forty three nine minus the four
thousand dollars that they paid for the sublease option. The first mortgage will
be paid down to twenty eight thousand dollars. They will owe eleven thousand
nine hundred dollars. 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 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. Four thousand dollars minus eighteen hundred dollars to fix up the
property minus a hundred dollars that he gave to the seller as option
consideration. He put twenty one hundred dollars in his pocket. He had a positive
cash flow every month because the mortgage payments were three and a
quarter plus a hundred is four and a quarter and he was getting five fifty
and at the end of four years he will get this just happened this year he will get
eleven thousand nine hundred dollars 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 brokers commission. It is easy and I'm not 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 a 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 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 gonna 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 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 an arrangement with your broker. For example one of my acquaintances
who's 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% of
the commission but on anything involving property she buys she gets 90% of the
commission that comes from property she buys. So again be be aggressive in
negotiating with your broker or with a broker who's 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 $5,000 to you take a third
mortgage on the property and I agreed to pay the pay the broker 12% 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 a 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 behind on payments of the
threat of foreclosure is there anything else? A divorce or a need for a quick
sale for 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 gonna pick a
hundred thousand dollars here. The contract price is $89,000. You put a
thousand dollars into the cosmetics. Now 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 we'll 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 to really make the
property aesthetically attractive. Amazing what you can do with two to
three thousand dollars or even a thousand. So you put a thousand dollars into the
property and then you sell your contract for ten thousand dollars. Now wait a
minute. Would I ever put, 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 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 a thousand or fifteen hundred dollars cosmetics into a property and
then try to flip it. If you can't flip it for ten thousand could you flip it for
five or four? 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. Utility deposits generally you don't ask
for these but if you did you might find you'd 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 a an investment
property that is one that's been occupied by tenants at the time you you
buy it but the thing that we so many times don't ask for our other deposits
for example prepaid insurance as you know insurance is paid in advance at the
closing if you don't ask for it 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
utilities 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 rent
security deposits tax credits and frequently other credits as well from
utility deposits or plea prepaid insurance plus a full month's rent that
I can put into my pocket I bought in a 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 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 hundred thousand dollar
property that's on the market their market value if you were to go in and
pay all cash for that property you might be able to buy it for 80 or 85 thousand
but hundred thousand dollars is not unreasonable there's a forty thousand
dollar first mortgage and the seller therefore has equity of sixty thousand
dollars what you would do would be to offer the seller a hundred thousand
dollars or maybe even as I suggested here be willing to go to a hundred and
ten thousand dollars you put a new sixty thousand dollar first mortgage on the
property I'm going to comment a couple of times that property that that
mortgages for sixty or sixty five percent 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 fifty or sixty or sixty five
percent 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
it getting a new sixty thousand dollar first mortgage here we pay off the
forty thousand dollar existing mortgage that's on the property right now sixty
minus forty there's twenty thousand dollars lying here on the table the
seller agrees to split that twenty thousand dollars with you gives you ten
thousand dollars puts ten thousand dollars in his or her pocket now in
order for the seller to get a hundred thousand dollars for the property if you
have put ten thousand dollars in your pocket you really have got to pay the
seller a hundred and ten thousand when I did this I did not pay a premium for it
the seller actually split cash with me there's only about four thousand dollars
that 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 an effect over financed 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 pay them to take the property anyone well
we've got one person anyway I've done it probably three or four times is again
once just a few months ago here's a situation a property is on the market
for a hundred thousand dollars there's a ninety thousand dollar 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 gonna let the property go back to
the lender I'm not gonna 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 a 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 anytime you see a property that's on the market for ten
percent down it'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 Brokers Commission and the closing costs ten percent down is not
going to allow the seller to put much cash in their pocket so that was the
case here I said I said to the seller I'll tell you what I'll do I will give
you ninety thousand dollars 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 a
hundred percent you would pay me ten thousand dollars 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 hundred thousand dollar property it was a thirty two thousand
dollar condominium granted the property had gone down in value somewhat it was
worth I think probably about twenty five or twenty six thousand the seller came
to the closing table the husband ex-husband dead was seven thousand
dollars and the wife was seven thousand dollars or teen thousand dollars 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 fourteen thousand dollars 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 stands for real estate owned by a bank where a bank is
loan 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 a hundred and twenty five million dollar condominium
development that was bought by Don Trump and Lee Iacocca for about 50 cents on a
dollar all cash was 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 a hundred you're going to try to get a
hundred 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 three or four percent because
those interest rates can get lost in a huge portfolio then 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 one 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 a hundred percent 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 a hundred and twenty thousand dollars 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 twelve thousand dollars so they tracked subtracted a
hundred and twenty minus twelve they were asking a hundred and eight thousand
my student was very aggressive as I tell all of you to be aggressive in your
offers he offered the bank ninety two thousand dollars for the property the
bank counter offered at a hundred and four thousand my student counter offered
and said okay I'll pay you a hundred and four thousand for the property provided
you at the time of close give me twelve thousand dollars cash and the bank said
okay so at the closing table my student gave them a mortgage signed and a note
for one hundred and four thousand dollars the bank gave him a cashier's
check for twelve thousand dollars which represented the bank's estimate of the
cost to rehab the property my student actually rehabbed the property for eight
thousand dollars by doing a little bit of the work himself incidentally and put
four thousand dollars cash in his pocket but at the close he actually had
twelve thousand dollars cash again be aggressive in how you approach banks I
approached them professionally I approached them reasonably I think in
terms of what I would 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 fifty cents on a dollar or seventy five
cents on a dollar 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 tech technique I want to talk about is
how to leverage an REO property owned by a bank that is a vacant land or 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 my telephone to a student in the Chicago
area who called me and said that they had found a bank that was making 90
percent 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 a hundred thousand dollars 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 anytime 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 a
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 two hundred thousand dollar property the
seller is asking a hundred thousand dollars 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 four hundred thousand dollar apartment
building with a fairly low first mortgage a hundred thousand dollars
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 two hundred thousand dollars I don't care what the bank's asking for it
if it's worth two hundred thousand dollars then you've got to find
property that has seller's equity of at least two hundred thousand dollars or
more you find this property that has sellers got three hundred thousand
dollars let's go ahead and make an offer to the seller offering the vacant land
as a down payment let's see four hundred thousand dollars two hundred thousand
dollars for the vacant land the first mortgage is a hundred thousand dollars we
still owe the seller a hundred thousand dollars don't we right so let's get
three hundred thousand dollars in equity the land accounts for two of it at least
a hundred thousand 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
banks gonna 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 they don't want to do it again but what if what if
that bank were told yeah 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 four hundred
thousand dollar apartment building you know yourself that banks are willing to
loan up to 80% on income property some of them are some of the more 80% times
four hundred thousand is three hundred and twenty thousand dollars now listen
carefully you put that first mortgage on the property of three hundred twenty
thousand dollars and you've got three hundred and twenty thousand dollars lying
here on the table where does that go number one it pays off the old first
mortgage of a hundred thousand number two that that leaves by the way 220
doesn't it you give the seller a hundred thousand dollars for the balance of
their equity that leaves a hundred and twenty thousand you give the bank a
hundred thousand dollars for the property that leaves twenty thousand 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 two hundred thousand dollars for or maybe if I
market it creatively I might be able to get two and a quarter or 254 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
it's worth 400,000 isn't it you've got immediate equity of 80 $20,000 cash in
your pocket and an asset with a positive cash flow look for situations like this
talk to your banker you don't want when we go to bankers to talk about REO
properties we have a tendency to say what condominiums do you have it 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 wish 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 got a 40 unit apartment 10 buildings the purchase price is 1 million dollars
if we divide 1 million by 10 buildings the purchase price is hundred thousand
dollars per building since there are four units in each building the purchase
price is on average twenty five thousand dollars per unit the terms are the
mortgage total eight hundred thousand 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 cash two hundred thousand dollars worth to the seller five
thousand dollars per unit here's what I'm suggesting you can do and 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 ten
separate parcels with the pool being commonly owned by all ten you sell nine
buildings to nine buyers keeping one building for yourself the terms that
you're going to be selling are 120 thousand dollars per building which is
thirty thousand dollars per unit you're going to tell them that each unit is
going to be encumbered by twenty thousand dollars in mortgages so all
they need to come up with is ten thousand dollars cash per unit or forty
thousand dollars 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 ten separate buildings 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 twenty five
thousand dollars a unit one hundred thousand dollars per building I'm going
to sell them for thirty thousand dollars per unit 120 thousand dollars 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 a
hundred thousand 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 baking 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't 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 forty thousand dollars excuse me thirty thousand dollars per unit
one hundred and twenty thousand dollars for the building giving me ten thousand
dollars cash per unit or forty thousand for building you with me he's paying me
120 but only 40 of its in cash but let's see where you are if you do this nine
times times forty thousand dollars in cash you've got three hundred and
sixty thousand dollars lying here on the table two hundred thousand dollars of it
is going to go to the seller and a hundred and sixty thousand dollars is
going to go in your pocket and that's just about what I made on maybe a
little bit more than I think I made a hundred eighty thousand on the one of
these that I did what I did was not have them resurveyed I had them
condominium eyes under the laws of Florida it was a Florida property I then
went to individual investors and I said hey you want to buy 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 a hundred and eighty thousand dollars 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 going to do this and the time that I condominium eyes
and sold all the units it was about nine months but I made about a hundred and
eighty thousand dollars 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 resurveyed so now you've got in a back
in effect two pieces of property now you got to be careful about doing this
because maybe there's a certain minimum size lot required under your under your
local governmental authority whatever that is so be careful about that but
let's assume that there's no problem have them resurveyed sell the left half
left half of lot one in the sub in the in the pine subdivision and the right
half of lot one you're going to 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 I have a home
study course on partnerships which I think is one of the best in the country
I I don't think anyone has ever written a course for partnerships aimed at people
that don't have licenses and I talked 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 is that really the same thing except
you're not making any money you're just dividing it making 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 gonna 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 proper with the
partners in fact the first four I bought with property 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 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% I'm
gonna take a small percentage ownership to put the whole thing together that was
my first one unfortunately 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 gonna happen if you and these four others
join me I'm gonna take out $20,000 at the time I buy the property and I'm
gonna own 15% of the ownership I'm gonna manage it and I'm gonna 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 a 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 seven or eight thousand dollars or less it's a big opportunity
for you and I'm not talking about buying a hundred 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 made 1200 bucks cash this is the property and I'll tell you what
happened property was on the market for thirty nine nine I believe that it had a
fair market value in fact don't look at me until for just a minute I mean look
at me not at the overhead property had a twenty four thousand dollar first
mortgage on it it had a fair market value I believe of about forty five to
forty eight thousand dollars but it was run down bushes overgrown roof needed
cleaning the lawn in terrible shape the cosmetic things that I ended up
correcting for as I recall somewhere in the twelve hundred dollar range twenty
four thousand dollar first mortgage the seller was asking thirty nine nine why
because he couldn't sell it at forty seven nine couldn't sell it at forty
five nine cut it to forty three nine finally this poor old man in ill health
in New Jersey said sell it for thirty nine nine 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
like I own a lot of properties with equity in it I used an equity loan and
took out twenty four thousand dollars out of that property I paid off the
existing non-assumable first mortgage of twenty four thousand that's gone I then
said to the seller you've got fifty nine in equity would you be willing if I can
pay off the first mortgage to take back a first mortgage yourself for fifteen
thousand nine hundred dollars I'll pay you a hundred dollars a month five
percent interest he said no I'll take seven but a hundred dollars a month is
okay at that point in time I didn't even know until I checked my computer for my
amortization book what kind of terms I got I only know that I could I only knew
that I could live with them do you know that that is a 35 year loan fifteen
thousand seven hundred nine hundred dollars at a hundred dollars a month
seven percent interest it was a 35 year loan so I now owe the seller fifteen
thousand nine hundred dollars on the property and I have twenty four thousand
equity is everyone with me on what I did I took cash out of one property
paid off a mortgage that on the property I was buying now it's free and clear the
seller then took back a fifteen thousand nine hundred dollar first mortgage then
I bought the property no money down I've got equity of twenty four thousand
dollars in it although the property that used to have equity of fifty now only has
twenty six okay 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
six hundred dollars a month actually it turned out to be six and a quarter but
that's what I projected six hundred they can see at five percent is thirty
effective gross income is five seventy here are all the expenses taxes
insurance management maintenance advertising miscellaneous that totals a
hundred and fifty five dollars giving us a net operating income of four hundred
and fifteen dollars the first mortgage payment to the seller is a hundred bucks
giving me spendable cash each month of three hundred and fifteen dollars 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 fifteen you put in five thousand dollars
I'm going to get six people like this six times five thousand is thirty
thousand in return for that five thousand dollars you're going to get a
fifteen percent ownership and some partners gonna say wait a minute fifteen
times six is not a hundred it's only ninety percent and you say that's right
I'm gonna get a ten percent ownership myself for putting this together and I'm
gonna do it at gonna get this this ownership interest at no cost free and
you've also got to tell them that you are going to owe the seller twenty four
thousand dollars in cash I mean you've got to pay off that first mortgage for
twenty four thousand in cash so you're putting six thousand dollars cash in
your pocket required by law that you disclose that but is this a good deal
for them for the partner absolutely it is they're buying a property with an
actual value of forty seven to forty nine thousand I will give them two
hundred and fifty dollars per month cash which times twelve is three thousand
bucks they're putting in thirty that's ten percent right where can you get a
better return on your money than ten percent today very difficult you are
getting six thousand dollars cash at close you're getting thirty dollars a
month from management you're getting sixty five dollars per month from the
property because you're getting 315 a month cash flow but you're only paying
out 250 and you get ten percent ownership in a house can you see this
relatively simple technique of using partners with single-family homes if you
did this ten times in a year and I don't think that'd be tough you could earn
sixty thousand dollars cash and ten times ten percent ownership in each house
is equivalent of putting sixty thousand dollars 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 their promissory notes in
effect is what they are they're in one thousand dollar denominations I explain
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 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 equity should be at least 80 percent 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 the sellers 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
we'll 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 be one rated which is a good rating by Moody's or Standard & Poor's be
one rated you can buy them for $530 and 63 cents they are due in 11 years so to
buy $45,000 that worth of them will cost $23,878 giving you cash in your pocket of
$6,122 sellers says wait a minute I gotta 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 four or five percent what
if you are able to negotiate four percent interest on these bonds that are
not due for 11 years four percent 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
percent of $19,800 is roughly $5,000 bucks to buy $5,000 worth of zero coupon
bonds at $530 and 63 cents per thousand is going to cost $2,653 leaving you in
in your pocket not $6,122 anymore but $6,122 minus $2,600 which is about $3,500
$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 five percent vacancy giving us an effective gross
income of $617 these are all the costs that 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 then wait we paid 25% of that interest in advance didn't wait but we
still got 75% left to pay and that works out to be 75% of 4% interest only per
year is 112 bucks 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 3500 you've got equity
buildup 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 it's something like this 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 of you have used these techniques some of you have here
some of you watching have believe me I know you're gonna 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 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
thank you very much very much
you