Hello, I'm Carlton Sheets, and I'm pleased to be able to provide this full-length video
to you at no extra charge.
This video covers chapters 11 through 15 of your system, which are all of the No Money
Down techniques in their entirety.
I've arranged to provide these chapters on video because over the many years of personally
teaching this material in seminars all across the country, I learned that people found it
very helpful to be able to see these techniques presented live.
With this video, you can now learn them in three ways, in written form, on audio tape,
and now also on video tape.
Experts in cognitive research and learning tell us that the more ways we can internalize
a concept, the better we understand and retain it.
But we also know that the best way to truly internalize all of this material you're learning
in the course is to actually go out and use it in the marketplace.
Incidentally, if you find that having these five chapters on video is helpful and would
like to obtain the remaining 19 chapters on video, they're available through the Professional
Education Institute for a very nominal price.
As you see me present these creative financing techniques, keep in mind that they're offered
as possible solutions to a particular set of circumstances involving you, the seller,
and the property.
None of them are set in stone.
You'll inevitably find yourself altering them to fit situations you encounter in your investing.
The overriding principle here, though, is to remember that you are a creative problem
solver.
Now, let's learn some ways to help you solve a seller's problems by buying his or her
property no money down.
Chapter 11, buying properties with no money down using some simple techniques.
This is an exciting chapter for me, and I think for you as well, probably you're going
to be as we go through these techniques saying, aha, that might have worked for me, or aha,
I could use this with something I'm working on right now.
I'll be the first to tell you that the creative no money down financing is not a real new
area.
As a matter of fact, I can trace it back some 50 years to William Zeckendorf, who would
use creative real estate financing to add value to properties that he purchased.
For example, he was the one that put together a partnership to buy the Empire State Building,
and then once he bought it, he split off or spun off the land underneath, the personal
property inside the building, the air rights, the building itself, and he would sell each
of those to an investment group, and he was creating a tremendous amount of value by doing
that.
Other people have used creative financing techniques throughout the years, people like
Trammell Crowe, a very successful real estate investor, Don Trump has used the creative
financing techniques.
I'd have to say that Ted Turner is also very much into using these techniques as he tried
to do not too long ago when he was acquiring one of the major movie studios.
What I will take a little bit of credit for though is taking these techniques down to
a level where people like you and me, ordinary people in conquest of better things financially,
can use them to buy single family homes and small multi-unit properties so that you can
buy no money down and you can do it if you've got no cash and you can do it if you've got
no credit.
Now most people think that when you're buying property no money down and we're talking about
creative financing techniques that it only involves seller financing.
Look if you will please at the list on this page, the seller is listed as number one,
but there's a lot more, the property itself.
Remember in the last chapter when I was talking about creative problem solving how one of
my students actually sold the trees on a farm in advance of buying the property and was
able to generate the cash for a down payment, that's a good example there.
Other investors, this is how I got my start back in the early 70s when I had no cash and
I had no credit and the very first course that I took on creative real estate investing
had to do with partners and I didn't even want to go to that course and I said to them
don't you have a course on any other subject relating to real estate and they said no,
this is the only one we offer.
And I often look back and I think if that first course had been on mobile homes or on
lease options I probably would have been very much oriented in that direction, but it was
on partnerships so I began to put together partners to buy property and made an enormous
amount of money doing it.
Number four partners, number five tenants, number six real estate agents and brokers
using their fee or their brokerage commission as a down payment.
Your own services and skills, existing loans on the properties can certainly help you buy
it, unsecured paper and secured paper on equities that you might have.
Now equity by the way is nothing more than the value of an item minus what you owe, whatever
is left is your equity.
If you have a single family home that you're living in that cost $80,000 and you owe $50,000
on it, your equity is $30,000.
And finally last but not least but deliberately last, the role of institutional lenders like
banks and savings and loans.
There are some misconceptions about no money down financing and that is first if the seller
gets no cash.
In many cases when you're buying a property creatively no money down the seller will actually
walk away from the closing with cash in his or her pocket.
The point is it just doesn't come out of your pocket.
Number two the seller must be a down and outer and I commented on that earlier that many
sellers of properties are flexible sellers independent of their financial situation.
And some of the most attractive transactions I've ever done have been with sellers who
are quite well to do but sellers who desperately wanted to get rid of their property for one
or more reasons.
Number three the techniques will not work with inflexible sellers.
Some sellers are inflexible and it's more difficult to work with them but if we can
give them cash on the front end it really doesn't matter whether they're flexible or
not does it.
The important thing to remember here too is that when we're dealing with sellers that
we think are inflexible today remember that sellers needs and wants constantly change
and so an inflexible seller today may be very anxious to sell their property in a way that
is flexible in a week or a month or three months.
The no money down techniques I encouraged you earlier to use that cog chart that creative
options grid that comes with the course because every single one of the techniques that we're
going to be describing in detail here are included in that cog chart and it's nothing
more than a reminder to you that there's more than one way as I said to skin a cat.
Do any of you fly airplanes any of you pilots in the room?
Well okay good one or two of you.
We use it we use the cog chart the way a pilot uses a checklist and if you've ever looked
at or probably you never have but I will tell you the checklist of some of the 747 and 1011
aircraft are that thick you can't afford to leave anything out so that's what that checklist
is all about.
Let's look at technique number one.
Obtain a new mortgage to pay off existing loans and provide down payment money.
Now this technique works best when a seller owes nothing on the property when the property
is owned free and clear and the or when the seller owes no more than 40 percent of the
value of the property.
Look at that next paragraph.
For example assume the seller of a $50,000 house has an existing loan of $12,000 and
is looking for a $15,000 down payment.
He's willing to carry the financing for the balance of $23,000 $50,000 less $12,000 existing
mortgage less $15,000 down payment would equal $23,000.
Simply obtain a new first mortgage for $27,000 which can pay off the existing $12,000 mortgage
and give the seller $15,000.
Next give the seller a second mortgage in the amount of $23,000.
The $27,000 first mortgage plus a $23,000 second mortgage gives the seller his total
asking price of $50,000.
What if any problem do you see in that technique?
Tom?
Yeah, the bank may balk I mean you're trying to borrow a relatively small percentage of
the total value of the property but the bank may say wait a minute where's your down payment?
And I gave you one way around that which was what?
Sir?
Sure, put mortgage on another property Kirby, another property that you have equity in.
The mortgage that we're giving back to the seller could be on that property that may
very well satisfy the bank.
But you don't have any other property with equity in it.
What could you do?
What about finding a partner with a property with equity in it?
Or what about, now listen to this, going to a mortgage broker who will loan up to 50 to
60% of the value of a property he represents or she does private investors and all you've
got to do is fog up the mirror.
Did you know that?
Mortgage brokers will frequently represent private individuals who want to loan money
on real estate, will take back mortgages up to 50 to 60% of the value and it doesn't matter
whether you declared bankruptcy yesterday, they're willing to loan the money.
Are the terms difficult?
Yes they are.
For example, you would pay anywhere between 14 and 16% interest and you would probably
have a balloon from three or maybe even two to five years.
But if the property has an exceptionally good return for you, does that matter?
No.
For example, real quickly, here we're giving the, we'll get a mortgage from a mortgage
broker for $27,000 and that's the first mortgage and we're giving a mortgage to the seller
for $23,000, that's the second mortgage and I told you that the interest rate here might
be 15% which is going to be 4,000, help me out, $4,050 a year.
But what if the seller was willing to take a second mortgage, now keep in mind we're
offering the full asking price, right?
If the seller will take a $23,000 second at 5%, the blended rate, you can eyeball and
see is going to be about 10.5% and many properties will support 100% financing at 10.5%.
You all understand how to figure a blended rate?
I won't do the math right now but if you've got a $50,000 mortgage at 15% and you got
a $50,000 mortgage at 5%, you can very easily see that the blended rate there is 10%.
Here again, be creative, you know these techniques are not set in stone, they're to be modified
and molded to fit the situation and we talked about the barriers that people who are successful
had to cope with and it's very easy for you to say, well, Carlton talks about going out
and getting a bank loan for $27,000, I don't have the credit to do that, fine, use equity
in your property, you don't have that, fine, bring in a partner, be creative, there's got
to be 10 different ways to solve this problem.
Technique number two, lower the price, raise the interest rate.
Look at the second paragraph here, a seller has a property for sale at an asking price
of $100,000, the property has an existing assumable mortgage of $50,000, payable the
rate of $450 per month.
The seller wants $10,000 cash at close and will extend you a loan of $40,000 in the form
of a mortgage at 10% interest.
Offer the seller $95,000 with no money down, agree to take over the loan of $50,000 and
pay 15% interest on the remaining $45,000 for a period of five years, the result is
a monthly interest payment of $563 which is nothing more than 45,000 times 15% interest
divided by 12 months.
You will pay $563 per month for interest, then the entire principal amount of 45,000
will be due in five years.
If the total monthly payments for the first and second mortgage of $1,013 per month, 450
plus 563, result in a negative cash flow, restructure the second mortgage so that only
a portion of the 15% interest is paid monthly.
The balance would accumulate but not compound, that's important, underline that but would
not compound and would be due along with the 45,000 at the end of five years, then at the
end of five years refinance the entire debt using your equity as a down payment.
I bought a piece of property once, was on the market for $265,000 through negotiations
with the seller, I finally got the price down to $225,000, I wanted to get it lower but
that was as low as he would go and then I realized and I refer you to your creative
tax strategies book for this but I realized that the person was not an investor, he was
a dealer because he had built the property and anything that he made would have to be
treated as ordinary income to him.
So he agreed to take back financing and I said what if we do this, what if I pay you
not $225,000 but I pay you $165,000 but I'm going to pay you 18.36% interest which really
gave him his asking price of $225,000 or $235,000 and he agreed to it, it didn't matter how
he received the money whether it was interest or in capital gain because it was all ordinary
income but it made a big difference to me, why?
Because that high interest rate really allowed me to get a partner in the form of whom?
Uncle Sam, Uncle Sam helped me make that down payment on the property.
So be creative.
The only thing you've got to watch out for in trying to induce the seller to go along
with you by offering high rates of interest, what do you have to be careful about?
Negative cash flow, that's why it is so important to do a cash flow analysis of the property
so if you can buy it no money down, give the seller what he or she wants that you don't
have a negative cash flow.
You know it's amazing what people will do when they are emotionally disenchanted with
their property.
I was in a stationary supply store a few years ago, a young man saw me, he worked there,
saw me pull up and I had kind of a nice looking car and he said is that your car and I said
yes and he said that's mine right next to it and it was a little red sporty type car
and I said really I said that's a nice looking car.
He said well it's for sale.
He said that car has a value of $6,000.
He said I owe to the bank $8,000, does that ring any bells to you?
Talk about destructive assets or depreciating assets and he said if I were to pay off the
loan at the bank, obviously you would get a little bit of a discount, he said it would
cost me $7,000 and I said well it's interesting.
I said my son is looking for a car and I said he's got a budget he's got to work with but
I said I believe that if you would pay him $1,500 cash he would take over those monthly
payments which were like I don't know $267 a month or something like that, it was ridiculous.
I said I believe he would take your car.
Well you'd have thought I'd called his mother a bad name.
I mean he could not have been more of he said $1,500 cash for my car and I said yes and
he said well I'd never do that.
Well I had a charge account at that store where he worked.
He called me one week later and he said I got the $1,500 when do you want to pick up
the car?
Isn't that amazing?
Two things, his needs and wants had changed and he got back in touch with me to tell me
that he was willing to take the offer.
Don't be afraid to make offers that embarrass you.
Technique number three, wraparound mortgage.
Look at the first paragraph, assume the following situation, a seller has a property with a
fair market value, you'll sometimes see that abbreviated as FMV, $50,000 with an existing
assumable mortgage of $30,000 at 8% interest with payments of $245 per month.
The seller's equity is $20,000.
Here it is diagrammed.
$50,000 property, got an existing first mortgage on it of $30,000 and the seller's equity is
$20,000.
A classic yet really conventional no money down way to buy the property would call for
the buyer to assume that $30,000 mortgage and merely give the seller $20,000 second
mortgage for their equity.
Maybe with an interest rate of 10% it says in the next paragraph with payments of $200
per month.
But look at the next paragraph after that.
To avoid the cost and liability of assuming the existing mortgage, offer the seller a
$50,000 wraparound mortgage in some states known as an all-inclusive trust deed, AITD,
payable at the rate of 10% interest with payments of $445 per month.
On the surface it appears to be the same proposition but it is very different.
What is a wraparound mortgage?
It is a mortgage that wraps around existing financing on the property but is subordinate
to that financing.
If we offered the seller a $50,000 wraparound mortgage, that means that we would pay on
that $50,000 mortgage as if that's the only mortgage on the property.
Now while I think about it, a wraparound mortgage or an all-inclusive trust deed must state
that right on the face of the mortgage.
It must say in bold type at the top, this is a wraparound mortgage or this is an all-inclusive
trust deed.
If we give that seller that $50,000 mortgage with interest at 10%, we are going to be paying
$445 a month for the property, for that mortgage rather.
The seller in turn must pay the underlying mortgage payment of $245, meaning that after
that underlying mortgage is paid, the seller gets to pocket $200.
You may say, well, that's six of one, half those of the other but it really isn't and
here's why.
Number one, the seller has got more control.
If you were to buy the property from the seller and just give the seller a second mortgage,
how does the seller know that you're making those first mortgage payments?
That's very important to sellers to know that.
Of course, on the other hand, if you're making those payments of $445 a month to the seller
and you're expecting the seller to make the $245 a month payment on the underlying mortgage,
how do you know that he or she is making those payments?
You don't.
What we do is use an independent third party like a bank, a title company, or a lawyer
to collect the check and then disperse the payment on the first mortgage.
But here is the real beauty of this technique.
Right now, you can see that the existing mortgage is $30,000.
The wraparound mortgage is 50,000.
What is the difference between the two?
Answer, 20,000.
But down the road, approximately 20 years, the underlying mortgage is going to be paid
off to zero.
And the wraparound mortgage, which will then become a first mortgage on the property, is
going to be paid down from 50,000 to 33,000, meaning that for 20 years, the seller has
received a 10% return and has a growing equity.
I mean, that's like putting $20,000 in the bank, getting a 10% return on your investment
or on your savings account or CD and going down to the bank at the end of 20 years and
saying, give me my 20,000 back and being told that it has grown to $33,000.
Who do you think might have an interest in a technique like this?
Does anyone fit the profile?
Anyone come to mind that might be interested in this?
What kind of a seller?
A motivated seller.
Okay.
A motivated seller.
How about someone who is elderly, someone who is not a kid and they're looking for a good
safe return plus the growing equity?
What's an ideal for older sellers?
Seller says, wait a minute, you're still buying no money down.
I'm taking back a mortgage right over here for the whole amount, a wraparound mortgage
for 50,000.
I need more security.
Keep that question in mind because in a very short while, we're going to be getting into
how to give the seller more security.
Question, if we do this, would it activate the due on sale clause in the first mortgage?
The answer is yes, it would.
That's why in this particular example, it says that the first mortgage is assumable.
Any mortgage that's an assumable, even though you don't assume it, if it is assumable, there's
no due on sale clause to activate.
Thank you for asking that.
Please go through these techniques again on your own.
We're not going through them word for word and there's an example here where we summarize
the terms and the procedure.
Read those on your own, please, but you at least get the basic idea of how these work.
Technique number four, using equity in one property to buy another.
Let's say this represents a property and that property has equity in it.
Equity is what is owed, subtracted from the value of the property.
You might have equity in a timeshare, a piece of vacant land that you bought before you
ordered this course.
You might have equity in a home and your personal residence.
You might have equity in a whole lot of things.
Let's look at the second paragraph.
Assume that you have located a two-family property that is on the market for 60,000
and there's an existing $25,000 mortgage.
The seller's equity is 35,000, total value minus what is owed is the equity.
Create a promissory noted mortgage in the amount of $15,000 secured by equity in one
of your assets.
Use that as a down payment on the two-family property and ask the seller to take either
a $20,000 second mortgage or a $45,000 wrap.
Here's the property you're trying to buy.
It's a two-family we said that is worth 60,000.
It has a $25,000 mortgage existing on the property and the seller's equity obviously
is $35,000.
What if our equity and whatever this mythical asset is, whether it's a timeshare or vacant
land or travel trailer or maybe your own home is, we'll say $5,000.
Why couldn't you use that as a down payment on the property actually giving the seller
a mortgage secured by that equity?
By taking that equity out of property that you have and then getting the seller in the
amount of $5,000 and then getting the seller to take back a $30,000 second mortgage, can
you see how you are immediately buying a property and you've got equity in it?
Is that clear?
There's an existing first mortgage at 25,000.
The seller's equity is 35.
What you're saying to the seller, look, I don't have $5,000 cash, but what I do have
is equity in an asset.
I'm going to give that equity to you as a down payment.
You could just deed the property to them, couldn't you?
I mean, if it was a timeshare or something that had very little value, you could deed
the property to them or go down to your stationary supply store and get a note mortgage, mortgage
that equity, give them that as a down payment and then ask them to take back a mortgage
for the difference.
In this case, the mortgage would be $30,000.
Now what might be attractive to a seller about that, especially if the seller did not need
cash?
It's a little bit safer for the seller, isn't it?
The seller is getting equity on an...or is getting a down payment consisting of equity
in another property and you, in the seller's mind, have more at risk.
Can you see that?
You've got more at risk.
Imagine, if you will, that this is your own home.
Be careful with this, but you have equity of $10,000 in your home.
Here's property A. You're going to use that equity in your home to buy property A. Once
you complete the transaction, how much equity will you have in property A?
$10,000, won't you?
You got $10,000.
What about using the equity in property A to buy B?
And B to buy C?
Each time using equity in another property as a down payment on the property you're trying
to buy.
Now, obviously, you're not going to be very happy about having your own personal residence
100% mortgage.
So what you could do would be to take that last equity you have here, because every property
you're buying, you're creating equity for yourself, and merely move this mortgage to
that last property you buy, which in turn creates equity back in your own personal residence.
What would you need to do to be able to move that mortgage?
It would require that the mortgage have a substitution of collateral clause in it.
And our basic contract form that's in your book, my form to buy real estate, has a substitution
of collateral clause in it.
It is so powerful.
Technique number five, the blanket mortgage.
This is an easy one to understand.
The blanket mortgage is merely a mortgage that encumbers more than one piece of property.
Just think of a blanket.
Here is this blanket encumbering multiple properties.
Now, remember a moment ago when we were talking about buying a property with a wraparound
mortgage, 100% financed.
Remember that?
I said that the seller has a...we're giving the seller a $50,000 wraparound mortgage.
The seller's got the best of all worlds.
They're getting a 10% income from the mortgage, plus the equity is growing so that at the
end of 20 years, it's gone from 20,000 to 33,000.
Remember my saying that?
Then I said, what if the seller has an objection to that?
The objection being, look, you're buying this property, no money down, you have nothing
at risk.
I said, pay attention, I'll have an answer for you.
The answer is in a blanket mortgage.
A blanket mortgage could encumber another piece of property you own.
It could be an automobile, it could be a boat, it could be a diamond ring that you inherited
from your grandmother.
It could be anything, designed to give the seller some degree of confidence and some
security that you're going to do what you say you're going to do.
Now if you're going to use a blanket mortgage, make sure that you get a release clause which
would allow you to release whatever it is you're encumbering with that mortgage, allow
you to release it out from under that mortgage after you have a history of timely payments
like for example, once you make 10 or 15 or 20 payments on time, then you get to release
that out.
Buy low, refinance high.
I've repeatedly said that not every seller is going to take the offer that you give them
and just because you're prepared to close with all cash, not every seller will sell
their property at a big discount, but that is what I insist if I'm going to pay all cash
to a seller with a quick closing.
Let's assume that you've got a property that's on the market for $100,000.
You might say to the seller, because you have cash in the bank or because you have partners,
look, I'll give you $80,000 for the property that you're asking $100,000 for, I'll give
you $80,000 and I'll close in five days.
By the way, it is not difficult at all to close in five days, especially if you're paying
cash.
Will a seller take that offer?
I don't know.
They certainly won't if you don't make it.
You would get perhaps one out of five, one out of 10 perhaps, a seller would take an
offer like that.
Why would we ever pay cash even though we're going to get a big discount like that?
Answer, because we are then going to go to a bank or to a partner and refinance it based
on its appraised value, which is really $100,000.
You ought to be able to get an 80% loan from a bank, which is $80,000, and so you can buy
that property, then put financing on it, put the entire $80,000 back into your pocket or
in your partner's pocket.
Some of you I know in this room have cash.
This is a great opportunity to buy property at big discounts by using that cash.
If you're going to use a partner here, the partner might say, well, wait a minute.
If I put up 80,000 bucks, even if you give me 18% interest, we're only going to own this
property for a month or month and a half before we refinance it.
You know, 18 divided by 12 is a percent and a half.
That's no return for me for the time I've got my money tied up.
What if you said to the partner, we're going to show you this again in the partnership
chapter, look, I'll give you a 50% ownership in the property.
That way you'll not only get your money back, but I'll give you cash flow, equity build
up, tax loss, appreciation, oh, by the way, I'm going to charge you a 5% management fee
for managing it.
Is that a win-win situation for you and a partner?
Absolutely it is.
And this is real world stuff.
By the way, on that last technique, I did that, it's not been too many years.
I bought a single family home.
It was in Delray Beach, an old kind of a Florida cracker home with a very high gable roof and
a wood exterior.
It had a little cottage behind it.
The people that had owned it for so many years would invite people down during the winter
and they'd put them in the cottage.
Well, they were asking about 68,000 bucks for that property and I bought it all cash
for 48,000.
And I went out within 30 days and went to a bank and was able to get 100% of my cash
back out of that property.
So it was a no-money-down deal, if not right away, certainly within 45 days it was.
Stan is saying that he did one of those and he actually put cash in his pocket, $5,000.
You bet.
Now, someone will come up to me and they'll say, you know, I tried that technique with
a bank and they want you to own the property one year.
And you know what?
They were right for that bank.
Others don't care.
Some banks will do this if you've owned it a day.
All they're interested in is an appraisal to show the value.
So if you go to a bank and you find out that they want you to have owned it for a year,
then go to another one and go to another one.
There are a lot of banks out there.
In every area, there are some banks that are far more liberal than other banks.
You just got to find out who they are.
Okay, technique number seven, a home equity loan.
I don't know whether there's anyone today that does not know about home equity loans
if they own a home.
What they may not know though is that home equity loans differ tremendously from one
institution to another.
If you've got equity in your home, you can go to a local financial institution, a bank
or a savings or loan, and get an equity loan allowing you to take cash out of your property
very inexpensively.
What you'll want to do is check with banks and savings and loans in your area to see
what their terms are in making these loans.
Some of them are five-year amortization, some are 15 years.
Some will require an appraisal and a credit report and all the things that you'd go through
if you were originating a loan with them.
Others are very almost superficial in what they will require.
They are second mortgages and they can be a ready source for cash, particularly small
amounts of cash if you need to have immediate access to funds to buy a property or to fix
up a property.
The nice thing about it is you can put a home equity loan on your home and not receive any
money.
All they do is record a mortgage and they give you a checkbook and anytime you need
money you just write a check against that home equity loan.
How many of you have ever used a home equity loan to buy real estate?
Have you done it, George?
Good for you.
And you too, Bill?
Worked out well for you?
Very good.
Home equity loans may not be an immediate thought to people that have equity in their
properties but if not, perhaps it should be.
And I'm not suggesting that anyone put their properties in jeopardy by getting a home equity
loan.
That's not the purpose.
I'm not suggesting that you put your financial well-being in jeopardy by buying any piece
of real estate.
That's why we keep emphasizing over and over again the importance of doing an accurate
financial analysis and a, what kind of analysis?
Cash flow analysis, exactly right.
Technique number eight, bank loans and other sources for down payments.
I hope as a result of the credit pursuit strategy that you're going to be able to develop a
line of credit with local banks, a line that may allow you to borrow a thousand or fifteen
hundred or even five thousand dollars merely by picking up the telephone.
If I didn't make it clear when we were talking about that part of the credit pursuit strategy
where I suggested that after you have paid back the three banks, you immediately go back
in and borrow money unsecured, if I didn't make it clear, once you get your first unsecured
loan and you have paid back that loan to the bank, at least every six to eight months you
should go back into that bank and borrow that much money at least or more.
So you've got a borrowing history, if you will, and a history of timely paybacks.
Any questions or comments on home equity loans or bank lines of credit?
Kind of interesting, I met a gentleman in Chicago not too long ago and he had a property
for sale that he had fixed up and I was interested in buying it.
We met at a Denny's in a suburban location and I said to him, I said, how many of these
things do you do a year?
He said, oh, I try to do a couple, three of those a year.
He was very willing to talk with me when he realized I was a real estate investor.
And I said, where do you get the money to buy these properties and fix them up?
And he said, I have $150,000 line of credit with two different suburban banks.
And I said, that is fantastic.
I said, how many of these can you do a year?
He said, oh, usually two or three.
And I said, well, I would think with a $300,000 line of credit you could do eight or 10 or
12.
And he told me that he tried to make about $12,000 to $15,000 for property.
And he looked at me and he said, no, I just don't have the time.
He said, you see, I'm a school teacher.
And I'll never forget that conversation that took place many years ago, but I thought to
myself, here is a school teacher who is pretty much confining his activities to buying and
selling and fixing up properties during the summer months who had developed a $300,000
line of credit.
You know, I can talk to you all I want to about going in for $500, $1,000, $1,500.
Be very aggressive and be very ambitious in your contacts with banks in trying to develop
lines of credit.
It can be very helpful to you.
Any other questions?
What is the difference between a real estate dealer and a real estate investor?
A dealer is one who owns real estate, holds real estate in inventory for reselling.
A real estate investor who is one who owns property with an intent or for investment
purposes for the return that can be obtained from the ownership of that property.
In other words, a dealer buys and sells, buys and sells, much like a shoe store owner.
A dealer is one who buy, I mean, an investor is one who buys and holds on.
What if you do both?
Well, you could potentially have a problem.
They could come in and then say, well, I don't care whether you buy half your properties
and hold on to them.
And the other half you buy and quickly sell, we're going to classify you as a dealer.
How can you avoid that?
Number one, by using a corporation when you're buying and flipping properties.
That would be the big thing to take it under a different name or using a trust.
And so you say, well, what is the big deal if they declare you a dealer?
Well, number one, no installment sales.
If you buy a piece of property and you sell it over a long-term installment sale period,
you've got to pay the entire profit in the year that the sale occurred.
Number two, you are subject to, are you ready for this, FICA taxes.
Just as if you earned that money working for a corporation.
It's amazing.
Number three, you cannot take depreciation on any property.
No depreciation deductions.
Number four, you can't exchange, you can't exchange.
Okay, let's review chapter 11.
The basic and underlying principle here is creative financing or using the principle
of leverage.
Leverage is making a little bit of money, usually someone else's money, by a large
amount of property.
When the leverage is 100% or no money down, it means getting other people's money to
do everything.
Now, there are lots of places to find other people's money.
I've identified ten in this chapter, such as the seller, the property itself, other
investors, partners, and so on.
Your creativity and common sense will tell you which one to use and when.
The cog chart can also be a tremendous tool for you.
On it, I've listed your situation, the seller's situation, and the situation of the property.
And by matching along the side and top, you can determine which no money down technique
is right for you.
Now, keep in mind, no money down doesn't mean that the seller gets no money, just not any
of your money.
Also, the seller needn't be a down and outer for these techniques to work.
And don't think that these techniques are only for flexible sellers.
They'll work for inflexible sellers too, because often the seller gets all the cash
down payment he wants.
The first eight techniques described in this chapter are fairly basic, but you should work
through the math until you understand and are completely comfortable with them.
Your understanding of these beginning techniques will serve as building blocks for the following
chapters and techniques.
Keep in mind that although these techniques are numbered, each one is really the essence
of a plan for buying real estate distilled down to its simplest form.
So it's easier for you to understand.
Each one of these techniques could give rise to dozens of other techniques as they are
molded and modified and combined by you with other techniques to satisfy a particular seller's
problem.
Now, in Chapter 12, we'll go through eight more somewhat advanced techniques to continue
building your arsenal of creative problem solutions.
Here are 16 deals, Carlton, that I've done in the last two and a half years.
I don't even look at a property unless I can make $25,000 at least.
Maybe you'd like to buy a property, do a little clean and fix up, then sell it for a quick
profit.
Well, since getting my course, Mike and Francine from New Jersey have done that 16 times and
improved their net worth over $838,000.
Mike, I think what you've done is just amazing.
Let's just look at a couple of these.
For example, here, this one, $52,415 profit in three months.
Here are the checks.
I think this is the Baldwin property, isn't it?
That you made $50,194 in eight months.
Here's another one, 21 Hazel.
You made $44,071 profit on this in two months.
Am I reading right, $53,000 profit in two weeks?
Yes, this one's amazing.
I've only used a few of the techniques that you show in the course.
What about your monthly positive spendable cash flow?
It hovers right around $8,000 a month, positive cash flow.
$8,000 a month of spendable cash?
Yes.
I know people that have master's degrees and don't make that kind of money.
I never in my wildest dreams thought I would own two homes.
My parents only owned one home at a time, and they struggled to even get that first
house.
Here we are.
I think we own nine houses.
After the first one, it was a piece of cake.
Chapter 12, more exciting no-money-down techniques.
You know, it's funny.
I had a call from a student that I've gotten to know.
As a matter of fact, the lady is in my television show, and I really consider her to be very
proficient with the use of the no-money-down technique.
She's bought literally hundreds of thousands of dollars worth of property.
And she called me, and she said, I got a problem.
She said, I bought a piece of property that had an assumable mortgage on it.
She's in the state of Washington.
She said, the seller took back a very sizable second mortgage.
And she said, the property, with my help, has gone up in value considerably.
And she said, I've got all this equity.
And she said, I want to get it out.
And I said, well, why don't you talk to the second mortgage holder, the seller, about
letting you bring in a new first mortgage on the property, and he would still take a
subservient position.
And she said, well, I'll talk to him about it.
And she did.
And he agreed to continue in his second mortgage role.
And I believe he wanted a little cash, maybe $5,000 or $10,000 out of the property.
But it turned out she was able to get a new 60% first mortgage, what they call a no-qualifying
or non-doc loan, they call it.
The seller continued to have a second position in the property.
And she put about $30,000 to $40,000 cash in her pocket.
And it was kind of a reminder to me that even though this is one of the no-money-down techniques
that I teach, and she was very, very proficient in the use of my book, my manual, and buying
property, that she had completely overlooked that possibility.
What am I saying?
I guess that there's a constant need to refer to that cog chart that comes with your book
to make certain that you really have considered all of the alternatives that are available
to you in buying property or perhaps refinancing.
And that's what technique number nine is.
Move a private mortgage from a senior to a junior position.
By the way, a mortgage does not have second mortgage written on the top or first mortgage
or third mortgage.
A mortgage becomes a second or third or fourth mortgage or a second or third or fourth deed
of trust, depending on the state in which you live, based on the order of filing in
the public records.
So Stan could loan money to me to buy property and I would give him a mortgage.
And he does not record that mortgage.
Rich comes along a week later and he loans more money to me for that property, perhaps
to fix it up.
And Rich is given a mortgage also.
Rich goes to the public records and records that mortgage.
Who's got a first mortgage?
Rich does, even though the money that he loaned and the mortgage that was taken back occurred
at a later date than the one that Stan has.
So it's based on the order of filing in the public records.
Let me read this.
Consider the following situation.
A seller has a property in the market for $60,000.
There's an existing private first mortgage on the property in the amount of 30.
Approach the private mortgage holder to see if the mortgage can be moved from a first
position, which is a senior position, to a second position, which is a junior position.
If you pay $10,000 in cash, agree to pay the cash after a new first mortgage is secured.
This will reduce the mortgage from $30,000 to $20,000.
Next, put a new $40,000 first mortgage on the property.
$10,000 of this will be the cash that goes to the private mortgage holder and the other
$30,000, $40 less $10,000, will go to the seller.
This no-money-down technique works well when the private mortgage holder is not willing
to discount the mortgage in return for a complete payoff.
Now, this is a little bit of a different situation in that the mortgage that the seller held
is a first mortgage.
But still, the principle is the same.
We're asking them to put that mortgage in a second position.
Now, are you going to offer to pay the private mortgage holder $10,000 immediately in return
for them doing that?
No, I see a lot of people shaking their heads.
Of course not.
What you would say is, I would like to have you move from a first position to a second
position.
They may say, what are you going to do for me?
And what are the alternatives?
What could we do for them?
Let's think about it.
What are some of the bonuses that we might be able to give that private mortgage holder
in return for doing that?
Tom?
Buy down the second mortgage.
Buy down the second mortgage by paying them cash like we did in this case?
Yes, sir.
Higher interest rate.
Exactly right.
And what else?
An earlier balloon.
A greater amortization of the mortgage.
What else?
One of the techniques we talked about earlier.
Pardon?
Yes, sure.
A blanket mortgage.
He feels that he or she does, feels that they have less security because the mortgage is
in the second position and maybe now accounts for 100% of the equity of the property.
So we say, sure.
Give them a balloon mortgage.
Good for you, Brad.
This is the kind, you know, I'm so grateful for your responses.
This is the kind of creative thinking that you need to, that you need to employ in a
situation like this.
Let's go to technique number 10.
The FHA 203B loan.
This is one of the most simple, frequently used of all of the government loan programs,
the 203B.
And I know some people listening to this right now who may be living in an apartment have
never really seriously considered the idea of home ownership are not familiar with the
203B loan.
And so I want to talk about it from two focuses, if you will.
One is telling you about it if you're not now familiar with it.
And the other is a little known opportunity where you could actually get money back after
you buy a property with a 203B loan mortgage on it because of insurance premiums that have
been paid.
The government will insure a 203B loan so the lenders will not bear any risk in the
event of default.
Up until 1984, insurance was paid to the federal government, actually through the local lender,
but eventually to the federal government, to insure these loans and it was paid on a
monthly basis.
The premium was one-half of 1% of the outstanding balance of the loan.
If any of you incidentally have a 203B loan on a property right now and that 203B loan
accounts for 80% or less of the value of the property, you can apply to have that insurance
waived.
You wouldn't have to pay it.
In fact, that is true with private mortgage insurance as well.
If you've got a mortgage on a property where you're paying a private mortgage insurance
premium because originally the loan exceeded 80% of the value of the property, apply to
the lender to get that private mortgage insurance waived.
After 1984, that insurance was paid in one lump sum at the time the mortgage was acquired.
Generally, the down payment for an FHA 203B loan is 5% and effective December 15th, 1989,
you must qualify to take over an FHA loan and in doing so, you must occupy the property
as well.
So it's not an ideal thing from an investor standpoint.
But here's the other aspect of this that I mentioned earlier and that is if you buy a
property with a 203B loan on it, after you have owned that property for six months and
you have assumed the mortgage, if that mortgage is paid off, you are entitled to a refund
of the insurance premiums paid.
Now up until 1984, those were called distributive share.
Your portion of the insurance was called a distributive share.
After 1984, it is known as a OTMIP, a one-time mortgage insurance payment.
So once that mortgage is paid off, you can actually apply to HUD and receive a lump sum
distribution of that insurance, of the insurance monies that have been paid.
Now at the present time, the distributive shares are being withheld by the federal government
because they do not consider the mortgage insurance to be actuarially sound.
Sounds like a government word, doesn't it?
Actuarially sound means they're close to going broke.
But in the case of one-time mortgage insurance premiums, you can actually get those back,
that is for any mortgages put on property after 1984, you can get that back in one lump
sum and that frequently will run $1,500 to $2,000.
So if you're buying a property that has a mortgage, an FHA 203B mortgage on it, you're
going to pay that mortgage off, then make sure that you apply for that refund.
Will the government contact you?
They should, but there's not a 100% guarantee when you pay it off that they will.
It's kind of a reminder to me also to remind you before you pay off, any money due, any
money due to any person, always ask for a discount.
That wouldn't apply to banks, would it?
Yes, if it's a real old fixed-rate mortgage in the 5.5% to 6% range, even some banks have
been known to accept a discount, if you will, when mortgages are paid off.
But almost always, private lenders will do that.
It's a very important tool and it's funny, I talked to one of my students not long ago
and he said, I can't believe the number of mortgages over a period of time that I paid
off and have never asked for a discount.
And he said, now I am doing it all the time.
And he said, the results of that are just startling.
He said, I saved literally thousands of dollars.
HUD customer service number is given in your book.
That's who you would contact about that mortgage insurance premium.
Number 11, borrow the broker's commission.
Do you remember we talked about how you might have a broker representing you as a buyer's
broker?
Now, whether it's a formal relationship or whether it's an informal relationship makes
no difference.
But the point I made then is that if you go, if you're in your neighborhood and you see
a home on the market for sale and it's got a sign in front of it, meaning that the listing
broker who took the listing would put the sign in front of the house, are you better
off to contact that broker directly or would you go back to the broker that you've been
working with who is your buyer's broker?
And we suggested that it's probably more appropriate that you contact the broker who has the listing
on the property.
Why?
Because they're going to get the full commission if they list and sell the property.
So let's say that you do that.
And let's say that a property is on the market which if it is sold by the listing broker
will yield a $5,000 commission.
So the listing broker is also going to sell the property and the total commission is $5,000.
Now a listing broker who is also acting in the capacity of a selling broker is not willing
to loan a portion of the commission to you, you might suggest to him or her that you are
working with another broker who is a buyer's broker and they're very willing to take their
commission in the form of a note.
That may result in the listing broker taking all of their commission in the form of a note
or at least one half of it.
So this broker has a $5,000 commission and you ask the broker if they will take their
commission in the form of a note.
I've had all kinds of responses.
A sales agent will say, I'm sorry, my broker doesn't permit me to do that.
Now that's blaming, that's the power of the third party.
Probably not true but that's what she told me at the time.
Or my broker refuses to do it but I would take my share.
Now remember we've got a broker involved here and we've also got a salesperson.
If they both list and sell the property, how much will the salesperson make?
They're going to make half, aren't they?
Probably they're going to make half which is 2,500.
The broker will make 2,500.
The last time I did this, I said to the salesperson, would you be willing to take your commission
in the form of a note?
And she asked me about the details about how this would work and I told her and I'll explain
this to you in a moment and she said, I will but I don't know whether my broker will.
So we went to or she went to her broker and her broker did agree to take his commission
in the form of a note.
What I told her is that I would be willing to pay a reasonable rate of interest which
I suggested was 8%.
It was a plucked from air figure.
I could have said 5.
I could have said 7.6.
I chose 8% and she got back and when the broker agreed to take his share in the form of a
note, they agreed that they would have to charge 10% interest and I readily agreed to
that.
So what I told them is that I would pay them 10% interest but I would make payments of
1% a month.
So every month I would make a $50 payment to the broker and to the salesperson.
50 times 12 months is $600.
But the interest rate is only 10% and 10% times 5,000 is 500.
So if I'm making a payment of 1% a month or in this case $600, you can see that $100 is
going toward reducing the amount that I owe which is $5,000.
Everyone clear about that?
Can you imagine if you are an active salesperson or a broker and you find someone like one
of us to work with and we are actively buying properties maybe at the rate of I don't know
3, 4, 5, 8 properties a year that if you're getting between $50 and $100 a month coming
in from all of those properties over a period of several years this could be a substantial
income for you.
I mean you could have an income every month of $1,500 to $2,000.
Now this broker when they finally agreed to do this he said the only way I will do it
is for you to give us a mortgage as well as a note.
I agreed to do that.
So they are actually a mortgage holder on the property.
Now sometimes I have and I'll be very honest with you this has never worked for me but
I have asked a broker if they would be willing to go into their pocket not only to loan the
commission to me but to put additional money in and I've never had a broker willing to
do that.
But let me say this as a result of my asking and my telling all of you and all the people
who are listening to the tape to do this I know that one of you will be successful in
doing that.
You say, Pete, you know this is such an excellent deal.
You know that it is.
I appreciate your loaning your $5,000 commission to me and taking a note and mortgage back
for that.
Since it is a good deal how would you feel about going into your pocket for another $10,000
or another $5,000 and either taking an equity position in the property or you can take that
at 10% interest in the form of a mortgage.
And if you've got a little bit of extra cash it's not a bad deal is it?
So borrowing a broker's commission can be an effective way of cutting down the amount
that you may be required to come up with at the time of close may result in no money down.
How many of you have ever seen an ad in a newspaper run by a broker that says XYZ property
10% down?
Have any of you ever seen that?
Look at the hands.
I mean three quarters of you have, of course.
What are you reading when you see that?
It's a no money down deal to the seller isn't it?
The seller is saying look I want to get rid of this property all I want is enough money
to pay the broker's commission and to cover the cost of closing.
So if you see an offer or see an ad with 10% down run by a broker there's an excellent
possibility that you'll be able to buy that property absolutely with zero down yourself.
Notice that each one of these techniques have an example summary at the end and I think
that's so valuable as a way to help you follow through if you've got any questions at all
about how the technique works.
Create a note, sell for cash, technique number 12.
There's an example in your book here, a specific example involving numbers that you can follow
through with but I think as a way to help you better understand this and also to give
you a little bit of a different perspective I want to tell you a story about a man who
was a part of one of my challenges in Chicago a number of years ago.
We had a challenge through the Chicago Sun Times newspaper that I could take anyone totally
unfamiliar with real estate, someone who had never bought property, I could teach them
in one day all of the techniques for buying property no money down and they could then
go out and buy a good piece of property no money down that would bring in a $100 per
month positive cash flow.
Well I received as you can imagine many, many hundreds of letters wanting to be a part of
that challenge and I arbitrarily picked a young man probably about 33 who was a factory
worker in Chicago living hand to mouth, he did not have bad credit, he had no credit,
he was trying to support a paying child support to an ex-wife and he was living at home with
his parents.
So I spent one day with him and then I turned him loose and I said you know the best way
for you to find a piece of property is going to be to look at the local newspaper and try
to find evidences of sellers being flexible in the ads they have run.
Remember we are talking about that earlier running looking at sellers ads and newspapers
how many other ways are there to establish yourself as a seasoned investor?
Remember the number of ways we talked about nine different ways weren't there well that's
just one of the nine so he did that he went to the Chicago Tribune of the Sun Times and
he started circling ads and he got on the telephone and he had a number of properties
that he followed up on.
One in particular he found was in a suburb of Chicago and the property was on the market
for $38,000, a two-bedroom townhouse.
It had an existing $28,000 roughly dollar mortgage which was an FHA mortgage and the
seller was looking for $10,000 what do we call that $10,000 equity what the property
is worth minus what they owe he was looking to get that money out in the form of cash
which of course they all are.
That FHA mortgage at that time was assumable the property did have an appraised value of
$38,000 and my student made an offer on the property for $32,500 agreeing to take over
the $28,000 FHA mortgage and offered the seller $4,500 in cash contingent upon being able
to get a second mortgage for that entire $4,500.
Is that a long shot you know I've seen some experienced investors shaking their heads
yeah sure that's a long shot but you know if you're out making many many different
offers and you've got contingencies in them doesn't matter.
Would anyone knowingly loan $4,500 knowing that that $4,500 coupled with the existing
first mortgage would account for 100% of the value of the property well the answer is maybe.
When you loan money to anyone or when you invest money there is always a balance of
two factors and what are those two factors?
Risk and reward sure risk and reward now here's what happened he knew from my course that
he should go to the financial services of the section of the local classified ad section
of the local newspaper and he did that and if you'll look in your own newspaper all over
the country you'll find a similar section financial services or money to loan or whatever
and he started calling people and their first question is he told him he was looking for
$4,500 cash and they said well how big is the mortgage that you're trying to sell and
he said well I'm creating a mortgage and he finally found a CPA who was representing a
pension and profit sharing trust who said to him fine let's sit down and talk about
it so they met the man ran a credit check on my student it wasn't good but it wasn't
bad he saw an appraisal of the property and he agreed to loan $4,500 and here were the
terms of the loan.
He said I will loan you $4,500 cash if you will give to me a $6,000 note interest only
at 12% with a balloon payment in five years and my student agreed to that because that
property with the FHA mortgage with management with maintenance with taxes with insurance
and with a how large a monthly payment on this $6,000 $60 a month right you with me
on that the $6,000 payment is payable 12% a year that's 1% a month or $60 a month he
still had a positive cash flow of nearly $100 a month so he bought the property now let's
review here for a minute do you think a 32.5 offer on a $38,000 asking price is outlandish?
No not at all not at all especially when it's going to be an all cash deal now would someone
who made that loan to my student would they have to be out of their out of their minds
to do that no let me tell you why.
Number one it was a loan from a pension and profit sharing trust and I'm not going to
get into details on the on the law here but if a pension and profit sharing trust ever
loses money to the extent that it loses for the year it can be funded pre-tax to compensate
for that loss they knew that secondly in a worst-case scenario what could happen?
The pension and profit sharing fund would foreclose on the mortgage it would end up
owning a $38,000 townhouse for in effect $32,500.
We talked about risk reward what kind of a reward was that CPA obtaining for the pension
and profit sharing plan?
This is a little camera shop owner that had this pension and profit sharing plan plan
and he had said to the CPA let's see if we can get a better return on our money well
now let's see my student paid $720 a year you with me 12 percent of $6,000 $720 a year
for five years that's $3,600 at the end of five years he had to pay back the pension
and profit sharing fund $6,000 but he had only received $4,500 to begin with the difference
of $1,500 was also profit to the pension and profit sharing plan so that totals $5,100
and if you divide that by the five years you can see that they've got an average return
of about $1,020 thank you $1,020 $1,020 a year as a return on a $4,500 cash investment
you can see that that's well over 20 percent isn't it well over 20 percent so again win
win win for everyone seller got the cash they were looking for my student got the property
for no by the way the closing statement and I used to carry it I wish I had it now $9.18
that's what his out-of-pocket cost was for the property and the person who loaned the
money was able to get about a 20 over a 20 percent return on their investment you want
to hear what's happened at that townhouse the value of that townhouse since then you
know we it's so easy to read the newspapers real estate flat properties not going up like
it used to go up and I told you like they used to go up and I told you yesterday that
that properties have gone up over the last 20 years almost 5 percent compounded well
that little two-bedroom townhouse in a suburb of Chicago is right now worth about $80,000
between 75 and 80 thousand so he had wonderful appreciation on top of the fact that he bought
it no money down with a positive cash flow satisfy the seller's needs technique number
13 if you can somehow determine what the seller is going to do with any money they receive
you may be able to satisfy the seller's needs either by charging on a credit card or perhaps
by using your own skills or services that you could provide to satisfy their needs one
of my students has a carpet company with his with his parents they own a carpet retail
operation and he was able to sell a person to whom he was from whom he was buying a property
carpet for a new home in lieu of a portion of the down payment if a person is going to
buy furniture maybe you can buy the furniture or let them charge it to your charge card
and pay for it over time I was talking to a seller some years ago and I said what are
you going to be doing after you sell the property said well I'm going to take whatever cash
that I get out of here and go back to my native Greece and I said would you allow me to pay
for all your airline tickets and associated expenses in moving your in moving your household
and your personal effects back to Greece is I've got no problem with that he said whether
you pay for it using a credit card or whether you give me cash and I pay for it makes no
difference so it just opens up another possibility for you life insurance policy loans look at
the second paragraph let's read that let's say you need a ten thousand dollar down payment
to purchase an investment property you've got no whole life insurance of your own contact
a life insurance agent to learn if he or she has a client with a policy that has a cash
value of ten thousand dollars the policyholder could borrow the ten thousand loan it to you
perhaps at one to two percent more interest than he or she would currently have to pay
you could use this ten thousand dollars as a down payment perhaps even giving the life
insurance policy owner a ten to fifteen percent ownership interest in the property as a bonus
sometimes we forget that we have whole life insurance policies and could borrow on them
for a very low rate generally in the four to six percent range well if you don't have
a whole life insurance policy does that render this technique useless no if you know an insurance
person that that handles life insurance you could ask them if they've got any clients
that have whole life insurance policies that they might be willing to talk to on your behalf
to see if they could borrow money from the policy and loan it to you at maybe a one to
two percent spread now let's see you're the life insurance agent and you're you're
hearing someone say to you look I'm trying to generate twenty five thousand in cash see
if you can find a whole life insurance policy owner that's willing to loan me twenty five
thousand dollars cash they're going to be paying four percent or five and I'm willing
to pay him seven or eight does that sound attractive yeah I don't think so does it what's
the problem if you're borrowing money against your life insurance policy aren't you in effect
reducing that death benefit by that amount of money sure you are so there's got to be
something more in it if you will for the one who has the life insurance policy what could
that more be pardon sure ownership in the property give them a ten to fifteen or a twenty
five percent ownership in the property what else could it be it could be that you would
buy a term life policy on their life very low cost for the amount of what you're borrowing
or maybe you would also buy a term life policy on your life for the amount that you are borrowing
is this a long shot yeah kinda but you know it's just one more technique in the arsenal
that you have to solve problems something you might not think about if it were not mentioned
I happen to have a small life insurance policy that my father bless his heart I mean that
took out on me when I was fourteen or thirteen years old and it has a little bit of cash
value and from time to time when when my economic situation is required it is years ago I would
never borrow in that life insurance policy for about four and a half percent so it can
be done and it is one more way to generate cash that doesn't come out of your pocket
technique number fifteen deposits rent credits and real estate tax credits I'm going to let
you read this on your own but I'm going to summarize a technique that has major consideration
in the acquisition of moly family property and Tom up here in the front who just bought
a fairly large apartment complex in Texas about which I'm aware is shaking his head
because he knows this is a big factor look at this today many many sellers of income
properties moly family properties will have a last month's rent now that last month's
rent is meant to apply to the last month of the lease so if you're renting in a typical
apartment building that has that and your and your lease starts may one the last month's
rent that you pay we'll just assume it's six hundred dollars applies toward April of the
following year the last month it's a way to get more security for the landlord because
if you move out before April guess what happens to that last month's rent it's forfeited
well if you've got a thirty unit apartment building we multiply thirty times six hundred
that's eighteen thousand bucks oh and also we've got security deposits now we're going
to be talking about management a little bit later and you will hear me emphasize that
the security deposit should never be the same amount as the rent you're charging and I see
some people whether they've learned it from my course or whether they've learned it the
hard way which is it good good for you it should never be the same so this this seller
has four hundred dollars in security deposits from each of the units which is twelve thousand
dollars in addition there are tax credits on the property depending on when you buy
most taxes in almost every tax jurisdiction are paid in arrears so if you're buying the
property mid-year you're going to have a tax credit for that portion of time that you did
not own the property and we'll assume the tax credits in this case I'm just going to
pluck from air are ten thousand dollars all of these credits at closing are going to total
forty thousand dollars now I don't know what you're going to pay for a thirty unit apartment
building but except for certain high-cost areas of the country it's going to probably
run somewhere between thirty and forty thousand bucks a unit and you're going to say oh I
know some of them are fifty or sixty so you paid you paid nine hundred thousand dollars
for this property at thirty thousand dollars a unit and look at this we've got almost five
percent of the total cost of that unit covered in those credits but there's one more
in the tax strategies book you will know why we recommend closing on the last day of the
month now let's say that you do indeed close on the last day of the month so you're the
owner of record as of the first of the month and all of those rents for that first month are
going to come to you now we've already established that the rents are eighteen thousand dollars for
the month what kind of an out go are you going to have during that first month zero you're
going to owe you're going to have no expenses no out go for anything even unless you're
on a salary basis with a manager where you're paying every two weeks generally a management
company who's going to charge you anywhere between six and ten percent to manage the
properties they're going to be figuring based on last month's rent that's going to be collected
in the following month so you're going to have no expenses add that eighteen thousand
dollars to the forty thousand and I don't like to run this close but you sure could
fifty eight thousand dollars in literal credits in buying that property you have no expenses
the first month because all the utilities are going to be transferred for example to
your name effective the first of the month so the bills won't come in until the until
the middle of the next month or early the next month in addition any mortgage payments
that are due are always paid in arrears so they won't be due until the first of the following
month and there there are just no other expenses obviously your insurance payment that probably
would be prepaid but that would be the only thing and that would be handled at the time
of close sir yeah the last eighteen thousand comes from the rents that you're going to
be getting for the first month of ownership for the first month of ownership because you've
closed on the last day of the month all the rents coming in for the following for the
for the for the upcoming month will go into your pocket I've got a I've got a property
right now that I'm getting ready to put on the market and in doing my own financial planning
and I'm willing to sell this property for very little money down it's a fourteen unit
apartment building and in doing my own budgeting and my own financial planning I was sitting
down and calculating what I'm going to have to get to give to the purchaser at the time
of close and someone probably could literally buy that property and walk away with cash
in their pocket I'm waiting for you all to rush up here you're not doing that but that's
true as you become more and more successful as you have more and more financial wherewithal
you still try to use other people's money or are you willing to put cash in yourself
and I would say my goal is to make the is to make the acquisition as financially attractive
as possible and if it means in my case drawing on a line of credit and paying all cash I
will do so ever most of the offers I make though are no money down offers keep in mind
though what we said earlier and that is that no money down for me may very well put cash
in this in the seller's pocket because I am utilizing a line of credit you know no money
down does not literally mean zero money zero dollars down out of your pocket it means no
money down out of your pocket it means two or three or four percent out of your pocket
sometimes it means that you buy property and you actually walk away with cash at the close
no money down I think is really a concept where we talk about buying property creatively
with as little of our money as possible and this whole program is aimed not only at people
that have a little bit of wherewithal and can borrow money but also predominantly at
people that have no cash have no credit and are desperately trying to improve their financial
situation in life and don't know how to do it so I would say it's whatever the situation
might dictate but it's a very good question obviously the need to buy property no money
down zero down out of my pocket is not there like it was many years ago question is are
there any legal requirements in handling the last month's rent as well as the security
deposits to my knowledge there is no requirement by any state law in how those last month's
rents are to be handled there there it's your money to do with as you please on the other
hand almost every state has a law relating to the disposition or the handling of security
deposits and generally what they will say is that it must be put into a into a escrow
account something that's that's away from you it's not commingled with your with your
funds and if it earns interest you've got to give the tenant three-quarters of the interest
earned so you need to find out thank you for bringing that up Kirby you need to find out
what the law is in your own state regarding the handling of security deposits you know
I just mentioned to you that I have a property that I am thinking about selling and could
be that someone will buy it and walk away with cash in their pocket what might my motives
be in offering a property for sale creatively this is going back to Ryan your question you
know obviously my financial situation is different today than it was a quarter of a century ago
but what might my motives be in offering a property creatively practically no money down
to someone yeah let's yes sir very good I'm making the property available to a larger
marketplace therefore I can get rid of it quickly there's no money down techniques
we'll give it we'll get a seller a little bit of a higher price and I'll yes one more
feet very good that's what I just going to say it reduces my tax liability by selling
that property on an installment sale reporting method I can spread out the tax liability
over a long period of time and also if I'm providing the financing I'm probably going
to get a premium I just sold some property not long ago took back a blanket mortgage
on them and I'm getting about ten and a half percent which is fairly attractive so if I've
got any extra money to to put it put into an investment right now I'm hard-pressed
to find something that's going to yield ten and a half percent so all of these things
go into into my decision to sell the property that way now let me ask you a question you're
on the buying side and here's the question do you think that every seller will sell their
property no money down I see a few people saying yes and a few people saying no let
me tell you every single one of them will bar none every single seller will sell their
property that way and I mean sell their property and not receive any cash at the close there's
not a seller that would not agree to postpone receiving cash 24 hours if that note was secured
by US government bonds that's an extreme example but that really answers the question doesn't
there's not a seller that wouldn't be willing to do that on the other hand how many sellers
are there that will sell their property no money down and take a 30-year mortgage for
money that is due them not many but they're there like I just bought a piece of property
not long ago an 86 year old man living in New Jersey in poor health had a home in Florida
basically a no money down deal I bought the property he took back a 37-year mortgage literally
a 37-year mortgage the term was never discussed but the interest rate and the amount owed
and the monthly payment put into a financial calculator showed 37 and a half years so I
just want to implant that firmly in your mind that every seller will sell no money down
the question is can we can we strike an agreement or or agree to terms that will that will be
satisfactory to that seller technique number 16 a rental participation technique by the
way this is an oldie I was first exposed to this technique when I bought a 72 unit apartment
building in Tampa and I went to a an insurance company in Tennessee to get financing for
the property and the insurance company basically calculated the value using the income approach
to determine value and gave me literally nearly one hundred percent financing gave me and
my partners one hundred percent financing on the property but they had what they called
an equity kicker in the loan that meant that once the rental income exceeded a certain
amount they began to participate and in their case it was twenty percent or fifteen percent
I forget which doesn't matter fifteen to twenty percent of all of the income beyond a certain
level now why would they call a rental participation which I have labeled my technique here why
would they call that equity participation kind of a kind of a deep academic question
member I said as the net operating income can anyone define that for me the gross income
minus expenses is the net operating income as a net operating income increases with multifamily
properties what does it do to the value of the property it increases the value exactly
right and remember we said equity in a property is defined as the value of the property minus
what is owed that is your equity and if your net operating income does indeed increase
then your equity increases right but wait a minute there's a problem here it doesn't
increase as much as you would think it would because of this insurance company that's nibbling
away every single year at some of that equity doesn't reduce your equity it just doesn't
allow that equity to increase as much as it would they're really participating in the
equity if you will and that's how it that's how it got its name back then more accurately
today it's called a rental participation technique where you give someone a certain percentage
of the gross or net rental income are you better off with gross rental or net rental
net you're much better off with a net operating income a percentage of the net rather than
a percentage of the gross who might you use that with a seller some of you are in business
for yourself I'm sure some of you may own a company that someday you'll sell and the
buyer is going to look you right in the eye and say wait a minute Anthony how do you think
your company is worth that kind of money I mean you single-handedly have created with
your charm and your personal contact with the customer you've created that business
if I take it over there's no reason to think that I'm going to do as well and Anthony says
I'll tell you what take my word for it you're going to do as well I'll even hang around
for a year or two to make sure that that happens what you're doing is in effect guaranteeing
a certain price for the business there's all kinds of names for that earn outs and and
that's reason by the way many many corporate small corporate owners are kept on to make
sure that the business business does not lose its profit does not lose its momentum same
thing here mr. seller I think that I think that I can do well with your property and
if you'll take back a mortgage for all of your equity in the property I'll let you share
in the profits as if you still owned it what a deal right no management headaches no nothing
at the end of every year you're going to see my return to the to the IRS schedule e and
whatever that net operating income is I will give you ten percent of that just as if you
were a ten percent equity partner that's a good deal now let's review chapter twelve
you learn eight more techniques each of which I or one of my students is used in a real
life situation to put a deal together a word of caution here oftentimes when you bring
a technique like some of these that you've learned here to a seller he or she will immediately
reject it because they don't understand it when this happens you will play the role of
a teacher slash problem solver keep them focused on how your proposal solves their problem
and sells their property also keep it simple don't overwhelm the seller or his broker you'll
learn a lot more about how to do this in chapter 16 when I discuss win-win negotiating some
of the techniques in this chapter are complex that's why I've included the accompanying
video but remember this you don't have to become an expert on all of them in fact I've
had many students who perfected one technique and used it to do hundreds of deals like a
like a cookie cutter the next chapter chapter 13 is broken down into two parts part one
includes four more acquisition or buying techniques and part two shows you where you can find
government help in real estate financing what is your net worth now John about eight hundred
thousand dollars all from real estate all from real estate in what period of time a
year and a half in a year and a half almost a million dollars yes congratulations I wouldn't
have it if I hadn't bought your course in one year of investing using my course you
now have a net worth of your next about a million two about a million two hundred thousand
dollars yes sir and a monthly income spendable cash about sixty eight hundred dollars six
thousand eight hundred dollars a month yes sir congratulations it's wonderful we say
thank you we can't thank you enough.
Discounted bonds have any of you ever used discounted bonds to buy or sell property I
have heard of them being used in a variety of ways in fact I've got a friend who flips
properties I just learned about this two weeks ago very creative he will he will sell a property
on a contract for deed and you would think that the terms that he would be able to negotiate
with someone to buy the property in a contract for deed would be enough of an incentive for
that person to go ahead and do what they said they were going to do if it's a 20-year payout
I mean presumably the property is going to go up in value and and they're going to be
losing something if they if they if they leave the the deal but he says I don't want to leave
the deal I want him to stay in I don't want to have to resell the property so he says
what I do is tell them that in 20 years I'll give them ten thousand dollars worth of bonds
just as a gift for having completed the deal well what a ten thousand dollars worth of
bonds cost if you buy them today well if you don't know anything about bonds and you probably
wouldn't have an answer to that and I'm going to tell you a little bit about bonds right
now but it'll cost you roughly 2,500 to 3,000 bucks bonds are really nothing more than promises
to pay that are issued by governments and corporations they generally bear interest
but not always they are issued in $1,000 denominations and if Julia up here has a company and she
is issues a $1,000 bond and it's going to bear interest at seven percent that bond is
going to trade for more or less than a thousand dollars based on the interest rates today
I mean if she issued that bond five years ago and interest rates today are ten percent
not eight the bonds going to be trading for a premium or a discount a discount good for
you it's going to be trading less than a thousand dollar face value some other things that are
going to affect the the amount that that bond sells for would be the rating that it has
with standard and poor with Moody's bonds are rated triple a double AA triple B double
B B triple C now we're getting by down into what we call junk bonds you've heard that
term triple C double CC depending upon the quality of the bond the rating the strength
of the maker the age of the bond all of these factors come together to determine what bonds
bonds are selling for it's kind of fun if you've never had any exposure to bonds at
all to go to the newspaper look at the bond section do that tonight and just read what
bonds are selling for and you'll see some of them are selling at a premium which probably
means that they were issued a number of years ago when interest rates were very high and
some of them are selling at a deep discount which means that the company issuing them
may be in trouble or the interest rate is very low bonds are always always shown in
two digits so in the newspaper you'll see ninety eight and a half that's done really
as a as a measure to save room in the newspaper that's all since bonds are are issued in thousand
dollar denominations and you see a bond ninety eight and a half what is that bond worth nine
hundred and eighty five dollars exactly right so all you do is add a zero and you'll get
the you'll get the value of that bond now some bonds do not bear interest they are called
zero coupon bonds and they are designated in the newspaper with a ZR ZR and they trade
for way less than the face value of the bond in addition some zero bonds are issued by
municipalities and governments state governments and not only do they not bear interest but
if you are a holder of one of those bonds you do not have to pay tax as you would if
you held a corporate zero coupon bond another never forget a few years ago Tampa Electric
Company issued a zero coupon bond due in thirty years guess what it was selling for seventy
dollars you could buy this bond due in thirty years for seventy dollars zero interest and
have no tax to pay on in the meantime well thirty years a long time away but I can see
you can see to a degree for a state planning that these bonds could have could play a part
how does this relate to real estate let's take an example let's say and in this technique
is going to work best where the mortgage on a property is generally thirty five to forty
percent of the value of the property or less let's say a seller's got a property it's
on the market for a hundred thousand dollars it has an existing twenty five thousand dollar
mortgage meaning that the seller's equity is seventy five thousand dollars now I know
when I go through these examples people are saying there he goes again talking about an
assumable mortgage I can't find any of those or there he goes again talking about a property
with a very low mortgage on it I can't find any of those believe me they are out there
are you aware that fifty percent of all the properties in the United States of America
are owned free and clear let me say that again fifty percent of all the properties in the
United States are owned free and clear now I'm talking about vacant land I'm talking
about government tracts of land you know that's not the case in a given subdivision but if
we take all the aggregate of all the properties that is true how about people over the age
of sixty five sixty percent and maybe it's higher that was the last figure I read sixty
percent of all the properties owned by sellers over the age of sixty five are owned free
and clear there are all these there are a lot of opportunities out there that we that
we may not remember or appreciate because of our blinders we're looking only at a specific
area where we live or in a particular neighborhood here's what you're going to do you're going
to go out to a bank or savings alone and you're going to get a seventy five percent loan on
that property which is seventy five thousand dollars I don't have credit you tell me and
I say fine get someone to co-sign with you get a partner get a partner to put up the
seventy five thousand dollars do what I'm going to tell you to do then once you own the property
then go out and put a mortgage on the property we got seventy five thousand dollars lying
here on the table what are we going to do well twenty five of it has to be used to pay
off that first mortgage that leaves fifty thousand and we've got seventy five thousand
dollars that we've got to give to the seller but the seller wants ten thousand dollars
in cash at close so we give the seller ten thousand dollars at least forty thousand lying
here on the table now the seller's equity to begin with was seventy five thousand dollars
right we've given the seller ten thousand dollars cash we still owe the seller sixty
five thousand dollars don't we this is all presuming that at the time we were negotiating
with the seller we said rich rather than taking a mortgage on the property I'm buying from
you would you be willing to take a note and mortgage secured by good quality municipal
bonds and he agrees so what I'm going to do is I'm going to give him sixty five thousand
dollars in bonds that are due in nine or ten years and those bonds are going to cost me
thirty five thousand dollars and I'm going to end up putting five thousand dollars cash
in my pocket what have I really bought the property for I really bought the property
for seventy five thousand dollars haven't I that is my basis in the property the moment
I complete this transaction I immediately have twenty five thousand dollars worth of
equity plus I put five thousand bucks in my pocket now get your creative juices flowing
Rich says wait a minute that's nine to ten years down the road what about interest if
I can't get him to agree to zero interest and I'm certainly going to try we finally
agree that I'm willing to pay seven or eight percent interest Rich says how are you going
to secure that I mean I want to know that you're going to be paying seventy eight percent
interest on those on those bonds if it's a seven percent interest in the bonds forget
about what they cost me the bonds are worth sixty five thousand dollars that's about forty
five hundred bucks a year how do I know I'm going to get that so then we say Brad what
do we a blanket mortgage I give you a blanket mortgage well I've got an idea Mr. Seller
why don't I give you additional bonds if we multiply ten years times the forty five hundred
dollars a year that that I owe you that's forty five thousand why don't I give you
additional bonds to cover up to say half of that amount or a quarter of that amount can
you see all the techniques interplay with each other there's a lot of different ways
that you could you could appease him and satisfy his need for some security relative to the
payment of that interest can anyone tell me what the problem here might be in doing a
zero coupon bond deal well rich it's long term you're saying I thought someone was going
to say well the problem is maybe the property will not support the mortgage payment on seventy
five thousand dollars plus the interest on the bonds before you ever try to use this
with the seller just pick up the telephone and call your local stockbroker and say can
you tell me what what zero coupon bonds you have going out about ten years and what price
you have on them you're going to find you're going to be paying today about roughly sixty
cents on a dollar if you go out nine or ten years now the problem is you know a confused
mind always says no and we talk about all these sophisticated ways to buy property and
I don't want you to ever forget that if you're if you're going to overpower the seller with
something that makes him or her uncomfortable that's beyond their comfort range they're
going to say no I don't want to get involved that is the biggest problem I was going to
buy a motel on siesta key right off of your Sarasota in Florida and using this technique
I was going to put in my pocket a quarter of a million dollars but remember I said yesterday
you could buy a piece of property no money down but in doing so you might have a what
negative cash flow that's exactly right so that's why I said we anytime we buy a piece
of property no money down we want to be able to afford it and with this with this property
that I was going to buy it would have a negative cash flow somewhere around sixty sixty five
thousand bucks a year and the argument from the broker who realized he had a lot of stake
here he said you got the seller to agree you're going to put a quarter of a million dollars
in your pocket he said you know that you can take a portion of that quarter of a million
dollars and fix up the property raise the raise the rents and you'll very quickly have
a break even cash flow and that was enough to make me say thank you I'm going to I'm
going to decline and which I did there is room for this technique in some aspect of
your real estate investing it is so creative I know some of my students have used it and
rather than thinking in terms of your putting a lot of cash in your pocket which you can
or thinking about using this to buy a huge huge property which you can think of it more
as a way to buy a property at a discount being able to pick up in this case because you're
really only paying seventy five thousand dollars for the property pick up maybe twenty five
percent of the equity at no charge technique number eighteen land contracts or agreements
for deed or contracts for deed there are certain ways that you can acquire an interest in real
estate that will not give you legal title you get legal title when someone gives you
a deed on the property you get equitable title when you buy a property under the terms of
a lease option or under the terms of a contract for deed now in some states about which I'm
familiar namely Illinois Wisconsin Michigan contracts for deed are very very common in
the state of Florida a contract for deed is almost unheard of but nonetheless they are
legal in all fifty states if you're going to buy a property under a contract for deed
you would do so primarily to give the seller added security this way technically the seller
does not have to foreclose if you go into the default if you were to ask an attorney
about that an attorney would say no no if you bought a property under the terms of a
contract for deed for five years and you leave the seller of the property really should file
a foreclosure action against you in order to extinguish your interest but that is all
theory I've never heard of that being required in the terms of a contract for deed generally
the person buying it if they leave they just give up their rights many times a seller would
ask them to file a quick to sign a quick claim deed which further extinguishes their rights
but a land contract or an agreement for deed is a financing tool it's just like a mortgage
except that legal title does not pass remember we said earlier that if a property has a mortgage
with a due on sale clause the one thing that will will alert a lender to the fact that
that property the legal title the property has been transferred is the fact that insurance
will name the the new owner as co-beneficiary obviously with a land contract that doesn't
happen because the insurance policy stays in the name of the seller of the property
if you're going to enter into a contract for deed with anyone let's I'll take an example
rich here has a property I'm going to buy the property in the terms of a contract for
deed that means that I must make a stipulated number of payments maybe for a year maybe
for five years or ten or twenty years before he is finally going to to turn that title
over to me can you see any danger in paying on a piece of property but not owning it for
five years what are some of the things that could happen yeah for example he might die
Richard you mind laying down here on the aisle I'm kidding he might die he might become mentally
incapacitated the property may burn down and all the proceeds of the insurance would go
to him and you could cause you a problem there if he files bankruptcy or if he has an income
tax lien this is why I would recommend if you're going to do a contract for deed have
a contract for deed at least on your first when you get a lawyer involved secondly you
record the contract for deed or a memorandum of it on the public records and finally you
address these questions about what happens if there is a bankruptcy or a liens put on
the property many times to be ultra safe an attorney will say well rich what we want you
to do Carlton and I is for you to sign a deed over to him right now and we will hold that
deed in escrow pending performance on Carlton's part until he agrees to do what he's agreed
to do then that deed will be put on the file to the public records if I'm going to buy
a piece of property from rich though before I ever signed the contract for deed what am
I going to do am I going to go to the title could go to a do it to go to the courthouse
and do a preliminary title search absolutely I am I want to make sure that I know the status
of that title before I ever buy it so you can see a contract for deed can be very good
for the seller because it provides seller protection seller's protection and it also
provides them with a stream of income it's good for the buyer because it makes it easier
to negotiate a no money down deal with the seller you can you can buy a piece of property
so you can have a positive cash flow on it and I'm not concerned other than other than
the need an awareness of the need to protect myself I am not concerned about not having
title until I pay for the property if you'll jump ahead three pages to the example summary
on technique number 18 at the top of that page or right above the example summary in
that big paragraph there beginning in addition it talks about all the things that you need
to address in that contract for deed and this is why I recommend that you have an attorney
involved at least in your first one fire insurance condemnation divorce bankruptcy mentally incompetent
dying you should address all of those things and that is one good reason to have the seller
execute a deed technique number 19 to for a portion of the purchase price the purpose
of this technique is really to serve as a reminder to you that even though we talk frequently
about having a mortgage and a note on property one mortgage can secure a number of notes
one mortgage can secure multiple notes and most people who are entrenched in a traditional
way of buying property don't even think about that in other words I say to Monica who's
a seller property Monica I'd like to buy your property take over your mortgage and I'd like
to have you take back a mortgage and note for me perhaps at an agreed upon rate of interest
with no payment of any interest at all for a period of time and then I'll kick in and
make more payments down three four five year money God stop it she says I'm not interested
in that well maybe we can find a way to make that more palatable palatable for her and
that's what this really really is talking about let's say beginning at the beginning
at the second paragraph of that technique assume a seller has a three bedroom two bath
home on the market for ninety five thousand dollars there's an existing forty six thousand
dollar mortgage on the property which means that the seller's equity is forty nine thousand
in return for obtaining his or her purchase price the seller is willing to carry back
a mortgage for the balance at the going market rate of interest the fair market rent rate
on the property is seven fifty you offer to assume the first mortgage and give the seller
a second mortgage with two notes here's a mortgage for forty nine thousand with two
notes one for twenty five thousand dollars at an agreed upon rate of interest and another
note for twenty four thousand dollars also at a great upon rate of interest but with
the interest deferred for five or six years I think here it says six years at that time
both of the notes plus the unpaid interest will become due and again in the next paragraph
third line down you see the two words make sure it is not compounded as a matter of fact
to show you the effect of compounding in a six year period on an on just a small note
of twenty four thousand dollars interest on twenty four thousand at nine percent per annum
for six years is twelve thousand nine hundred and sixty dollars if it is compounded monthly
at seventeen thousand one hundred dollars that amazing and that is in a period of just
six years so here we're paying on this and deferring this so this is well I like the
idea that first note being you're paying on that first note but I need to get some
additional money toward that second note could you then say well I'll tell you what let's
do some sort of an equity participation or rental participation to give to give you a
extra money as kind of a little sweetener I'll give you five percent of the net operating
income to the extent that it exceeds the amount that we've we've shown in the projections
what we talked about being creative sit down and and think about what what could we do
to make this work and I'll be the first to tell you that the big problem there are two
problems connected with creative finance I don't think anyone could come up with them
anyone have any idea what they are boy you're sure heading in the right direction sellers
fears in terms of not understanding what we're doing or not understanding why it's such a
departure from the norm they don't understand that so they say no and you know what the
other part is and I hate to say it how many are real estate brokers here yeah that's the
other side real estate brokers you know how in the world that just adds to the problem
I mean here here we've got we've got a seller that's potentially going to be confused and
we talked to a real estate broker who's living within that small box and we can't we don't
have a chance to sit down with a seller and I know Julie up here in the front is a real
estate broker but she's also an investor and and bless your heart for being here my thank
you very much and for all of you who are real estate brokers but that is the biggest problem
is getting through to the seller and being able to sit down and and going through here
are the benefits you know this is a selling job we've got to sell the seller on why the
offer we're making to him to him or her is good for them as well as for us multiple notes
one mortgage a pledged asset mortgage I want to read this first paragraph I'm kind of proud
of this while bankers seldom come up with creative alternatives to buying a property
no money down several banks in the United States have done this very thing well I've
been teaching this technique for years and recently bought a property using it a pledged
asset mortgage is finally beginning to get some recognition among real estate bankers
and is being reported by real estate journalists here it is in a nutshell I'm an investor
I want to buy this property that's on the market for a hundred thousand dollars I want
the banker to loan eighty thousand dollars to me the banker insists on my putting twenty
percent down on the property and I say no I don't have the twenty percent down to put
on the property or the seller is willing to carry twenty percent secured by another property
the banker doesn't like that either so I say to the banker what if I get a friend to put
twenty thousand dollars in your bank with a CD and pledge that against the mortgage
and this is what bankers are more and more now willing to do amazing I mean it looks
pretty safe and straightforward to us doesn't it but believe it or not until very recently
this was not being done what is really interesting about it is that I'm the buyer of the property
the CD is in Rich's name how much of my own cash do I have in that property zero why is
that any different than if that property if that hundred thousand dollar property could
be bought for eighty thousand asking the banker to loan the entire eighty thousand it's no
different is it Albert because my my upfront risk is exactly the same but the bankers maybe
maybe this is the first tiny baby step toward coming around to to to to being a little bit
more liberal in the way they they approach institutional investor lending yes is there
any rest to the person who puts a twenty thousand dollars up absolutely there is if you go into
default on the mortgage they're going to they're going to the bank is going to take the twenty
thousand dollar CD and they're also going to take the property there is indeed a risk
yes Renato how long would they keep the CD in the bank he's saying that would be negotiable
it could be until the mortgage of eighty thousand has been paid down to sixty thousand or some
portion of that but that would be negotiable I mean it's like I would like to say to a
banker look I've got a I've got a forty foot yacht that's paid for I'll give you title
of that as a pledged asset in lieu of a CD I know what they'd say no thank you oh we'll
loan you money on the forty thousand dollar yacht they would say but we won't allow you
to pledge that asset or I've got a timeshare or I've got vacant land or whatever they haven't
gone that far yet but I bought a piece of property year before last and I and the seller
remember I told you every seller will sell their property no money down every seller
will provided they are at a adequately collateralized and number two can live with the time that's
the key I bought this piece of property and I talked to seller about taking back a mortgage
no interest I by the way I never talked to the seller one time not once I've never met
him I wouldn't recognize him all through a lawyer and fortunately a good one at any rate
I said what about a purchase money mortgage no no interest and finally I said just as
a long shot I said what about taking a note secured by a letter of credit from a bank
and I he said I would do that if you can get a letter of credit well then I went to my
bank went to a number of banks as a matter of fact and I said would you give me a letter
of credit to secure the payment of a note due in 15 months one bank said we've never
done it we never will another bank said I'll take it the loan committee and we'll talk
about it another bank said fortunately the one I deal with said I think we could do that
he said generally letters of credit are issued by us to to guarantee payment of notes made
by corporations that have a highly cyclical business like for example corporations that
that can fruit or the canned vegetables where the in some parts of the year their their
their businesses is nil other parts of the year they need a tremendous amount of of cash
and he said we usually secure a letter of credit by inventory and I got thinking well
what's my inventory my inventory or equities that I have in property so I said would you
issue a letter of credit secured by equity I have in a property and he took it to loan
committee and got back to me in one day he said we'll do it so I got a letter of credit
from a bank it cost me one half of one percent the mortgages were filed that cost me a little
bit of money but not much and I did something that the three banks had never heard about
I don't think this is as far as I know is probably new every place but it just shows
you that there are some creative ways to solve a seller's needs for security and because
of that letter of credit I was able to negotiate zero interest for 15 months we were talking
a moment ago about a pledged asset mortgage and someone asked the question if you're pledging
a CD or a friend is or whatever to compensate for the difference between the value of the
property and what the bank is loaning on it who gets the interest on the CD the answer
is that would either accumulate with the CD or it would be paid monthly whatever the arrangement
is with the bank but it would be the interest would be paid to the person who owns the CD
putting government programs to work for you sometimes we will find a property that needs
to be rehabilitated and maybe we have the financing needed to acquire the property but
we're concerned about how we're going to get the property rehabbed after we buy it I can
recall in one case where I that very thing happened to me where I bought a piece of property
and in fact it's the one that that I was able to borrow money and pay cash for and then
went out and refinanced put a loan equal to what I paid for the property and in essence
had bought it no money down within 30 to 45 days after my original acquisition but then
the property needed to be rehabbed so hearing that there were some government programs available
I went to our city hall in the town where it was located and I just said do you have
any programs available for rehabilitating property and they said as a matter of fact
we do where is it located and I told them and they said yes that fits within the boundaries
of the area that is targeted for this program and I believe from what I was able to understand
then that it was 100 percent federal money that was funneled down to cities and towns
throughout the United States on a 50-50 proposition it was up to $7,500 per unit I had two units
I had the home and then a cottage behind it so I was entitled to get $15,000 for those
to rehab those properties but it was on a matching basis so if the cost for the two
for rehabbing both units had run $14,000 even though the maximum amount that they would
have been willing to loan me was 15 I would have only gotten seven because I had to match
the amount of money that was going into the units well the total amount as I mentioned
they would loan or grant was $7,500 per unit a total of $15,000 there were three ostensibly
three bids that the city employee had made on the property they took care of everything
and would it surprise you to learn that the three bids came in between $29,000 and $30,000
isn't that just probably just coincidence right these companies that are bidding on
that they were all wired they knew exactly how much they could spend and so it cost $29,800
and I put up 50 percent of it could I have had that work done on my own yes I sure could
have and I could have paid for it on my own and I would have estimated based on what I
saw and the work that was done that it would have cost probably in the range of 19 20 21
$22,000 to do so I know there was a premium paid but I still only cost me just a little
bit under $15,000 out of pocket what this chapter is designed to do is to remind you
that there are many many government programs out there available to you if the property
you have fits within certain parameters or if you as an individual fall within certain
guidelines every state in the United States has some sort of a housing program and as
I say in the first chapter that can run from four housing programs in a couple of states
up to 25 programs in California and Wisconsin I literally counted for every state and the
least had four the most had 25 housing has been a very important part of the agenda of
state and federal and even local governments for a long long time these programs are designed
to help people that fit into the category listed there on that page for example you
would qualify for one or more of these programs if you are a first-time homebuyer a lower
moderate income homebuyer a disabled or handicapped person a minority a woman American Indian
property with an environmental hazard if you're elderly if you're delinquent on mortgage
payments if you want to build low-cost rental units if your neighborhood needs revitalization
that's where my property fell in that category if you're a migrant farm worker if you live
in a mobile home rental park you want to make more make your home more energy efficient
if you live in a home with dysfunctional plumbing or live in property with lead paint or like
to own a family farm I mean can you but is there wouldn't we all qualify at least for
one of those if there's any problem it is that many many of the government fund government
programs while they are not defunct are not regularly funded and as the government cuts
back on spending Congress says well we're going to leave that program intact but we're
not going to fund it this year or we're not going to fund this program this year so you're
going to have to do a little bit of research to determine which programs are active and
which you might qualify for what I would do would be to begin by looking at the telephone
directory for your own city or county government and look for anything that says housing in
it and just call them and say do you have any special housing programs and they'll say
in regard to what say any housing programs at all either for first-time purchasers or
rehabbing properties or whatever just begin there you could also get call your telephone
company and get a directory for the state capital and ask them to send you that directory
and go through and check your state capital to see if they have any any any real estate
programs there look at the list of federal government programs I'm not going to get into
these some of them are funded some of them aren't and probably since this printing there
may be more that have been added rural rental housing rural rental assistance rehabilitation
mortgage insurance 203 K let me just point out before you leave that particular entry
there that the 203 K program can be used to buy properties that need to be rehabbed and
the program will also provide money for the rehabbing check out a 203 K program yes question
is can you also use a 203 K program after you purchase that the answer is yes what they
will do if you're buying property for me Albert and the property needs to be rehabbed they
will appraise the property it's not truly an appraisal but they will estimate the properties
value as of it's fixed up after it's fixed up and they will loan you money to buy the
property and also loan you the money necessary in one mortgage to to fix up the property
mortgage insurance construction or substantial rehabilitation of condominium projects mortgage
insurance for homes there's a 203 B program mortgage insurance homes for low and moderate
income families mortgage insurance homes and urban renewal areas mortgage insurance manufactured
home parts purchase of units in a condominium rental housing rental housing for moderate
income families in the elderly rental housing for the elderly rental housing in urban renewal
areas supplemental loan insurance multi-family rental housing mortgage insurance for the
purchase or refinancing of existing multi-family housing projects housing for the elderly are
handicapped government development block grants and entitlement loans community development
block grants for small cities program now Stan just asked whether there are some programs
that actually are forgivable and this happens to be the one that I got that is forgiven
at the rate of twenty percent per year so if I sell that property prior to five years
having elapsed then I will owe the pro rata the remaining part that has not been forgiven
obviously I'm not going to do that I'm going to wait for five years and then I'll then
I'll sell the property section eight low income rental assistance we'll be talking about that
a little bit later many banks will handle these mortgages that generally is the that
is the primary source for dispersion of these funds although mortgage brokers are involved
as well renaldo as a matter of fact that reminds me to tell you that you could contact a local
mortgage broker in your area who is active in loaning money that is insured or guaranteed
by the federal government and ask them what loans they have available the two oh three
k program that I just mentioned has been around for some time I tried to use it about six
seven years ago and one bank was making loans available through that program only one in
the area and here's a good example if I go into another bank they said we don't handle
that because it's just it was so cumbersome and as I got into the loan I could see why
it was so cumbersome the paperwork and and and all the requirements that they placed
on me as a borrower I finally said to heck with it well about two years ago our president
said we want to make the two oh three k program more more readily available to investors and
owners throughout the country so all of a sudden it was loosened up and it's now easier
to to get the two oh three k loan again that chapter or that portion of that chapter is
just a reminder not to overlook just I mean there are five hundred million dollars I believe
that I heard for some programs that that are going unclaimed just because people are not
aware of the programs are not taking advantage of it so just just tuck that in the back of
your mind and be aware that there are many many programs that you might not hear about
you know it's kind of interesting that the government tries so hard to provide monies
for all of these different classifications of people and once they do how do they get
word out that that money is available well that's that's a problem advertising that
the that the money is there so you might have to do a little bit of research on your own
to to determine which programs are going to be applicable to what you're trying to do
and what you're going to be available in your in your area okay in summarizing chapter 13
I'd again like to emphasize that while it's not crucial to master every one of this these
techniques you should go back and review them until you've gained a comfort level with the
with the thought process behind each one also keep in mind that it's possible that you may
never use any of these techniques exactly as I've outlined here but try to understand
the creativity involved in solving a specific problem that you may be confronted with remember
you are now a creative problem solver consider the reality that no seller has a problem that
through your creativity would prevent you from finding a way to buy his or her property
in a win-win transaction realize however that there are many properties that you would not
or could not choose to buy but don't let that stifle your ability to offer many solutions
to the problem we also learned that there are some really great ways that all levels
of government can help us as real estate investors all states have agencies and programs designed
to meet the various housing needs of the American people and after all these programs are paid
for by us so why shouldn't we take advantage of the opportunity to participate simple research
is the key to locating programs best suited to your needs for a more expanded treatment
of government programs I suggest that you consult my video getting your share using
government programs for guaranteed profit which is available through the professional
education Institute now let me ask you how would you like to buy a property no money
down and see that the seller walks away with cash in his pocket better yet how would you
like to buy property no money down and see that you the pyre walk away with cash in your
pocket it's not difficult and in Chapter 14 you'll learn all about it we rented all of
our lives almost I know what it feels like to rent Jean Benson is a minister from Louisiana
he and his wife have used my course as a vehicle to supplement their income and further benefit
their ministry well we've had the course for five months our net income after expenses
is $700 a month we've got about $120,000 plus money we didn't have before we got started
on this no money down I have not taken money out of my pocket to do it I did this figuring
up the other day and my net worth 18 months ago was negative negative negative net worth
and my net worth right now today is $902,647 almost a million dollars that's unbelievable
I never had a million net worth my whole life Chapter 14 converting paper to cash and taking
cash out of closing now some sellers are not able to sell their property unless they receive
some cash that comes as no surprise we face that every day and I'm talking about not want
or not not want but need they need cash so are there any ways that we could help them
generate cash even though we might buy no money down well converting to paper converting
paper to cash may be an alternative for them most people know that if you have a promissory
note from someone that that note can be sold for cash if Stan owes me $5,000 and it bears
a reasonable rate of interest can I go out and sell that note for $5,000 I could legally
do it but would I be able to do it from a practical standpoint no way could I get a
buck for it knowing Stan probably not now sure I could could I get $3,000 for I don't
know it's whatever the market will bear someone's gonna say well who's this Stan guy and they're
gonna say well how seasoned is it how many payments is he made what is the interest rate
when is the due date all of these things are are going to go into a determination of whether
the note is readily convertible to cash and how much this is the one that most people
know about selling paper at a discount but look at number two collateralizing the paper
you might be able to go to a lender private or institutional and say look I got this $5,000
note from Sam from Stan I want to use this as collateral to borrow money and I would
bet that there are some hard money lenders that might do that the beneficial finance
type people number three use the papers a down payment to purchase real estate this
is probably one of the best ways to use a note that there is because many times you
can use a note at full face value I'm amazed at the number of times that people do not
think about using dead equities to buy property dead equities that you have in the form of
a boat or travel trailer or a fancy automobile that you can't get rid of or a or a timeshare
or vacant land get it appraised how many of you have a debt equity right now other than
wives or husbands or am I in trouble let me see your hands again how many have a debt
asset look around there's 50 percent of the room you mind my asking what would you tell
me what they are a camper a boat time shares in where in Cancun okay vacant land someone
said you know all of these things people say why in the world did I ever buy that and now
I can't sell it get it appraised use it as a down payment on property it is a very best
way to get rid of it number four create multiple notes using one note as collateral if you
had a note for a million bucks would that be easily saleable what did it what if you
sold it if it was a good strong note and you sold it a discount of 40 percent for 600,000
is that readily a sale of readily saleable well you say yes but how many people have
got 600,000 bucks what if you created 500,000 notes for two bucks a piece a lot easier isn't
it has this ever been done you bet let me tell you what some of the big wirehouses some
of the big stock brokerage companies are doing they're buying huge amounts of federal paper
United States government paper they'll buy five hundred million dollars worth of paper
and those that five hundred million dollars will then go into it into a vault and they
in turn will issue paper using that five hundred million dollars of security and they'll go
to rich and me and Ronaldo and they'll say would you like to buy a bond of it for a thousand
bucks secured by all that paper they're doing it every day you've heard of cats and stripes
and tigers that are issued by national stockbrokers a cat is a certificate of a cruel treasury
security and they have their own names to it and what they do is earn a spread they
get a spread between the five hundred million pay what's being paid on that and what they
have to pay you on the on the stripes and the Tigers very very creative you know when
you're dealing in just hundreds of millions of dollars just a just a fraction of a percent
can can can amount to a whole lot of money I mean look at the fidelity fund and some
of the other huge mutual funds that are there they're working with three eighths of a percent
a half a percent in terms of management fees and overrides and oh it's literally millions
of dollars when we talk about a point in connection with a loan or borrowing money in real estate
one point is equal to one percent so one point on a hundred thousand dollar loan would be
one thousand dollars points are further broken down into what they call basis points one
hundred basis points equals one point so a basis point is really one one hundredth of
one percent and finally sell income from the note this is very frequently used we're going
to be talking about this when we get into the chapter on mobile homes a powerful way
to generate cash if you have a particularly high yielding high yielding note sell a stream
of income to someone you've got a you've got a note that is payable a hundred dollars a
month for sixty months five years if I've got a hundred dollars coming in tomorrow literally
and I've got some history to that borrower in other words I know that the borrower's
guts is paid on time in the past and I need I need money today will anyone give me a hundred
dollars for that note that's due for that payment that's due tomorrow probably not but
I bet I could get ninety eight or ninety seven dollars for it what if I want to sell tomorrow's
payment plus the payment due a month from tomorrow well using a financial calculator
how many of you have a financial calculator you know I I I existed without a financial
calculator for years and years and you don't need one but I think you might find it helpful
so I have developed a course which includes a financial calculator if any of you're interested
in getting one it's a real quick way to figure out amortization and monthly payments and
what the return on investment is it's available through the assistance of the professional
education institute but using a financial calculator you can determine very quickly
that that if Tom here is looking for a twenty percent return on his investment we've got
a stream of income coming in a hundred bucks a month for the for the next indefinite period
of time how and I want to sell twenty months of stream of income in other words twenty
payments of a hundred dollars each and he's looking for eighteen percent return on his
money what's he willing to give me for that well you can figure it out very easily so
these are different ways that you can convert paper to cash taking cash out at closing how
many of you have ever bought a piece of property and taken cash out at the time of closing
would you look around please leave your hands up one two three four five six seven eight
nine ten eleven twelve people in this room that is fantastic you know we are programmed
to believe that you can't buy real estate without putting twenty percent down and without
having great credit and it's a hard enough job to get across to people that you can buy
real estate no money down when you talk about buying real estate and taking cash out at
the time of close it blows their mind oh how can you do that well there are a number of
ways you can do it and I'm not going to insult the intelligence of anyone by telling you
that you can take cash out of a closing with every property you buy it doesn't happen that
way it happens with me on an average maybe maybe once maybe twice a year but the point
is if you don't know what to look for and you don't know how to how to question the
seller and how to structure it to do that it'll never happen I bought a piece of property
a year before last I took fourteen thousand dollars out at the time of close right after
that I bought a property and took twenty some hundred dollars out at the time of close it
can be done if you know how to do it now most of the techniques the no money down techniques
we've gone over already can if structured the right way allow you to take cash out of
close someone will allow that but let's look at a couple of different ways that specifically
are aimed at taking cash out of close seller rebates at closing out of curiosity those
of you that raised your hand is this how you were able to take cash out at the close seller
rebates no okay you Tom okay here's the essence of this technique I'll read assume
you find a hundred thousand dollar two-family property with a mortgage balance of thirty
five thousand that means that the seller's equity is sixty five thousand go to a lender
and request a fifty five percent mortgage or in this case fifty five thousand dollars
is it easier to get a fifty five percent mortgage and it is one for ninety absolutely it is
absolutely as a matter of fact many lenders now have what they call no doc I think I mentioned
that no doc or no quality no doc no documents required or non qualifying loans for loans
up to sixty percent or less of the value of the property so you can get a loan like that
and generally they will check your credit but they will not verify employment they will
not do all of the due diligence that they would do if you were going in for an eighty
percent loan so we're suggesting here that you get a fifty fifty five thousand or fifty
five percent loan these mortgages fifty to sixty percent of the property's value are
relatively easy to get they're frequently called no doc loans the bank does not verify
or document the information you give them instead they rely only on your credit report
and your equity in the property the seller agrees that once the underlying mortgage of
thirty five thousand is paid the remaining balance of twenty thousand that is fifty five
minus the thirty five that you pay equals twenty will be split fifty fifty now here it is we go to the bank and we get a fifty five percent mortgage which is fifty five thousand dollars we're going to pay off that existing thirty five thousand
dollar mortgage leaving twenty thousand dollars lying on the table and we've read here that
the seller is willing to split that with you fifty fifty the seller now has relief up here
at the overhead from the thirty five thousand dollar mortgage plus the seller has also gotten
ten thousand dollars hasn't he or she what was the seller's total equity in the property
answer sixty five thousand since they've already gotten ten thousand dollars in cash what is
the remaining equity fifty five thousand dollars we're going to give that the fifty five thousand
dollars to the seller in the form of a second mortgage on the property so when the smoke
clears you have bought that property for a hundred and ten thousand dollars is it okay
to pay more than the seller is asking for a property sure depending upon the terms as
we said many times you paid a hundred and ten thousand dollars for the property a fifty five thousand dollar first and the seller is taking a fifty five thousand dollars second but in reality you only paid a hundred thousand
because you put ten thousand dollars in your pocket as the buyer and I have done that I've
done it in several ways I've done it as an outright gift I've done it as what Jane I'll
bet you've done this for fix up and sometimes the fix up doesn't cost ten thousand dollars
any questions on that I can guarantee you no seller is going to sell their property
to you and say let's see you're going to get a fifty five mortgage we're going to pay off
the first that's going to leave twenty thousand dollars you give me the twenty thousand they'll
say and I'll take back a forty five thousand dollar mortgage and if you didn't know any
better you'd say okay rather than saying why don't we split that twenty thousand dollars
give me ten you keep ten and I'll give you a mortgage for fifty five thousand is a seller really in any worse position I mean not much not much property still a still a hundred percent financed basically again recognizing a situation
or recognizing a seller might do this is an important part of of this technique technique number two this is a unique approach to a bank owned property as you know when banks loan money they will take back a mortgage on the property that they're
loaning on and we also know that when the property goes into default if it does the banks
are going to take back that property as an REO meaning real estate owned they will foreclose
on the property if you would go into a bank today almost any bank and you said what kind
of REO properties do you have they're going to have probably a whole variety but which
properties of all the kinds that they loan on are generally going to be the most difficult
for them to sell vacant land would certainly be one partially completed condominium projects
would be another one partially completed commercial projects what Bob partially completed commercial
right I mean if you go to a bank and you talk to them about REOs you would love to have
them say well we got a great little three-bedroom home in a suburb and it's got two baths and
and it's a bread-and-butter property for sixty five thousand but that just doesn't happen
it really doesn't in fact I became very irate I heard of a I heard of a condominium in Charlotte
North Carolina that was on the market had a value of about sixty to sixty two thousand
and an REO was taken back as an REO by a savings and loan and I called the I called the lender
and I said what are you asking for it he said well we don't know he said what are you willing
to offer so I faxed him an offer it's going to require about four or five thousand dollars
work and I faxed him an offer of forty one thousand seven hundred eighty dollars and
I didn't hear from him I finally called him back and he said well we've got to take it
to committee and one of the people's are sick called him back again and he said now we've
got a problem with someone traveling it was like this for two or three weeks finally I
called him he said oh we got a better bid I said I wasn't aware that I was bidding he
said well yeah we got a better bid we sold it for forty nine thousand eight hundred would
I have paid forty nine thousand sure I would have just one of those one of those matters
of communication that I lost out because I wasn't local and because I wasn't aware of
the circumstances under under which I was bidding I would probably have gone in at a
higher price and even ask them for financing but I figured with a potential fifteen thousand
dollar profit with a little bit of fix up it was worth doing it the way I did it anyway
if you go into a bank and you ask them about the REOs that they're having the greatest
amount of problem getting rid of it's probably going to be vacant land and here's what you
got to remember when a lender a bank loans money on vacant land they generally will not
loan more than fifty percent of the value of vacant land unless it is an approved subdivision
a lot in an approved subdivision then they will go up to seventy five percent so if they've
got attractive land whatever they've got in that probably represents about fifty percent
of the value of that property here's another fact that most people don't know and that
is that banks when they take back an REO will have that property appraised immediately to
determine its value for their books they always have it appraised so if you can determine
that a bank has a piece of vacant land let's assume that they've got sixty thousand dollars
I think this corresponds with the figures in the book sixty thousand dollars in a piece
of vacant land it would not be unrealistic for you to ask the bank what the appraisal
showed and it should show a fair market value of a hundred and twenty thousand now let's
say that you said to that banker we're not going to do this because we don't like vacant
land but let's say that we said to that banker would you be willing to loan sixty thousand
dollars on that piece of vacant land if you will I will buy it from you the chances unless
you were an extremely credit worthy borrower the chances of them loaning sixty thousand
dollars to you are very remote because they've been through foreclosure one time they don't
want to do it again but we're not going to even try that I was just going to put that
in as an aside what I want you to do having identified a situation like this I want you
to go to your buyer's broker and tell them to go through their multiple listing book
and see if they can't come up with a larger property for example a multi-family property
that might be on the market with a fairly low mortgage and so they find one here's
this multi-family property that's on the market for two hundred and sixty thousand
dollars it's an apartment building there is a one hundred and fifteen thousand dollar
mortgage that may or may not be assumable the seller's equity is a hundred and forty
five thousand dollars what you do is offer the seller of this property you offer to buy
it for two hundred and sixty thousand you tell them that you will give them no you tell
them that you're going to assume the first mortgage if it's not assumable you'll make
a contingent upon financing you're going to give them the piece of vacant land as a down
payment on the property if they will sell you that way sell the building that way contingent
upon you getting the vacant land what you would then do would be to go back to the same
bank and the book here contemplates in order to make it a little bit sweeter for the seller
of property you're even willing to give them a premium of two hundred and seventy five
thousand for their apartment building if you have to do it you certainly wouldn't start
out that way you go back to the back to the bank that has the piece of vacant land and
you say I will buy that piece of vacant land from you for your full asking price of sixty
thousand dollars provided you will give me a new first mortgage or a second mortgage
can banks make second mortgage loans sure they can or a second mortgage on an apartment
building that I'm about to buy now here's this apartment building for two hundred and
sixty thousand as an investor how much can you borrow from a bank on an apartment building
Tom what's your experience yeah sometimes 80 let's assume that you borrow eighty percent
eighty percent times two hundred and sixty thousand is two hundred and eight thousand
dollars if my math is correct that right two hundred and eight thousand dollars now watch
this this is presuming by the way that this mortgage here is not assumable to a degree
some of these figures correspond with what's in your book but we're pretending in your
book like the mortgage is assumable and we're also pretending like in order to make it sweeter
for the seller we're willing to pay a premium for the property and give them two hundred
and seventy five thousand let's let's in this case take a worst case scenario and say that
the mortgage is not assumable we got two hundred and eight thousand dollars lying here on the
table how are we going to use it number one we're going to pay off the non-assumable first
mortgage of a hundred and fifteen thousand when we do that that's going to leave ninety
three thousand dollars left you with me this ninety three thousand dollars will then be
used to buy the land from the bank that's going to leave thirty three thousand now in
our offer to the seller we said seller you've got a hundred and forty five thousand dollars
equity in the property we're going to give you the vacant land at full appraised value
as a down payment and we now owe you twenty five thousand bucks if you've got an eighty
percent mortgage on the property and you've paid off the first mortgage and you bought
the vacant land from the bank that's going to leave you with thirty three if we pay twenty
five thousand dollars to the seller we've got eight thousand left that we can put in
our pocket win-win situation here I know there are many people who have properties on the
market for sale that are not selling that would love to have an offer for full price
or even a little bit of a premium and would take vacant land in trade I've been in that
position where I would have what have you really paid for this property what is your
cost of this property the mortgage amount of two hundred eight thousand plus if you
subtract from that the cash you're going to put in your pocket remember we got to give
the seller twenty five thousand we had thirty three thousand left after buying the vacant
land and after paying off the mortgage we got thirty three thousand left we got eight
thousand in our pocket we really paid two hundred thousand dollars for that property
everyone okay with this technique you understand I borrowed eighty percent against the purchase
price of two sixty that's two hundred eight thousand the two hundred eight thousand is
lying here on the table a hundred and fifteen went to pay off the old mortgage ninety three
thousand was then left I used sixty of the ninety three to pay to buy the land from
the bank that left thirty three thousand I gave the seller twenty five of the thirty
three that left me eight thousand dollars cash that I put in my put in my pocket now
when the smoke clears I owe two hundred and eight thousand dollars in the form of a first
mortgage to the bank so two hundred eight thousand minus the eight I put in my pocket
is two hundred thousand dollars am I right but still if that's the case I bought the
property for about seventy five percent of value anytime you can use something at full
face value whether it's a dead asset whether it's a zero coupon bond whether it's a piece
of vacant land you're buying from a bank that's in foreclosure I mean an REO property and
can convert that to equity in an income property or you're in great shape very good Tom thank
you that is an excellent idea he said he has used that with realtors before giving them
a dead asset in lieu of a commission if they're not willing to loan the commission to you
at least would you take my sailboat that's worth about five thousand dollars and that
happens to be the brokerage commission that is due you and they say yes good point thank
you Tom rich is saying what is the owner what in the world is the owner going to do with
that piece of vacant land that really is high priced well I don't know rich let's look at
it this way if it appraises for a hundred and twenty thousand based on comparable sales
in the area and that's what the bank determined then it's really not overpriced it is at retail
price what's he going to do with it or what's she going to do with it I don't know we've
got to presume here that the owner of this apartment building wants to sell the apartment
more than he is not willing to take the vacant land and trade and if you understood that
you are a lot better person than I am the need to sell is greater than the resistance
that they might have for a piece of vacant land I love the thought of taking cash out
of closing and it doesn't happen a lot as I've said but it'll never happen if you're
not tuned in to the techniques that will allow you to do that recently I developed a video
tape taking cash out of closing that if you're interested in pursuing more techniques or
developing a kind of an expertise in this area this video is available through the assistance
of the Professional Education Institute how to take cash out of closing when you buy property
a little bit of a recap of all that we've been over for the last four chapters or three
chapters I guess on creative financing and that is that it is so important to repeat
what I've said already that you that you do everything you can to understand the situation
of the seller the situation the property and that you know your own situation well that
sounds like something silly doesn't I mean you stand up and say you know your own situation
but but Janet do you know what you know what the value of your whole life insurance policy
is you know what the equity and this property is worth you know what this debt equity is
worth do you know do you know you know you really really understand your own financial
situation and so that is important what is the situation the property will it rent for
550 as the seller says or can you really get 600 will it really rent for 650 is the broker
says or can you only get 600 and what can reasonably be expected with regard to the
expenses of the property how much how much net operating income will you really have
and how much positive cash flow will the property generate and how about the seller what is
the seller's real situation we only know it because of what the seller put into the listing
sheet where it says motivated seller make all offers and we only know what the real
estate broker has been kind enough to to share with us and they've got to be careful because
they got a fiduciary relationship with the seller and they can't disclose anything that
might ultimately harm the seller if we can possibly make contact with the seller ourselves
whether brokers involved or whether they're not it certainly helps us but brokers do not
look kindly on that on that thought once you learn all those things then go to that creative
options grid that cog chart and look for all of the all of the possibilities all of the
the possible techniques that you can use in buying that property and none of these techniques
are cast in stone they are meant to be shortened abbreviated expanded combined molded changed
to fit your situation and the more and more you use them this way the more creative you're
going to become and the more property you're going to buy questions well I've been saying
if you put 20% down on a piece of property for example a $50,000 property where you're
putting $10,000 down would it be wise to go to a bank and immediately try to refinance
a property pulling that out so you could go into another property yes if that's what it's
going to take for you to get another property or to free up some cash in other words if
if you have if you are thoroughly acquainted with your own financial situation and you
said I'm going to take $10,000 which I fortunately have and I'm going to commit that to my real
estate investing and you find a deal you can't pass up that really requires all that $10,000
would you then go to a bank and try to get that out the answer is yes I think but on
the other hand I can see that if some of you had $10,000 to put into a piece of real estate
and and and you bought a real estate and you bought the property absolutely conventionally
I mean you put $10,000 down and you went to a bank to borrow $40,000 and the property
generated a $200 a month positive cash flow even though that may be a strict departure
from what I've been teaching here is that a bad deal no way I mean a $200 a month positive
cash flows 2,400 a year on a $10,000 investment that's 2,400 bucks so again that the thrust
of this course is to help people that don't have cash that don't have credit not to help
wealthy people like you Albert or is it your wife that has all the money I okay let's review
chapter 14 don't be overwhelmed by the terminology of converting paper to cash it simply means
taking an IOU and finding someone to give you money for it the beauty of it is that
by merely writing on a piece of paper that you will pay someone money at a later time
you can actually get money now for it recognize that the power in this is that you can buy
property no money down and the seller can still actually get a down payment the five
techniques that I've outlined to do this as in all creative no money down techniques can
be combined expanded twisted reverse whatever simply by using your creativity remember you
are a creative problem solver now taking cash out of a closing is really exciting for people
and it happens all the time in fact I get lots of letters from students tell me that
telling me that they they've left closing tables with 10 20 even $50,000 I hope you'll
write me when you do it too let me share another very simple way that many students leave the
closing table with cash and it's called a simultaneous refinance you can use it when
you buy a property at below market value then at the same time arrange with a lender perhaps
the same lender is making a loan on the property you're purchasing to refinance the property
or you can put an equity line of credit on the property perhaps secured by this and other
property you own I call it a simultaneous refinance but sometimes you may have to wait
a month or two before the bank will do the refinance any cash that you take out on a
close like this is actually tax free at the time you don't pay any income tax on it it's
just a loan know also that the more financing you put on a property the less your positive
cash flow will be but there are many ways to increase your positive cash flow through
smart property management and I'll be going into that in detail in chapter 21 we've discussed
three ways here to buy property and take cash out at the closing I believe that this has
become a fairly popular area of interest because I've received letters from many of my students
sharing different ways that they've done it so I put together a video which contains 10
more techniques to obtain a copy of how to get cash at closing when you buy real estate
contact the Professional Education Institute we've gone through many creative ways to buy
property with no money down but perhaps the best way is yet to come in chapter 15 we'll
discuss it it's called using options we're calling on our third property that we invested
in we left the closing table with a check of forty seven thousand eight hundred and
eighteen dollars eighty five we also have another property that that we purchased that
we left the closing table with thirty three thousand two hundred and twenty eight that's
over eighty one thousand dollars with just two transactions I've basically bought twenty
twenty one units at with no money down and I've pulled out a hundred and sixty two thousand
dollars cash at the closing hundred sixty two thousand spendable cash spendable cash
at the closing tables I get about a thousand dollars a month positive cash flow on my rental
properties that's misleading though because within a past year or so I have pocketed sixty
thousand dollars cash just by buying property let's talk about options oh this is so powerful
how many of you have ever bought a piece of property using an option technique isn't that
amazing only one and I'll tell you you're too good you are you are missing such an incredible
opportunity generally buying property using an option technique is a no money down zero
interest deal and the nice thing about it is if you structure it right and I'm going
to show you how to do that right now you can really get multiple pay periods if you will
out of a lease option how an option works in its simplest form an option is nothing
more than an agreement between a buyer and seller where the seller gives the buyer the
right to buy a piece of property at a predetermined price and predetermined terms or formula for
price and formula for terms for example Bob up here in the front may say I will give you
the right to buy my property for sixty five thousand dollars for a two year period and
if you elect to do that by putting five thousand dollars down I will take back a mortgage at
eight percent interest for the balance that would be a predetermined price predetermined
terms or Bob may say I will give you the right to buy my property anytime up for a period
of three years and at the time you elect to exercise your option the property will be
appraised by three appraisers and an average will be used to determine the selling price
or we will plug in a base price right now and we will apply a consumer price index increase
to that price I don't like formulas for price I like predetermined prices an option contract
is a unilateral contract binding binding only on one of the parties and that is the seller
the seller has no choice but to sell if we wish to buy but we as the buyer can walk away
if we want to and elect not to buy a real estate contract where there's an agreement
between a buyer and a seller to buy and sell property is a bilateral contract binding on
both if I'm trying to buy renaldo renaldo's property and I've got a written contract to
do it and renaldo changes his mind I can go into court and file a suit for specific performance
in the courts it's going to say renaldo you've got to sell to carlton they'll make him do
it on the other hand if I elect not to buy if we've got a contract generally the contract
at least ours does as you'll see in a little while we'll say that in the event that the
buyer fails to purchase the property is contemplated in this contract then the deposit this day
paid shall be forwarded to the account of the seller so that really is a liquidated
damages clause if I default as a buyer he gets my deposit and he can't make me buy the
property but again an option is a unilateral contract meaning that if back to renaldo if
he's a seller and I say renaldo I want to buy up and he gives me the right up to two
years he's got to sell I can enforce it in court but if I elect not to buy then I can
just say buy I'm not going to buy the property I'm just I'm just going to drop my option
kind of interesting there was a case in court involving an oil company that had a two-year
option on a piece of property it was one of the majors and they had agreed with Roger
the owner of the property that they had a two-year right to buy the property I think
they gave gave Roger 10,000 bucks they had a two-year right to buy that property for
a predetermined price and sometime after about 15 months had gone by someone in the company
said we're not going our marketing plans have changed we are not going to buy that property
so they sent Roger a letter saying we are not going to exercise our option between that
period of time and the 23rd month the whole area had just blossomed and even though the
marketing plans of the company had changed suddenly the prospects of making a quarter
of a million dollars by exercising the option on Rogers property were very attractive so
they reapproached Roger and they said we are going to exercise our option he said no you're
not you sent me a letter nine months ago saying you were not going to do it guess how the
court ruled rule in favor of the oil company they said that you had an option to buy the
property for two years and you're sending that letter to the seller did not relieve
the seller of any obligation to sell to you if you chose to exercise it isn't that amazing?
Could you negate the option I think absolutely you could but it would have to be done with
a formal agreement good question you could probably negate it with a formal agreement
between signed by both the seller and the potential buyer does anyone know what we call
the seller here option or the giver of the option and the option a if we signed it yeah
I'm sure it could be legally negated but the way it was done with a letter we've decided
not to exercise wasn't enough I thought that was interesting when you learn more about
an option you'll see that at first glance the benefits of an option seem to accrue to
the count of the buyer but that's not true an option is good for both parties as we're
going to see here as a matter of fact if you look at the next page or a summary of benefits
to the seller generally the property can be sold at or near the top of the of the market
value range option money received is tax deferred the seller does not pay tax on that money
until the option is either exercised or dropped if the rent is not paid on time assuming it
is a lease option then the option is forfeited the tenant has pride of ownership and an incentive
to take better care of the property the rent including option payments is usually set at
or above the fair market value rent let's go to the next page and look at the summary
of benefits to the buyer risk is reduced while financial leverage is increased option consideration
is small compared to the value of the property if the property is not worth more than the
option price the buyer can walk away from the contract the buyer usually receives control
and possession of the property I said it earlier that anytime you see a property advertised
in the newspaper lease option or rent to own you are certainly looking at a flexible seller
because most people would prefer I think to to to sell outright than they would to lease
option by the way from my own history from a practical standpoint if I am trying to sell
a property that way I will not put in the paper lease option rather than I will use
rent to own more easily understood by the largest number of people if you see a property
advertised in the newspaper lease to own and I'm on under the subheading now lease option
to purchase a personal residence any of you renters in this room any of you paying rent
you got a few there is there's absolutely no reason I mean if your goal is to buy a
home there's no reason that you can't within the next 50 days move into your own place
there really isn't and do it no money down people say well I've got a I've got a contract
I mean I've got a lease contract on my property if you're in a if you're in a lease renewal
don't worry about it most states will not look unkindly from a credit standpoint on
when you're breaking a lease it's been renewed yes but what about the last month's rent I've
got in the security deposit well that a thousand or twelve hundred dollars that you may have
put up as a last month's rent in a security deposit is peanuts compared to what you can
make by immediately begin beginning to to accrue credits in your own property that you're
buying under the terms of a lease option you look in a newspaper and it says lease with
option to buy or sometimes it'll say for sale or rent to own and the property will be advertised
for sixty thousand dollars or they will say we will rent the property to you for five
hundred fifty dollars a month and we will give to you a credit of fifty dollars every
single month for one year toward the purchase price and there are people I guess who have
heard that lease options are not a bad way to go not a bad way to buy their own property
who would look at that and say wow that's not bad that is terrible that is terrible
don't ever get caught up in a lease option like that what I would rather have you do
is say look I'll give you your sixty thousand dollars are you not paying retail for the
property they're asking sixty it's worth sixty that's what you're offering you bet you are
and I and I the last figure I heard was that a the average property on the market for sale
sold through through realtor sold for about nationwide about ninety two percent of the
asking price that's almost ten percent off so anytime I look at a piece of property it's
on the market for sale I think in my mind well that property if it's if it's if I'm
an unsophisticated buyer without knowledge that I probably still could buy that property
for eight to ten percent less than it's asked they're asking for it so if I'm offering
sixty thousand dollars I know that I'm paying at the high end of the of the market value
range what I might be willing to do though is even go to sixty five thousand but here's
what I'm very interested in is term and credits in return for my paying that sixty thousand
dollars or perhaps sixty five thousand dollars I want to get a longer term minimum three
years I knew an individual who got a three year lease option on property in a in an area
where the values were rapidly escalating and this is probably about eight or nine ten years
ago and made two hundred thousand dollars and never took title the property two hundred
thousand dollars there have been areas in California where you could easily have have
done that a few years back so three years five years would even be better and I would
like to get a fifty percent credit and they'll say wait a minute the fair market value rent
on this is five to five fifty I'm not going to give you a fifty percent credit say fine
I'll pay you six hundred but I want a three hundred dollar credit toward the purchase
price what if they said well all right six fifty and two fifty credit and you're on would
I go along with that probably that's not bad what I'm trying to do is give myself time
number one to arrange for financing if I need to do that and number two to accrue significant
credits toward the purchase price and three years will generally give you that ability
for example if I if I do that if I've got a three hundred dollar credit if they offered
me six fifty and two fifty I might say what about seven and three and I think there's
a good reason to do that because even though we're splitting dollars here I think it's
going to have more credibility with the lending institution down the road if we have to show
them the contract but at any rate I got a three hundred dollar credit times twelve months
is thirty six hundred dollars times three years is ten thousand eight hundred dollars
toward the purchase price so even though I paid five thousand dollars more a premium
if you will just plugging in the number we mentioned earlier that properties are going
up at the rate of about five percent a year compounded nationally five percent of sixty-five
thousand dollars is three thousand two hundred and fifty times three the property should
go up to about seventy thousand dollars at the end of three years should be worth about
that and I've got a ten thousand eight hundred dollar credit toward that which means that
the cash I'm going to have to come out of pocket with is considerably lessened even
though we're not talking about a formula here we're talking about specifics in relation
to this example only do you all get the idea longer term greater percentage credit toward
the purchase price now look at the page there where it shows the seller situation and the
buyer situation figures are a little bit different here but no no they're not either now you're
paying six hundred dollars a month rent you've got no other payments other than that you're
getting a credit toward the purchase price of three hundred so your net monthly cost
is three hundred dollars and as a matter of fact if you plug in appreciation on the property
you might find that your net out of pocket cost to have lived in that property for those
three years was more like a hundred and fifty to two hundred dollars very very low cost
housing even though you're saying well I'm going six into my pocket for six hundred dollars
a month it's like putting six hundred dollars on the table three hundred dollars is going
to go to the bank and the other three hundred dollars is going to go to the seller what
we have to look at is not is assuming that affordability is not an issue what we have
to look at is the net out of pocket cost let's look at the seller situation mortgage payments
three eighty eight real estate taxes eighty dollars insurance twelve dollars maintenance
expenses forty five you got four hundred seventy five dollars so the monthly rental income
is six hundred they've got a hundred and twenty five dollar cash flow what if someone said
to you as they have to me well what about you picking up all the maintenance costs and
in some cases I have agreed to do that up to a certain figure like up to a hundred dollars
and that keeps the nuisance maintenance off their hands but they would still be responsible
as owners of the property for something like a major air conditioning or furnace replacement
those of you that have experience in options what has been your what has been your history
in terms of picking up maintenance costs Jane I know you've you've had some lease option
experience first fifty dollars in her case and they do anything above that I certainly
wouldn't I don't think I would mention that in your initial negotiations but if that turns
out to be an issue be willing to do it we're not talking about fifty bucks a month we're
talking about any cost up to fifty dollars let's look at the buyer situation on the next
page actual property value is seventy thousand your option consideration is sixty five in
your option price is sixty five you've got an option credit of ten thousand eight hundred
dollars you're only going to have to come up with fifty four thousand two hundred dollars
you see fifty four thousand two hundred dollars with a value of seventy thousand dollars on
the property that's less than an eighty percent loan if you had to go out and get financing
now what do you do if you're lease optioning a property today that has non-assumable financing
on it you may be able to work out a situation with the seller where at the end of three
years the seller would be willing to to take back a wraparound mortgage or would be able
to would be willing to sell it to you on a contract for deed or a lease for further the
lease option or whatever but if it's your plan to buy the property and put new financing
on it you better satisfy yourself concerning the assumability of the mortgage you might
say well my credits lousy now in three years I don't think it's going to be any better
I would I would want to take over that mortgage talk to the bank about it go to the bank today
and say I'm thinking about buying a property where there is a mortgage with a non-assumable
non-assumability feature what is going to be required for me to qualify to take over
that mortgage and I think we've already discussed the fact that some banks have only modest
qualifying requirements and some banks if you don't tell them about it you have a timely
timely payments representing six or eight months they'll let you do it but it's not
100 percent certain you should check with the bank and see what their policy is regarding
that especially again if you're going to be taking over that mortgage in three years
when the when when the lease option expires in order for an option to be valid for it
to be legal there's got to be option consideration the law does not dictate what that consideration
should be I think we'd have a hard time in court determining that the option I had on
this hotel to buy it for 25 million dollars was adequately secured by $100 in option consideration
that just is not enough we have to look at case law for that and a lawyer can probably
give you some guidelines an attorney can but I can tell you that if you're trying to lease
option a single-family home $100 options iteration would be enough but what if you don't have
$100 or what if the seller says no I want a thousand or I want $5,000 what form can
option consideration take let's take a look here back in your book go back if you will
please to where it shows examples of option consideration a few pages back number one
it can be money number two it can be mortgage a mortgage on property you already own like
if you've got a property with equity you say mr. seller I'll tell you what I'll give you
a mortgage on that property and I'll make you monthly payments on the mortgage make
monthly payments to you and we'll use that as consideration it could be an unsecured
promissory note just a promise to pay 500 bucks at the time the option is either dropped
or exercised you would owe $500 it could be equity in a debt asset you've got a timeshare
in Florida or timeshare in Cancun worth 4,000 bucks or 8,000 whatever give that to the seller
as option consideration it's a good way to get rid of a debt asset and number five fix
up the cost of fix up if you're going to buy a piece of property and it's going to need
to be rehabilitated in some way and you estimate that cost is three or four thousand dollars
then you might say to the seller look I will promise to pay up to three thousand dollars
or a minimum of three thousand dollars to rehab the property and that's like putting
cash in your pocket because if I don't exercise the option then you're going to get the property
back with all those improvements having been made and it's good for you it's good for me
so that option consideration can be very powerful and I've used that okay let's jump ahead if
you will please to where we left off sublease income property for a profit there are a number
of ways to do this limited only by your own imagination let's go back to the same example
we had a moment ago where there's a sixty thousand dollar property let's say we agreed
to pay sixty five thousand dollars for it and we're paying six hundred dollars a month
in rent with a credit of three hundred dollars the moment you have that lease option could
you in turn sublease the property sure you could you could lease it to a tenant just
like you would if you owned the property you could lease it to them for five fifty wait
a minute would that make good sense you're paying six hundred dollars I see some people
saying yes some people saying no I think if you could afford the negative cash flow that
that is not a bad deal I mean every month you're putting three hundred dollars in the
bank and so even though you're you've got a negative cash flow each month of fifty bucks
meaning you're paying to the seller or the option or fifty dollars more than you're receiving
I could make a case that that could be a smart a smart situation what if you subleased sub
optioned the property or as we say sublease option the property you're paying sixty five
thousand you could find someone to come along and give you seventy for it and you tell them
you will give them a thirty month lease option I would never make it longer than the option
period you have and preferably a few months shorter you could you could have a real problem
if it runs consecutively and the and the option period expires on the same same day I would
say look I'll lease option the property for seventy thousand dollars to you for thirty
months and your rent is going to be seven hundred and fifty a month but I'm going to
give you a credit of three seventy five now those figures are plucked from air but I think
they would still work I mean you're getting a credit of three hundred you're giving them
a credit of seventy five dollars more but that's only going to be that's going to be
less than a thousand dollars and you're making a five thousand dollar profit on the on the
property you see the you see the range of opportunities that a lease option gives to
you lease option sublease or lease option sublease option could you sell your lease
option to someone for seventy thousand dollars on a contract for deed you really could it
would take some very careful structuring on the part of a lawyer but you have an interest
in that property that can be conveyed to someone else as long as there's no fraud involved
and as long as you can deliver what you promised then there's no reason you can't do that
there are really three pay periods in a lease option sublease option when you sublease that
property to someone else the one you've got a lease option on the first pay period is
going to be the option consideration no reason why if you paid a hundred dollars in option
consideration you cannot get a thousand on the front end absolutely that's not a lot
of money today number two pay period is the payment spread you are getting seven hundred
dollars a month in income and you are paying out six hundred dollars under the terms of
your own lease option and of course the final pay period number three is the differential
between what you're buying for and and selling for and I'll tell you why people like to
buy into the terms of lease option and that is because many people cannot qualify for
a mortgage we talked about that earlier you know even though interest rates have gone
down a little bit from what they were years ago people still cannot qualify too much consumer
debt so this is a painless way for people to buy property a home to live in and you'll
find them very receptive to buying property under the terms of a lease option or for that
matter a land contract the question is could I give you some idea of how I would respond
to a seller who would be reluctant to establish a price three years down the road Dave I would
find it difficult I really would because it's a case-by-case basis for example if I were
if I were negotiating with Anthony on a sixty thousand dollar property he says boy I hate
to attach a figure I don't know what's going to happen over the next three years my first
question would be well what's happened over the last three years and see if you can come
up with some sense that he has a understanding that property has gone up a little bit over
the last three years and Anthony I know that you're asking sixty thousand dollars for the
property certainly you would enter into a lease option if I agreed to give you a hundred
thousand in three years and he says oh in a minute well obviously I can't do that because
we both know the property is not going to be worth that in three years why don't we
do this why don't we why don't we try to try to project ahead what it's going to be worth
based on the last two or three years and see if we can't come to an agreement there and
I'm not going to go wild with that believe me I'm not going to let him name a number
and let me have me go along with anything he suggests but I think I would approach it
I guess what I'm saying is kind of a common sense I think I've got no let me ask those
of you have done lease options who are you in the room okay how would you respond to
that but what Jane has said is very powerful and it certainly is worth repeating she said
number one in my negotiation with Anthony I'd say Anthony if I were to pay you all cash
you'd take a figure lower than sixty thousand what what might that be and he says well maybe
fifty nine or he might say fifty who knows and say Anthony the other thing is I want
to buy your property and you want to sell it this is what what Jane is saying these
are good arguments I want to buy it you want to sell it obviously if we pick a figure that's
going to be too high at the end of the three year period I'm going to walk away and you
in turn will have had your property tied up for three years and that's not what you want
and not what I want either again a common sense approach but very too very powerful
arguments good for you thank you Jane yes any thoughts on your part Albert he's making
a good point too he said it doesn't make any sense going blindly down the road and maybe
maybe he'd be willing to go up to three thousand but you've got to understand this is on a
case by case basis isn't it I mean if I believe that his property right now is worth sixty
five thousand dollars and he's only asking sixty for it then I might be very willing
to say fine I'll give you sixty five thousand dollars at the end of or or more at the end
of three years on the other hand if he's asking the very top of the of the of the market value
range then what Jane said is so true look if I were to come in and pay you cash and
close on it tomorrow you certainly would give me some discount and I would even add you
know some sellers will discount as much as ten to twenty percent for an all cash quick
quick purchase how do you feel about that I might say I appreciate you bringing that
up Dave I think it's a good discussion yes sir he said if you sub lease option a property
that you have a lease option on is that going to upset the seller not to be cold hearted
about it but I really don't care provided Larry I've got the legal right to do it and
we're going to be talking about that right now let's talk about how to protect yourself
number one the option should be recorded if you don't record the option at least record
a memorandum of option we have a memorandum in your legal forms portfolio the right to
sub lease if you don't have that specifically spelled out in the contract in some states
they could legally deny you the right to sub lease to someone else they meaning the seller
the next page right to assign you should have the right to assign the contract to someone
else I mean here here I have in my example that I've been using all along I've been
paying a six hundred dollar a month payment I'm getting a three hundred dollar a month
credit times thirty six months is ten thousand eight hundred dollars the property is going
up to seventy thousand I've got a right to option it I've got an option on it for sixty
five thousand I got ten thousand eight hundred dollars in credit I need fifty four thousand
two hundred dollars but I decide not to option it why because I'm dead because I moving out
of the area because a whole variety of reasons I don't want to option it many people not
knowing the difference will walk away and lose potentially hear how much money not ten
thousand eight hundred fifteen thousand eight hundred dollars so you should have the right
to assign which is another word I mean sell the contract now can I find someone to buy
it readily for fifteen thousand eight hundred dollars yeah I couldn't can I find someone
to buy it for a buck you bet someplace in between there that is going to be readily
readily saleable plus I may have put in three thousand dollars in improvements and that
was my option consideration and the sellers giving me credit for that so all of a sudden
I only I only have to come up with fifty one thousand two hundred dollars so you can see
that there can be considerable value that builds up over a three year period with a
lease option that's why you need a right to assign a right to extend we've gone through
all the negotiations rich we've agreed to three years we've agreed to the the payment
I'm going to pay you we've agreed to the credit that I'm going to get I'd like to do this
rich I'd like to have the right at the end of three years to extend it for one year now
let's assume rich trying to put yourself in the situation of a seller what are you going
to say to that rich just said drop dead now he said it's going to depend on the circumstances
absolutely but if you were a seller property and you were being asked for really something
that's going to benefit me what might your response be what's in it for me right what's
in it for me well rich I'll tell you what let me do this let me pay you let me have
the right to pay you one thousand dollars in cash at the end of three years to apply
and that will give me a right to extend for one year and we'll apply that one thousand
dollars toward the toward the purchase price yeah hard to decide how the rest of you feel
it wouldn't that be a good deal for the buyer rich what if rich came back and said no way
you give me two thousand dollars and it won't apply to the purchase price what do you say
okay okay I mean if I can see number one I don't think I'm going to need that year but
number two if I can see that I'm going to be that I'm going to have credits of somewhere
between ten and twenty thousand bucks I'd spend two thousand dollars anytime in order
to save or protect or earn ten to fifteen thousand you agree with me on that I mean
you got to be reasonable if he said well ten thousand I'd say no at what point in time
do I agree when it makes sense to you individually question is what happens if the seller that
is the option or dies during the term of the lease option period what happens to it it
is then binding on the heirs on the estate it's a legal contract entered into it would
be binding on the heirs yes ma'am she says you also have a right to buy it at a discount
if they need the money badly I mean let's go back to my case with rich here rich has
given me three years to buy the property then we negotiated the fact that he's got two thousand
more dollars coming in if I want to extend it for another year I mean potentially he's
looking at a four-year period at a predetermined price plus two thousand dollars if I decide
to postpone it another year and all of a sudden two years goes by and rich is in trouble financially
or maybe I don't know whether he is maybe what I would do is go up to rich and say rich
you know I've got an option on your property and I've been paying you every month I'm
not ready to option exercise my option quite yet but I've come into some money and my
attorney said that I'm here my accountant said I should contact you I'd be willing to
buy the property right now if you would give me a discount and what is every single seller
in the world going to say to you then how much exactly right how much well that's what
we're trying to find out right now what would you consider would be an amount that would
be fair to you get them always to name the first figure and if they come back say well
I might be willing to take a thousand dollars less what are you going to respond even if
you don't like it are you going to respond no way or you're going to say let me think
about it let me go back and talk to my accountant of course you don't have an accountant you're
just buying yourself time so you come back the next day or two and say well we've talked
about it a thousand just wouldn't do it but we could give you we would buy it at a five
thousand dollar discount thank you for bringing that up it's incredible any contractual obligation
you have whether it's a note or a mortgage or whatever can potentially be discounted
don't ever forget that now we've got a couple of pages later we've got an actual lease option
that I want you to go on your own this is a rental lease with option to purchase we
also have a blank form in the legal forms portfolio but it is all here totally complete
and I encourage you to go over this on your own as you look at the residential lease option
to purchase you know I said yesterday as we went through a particular section I said they're
going to be a lot of ah-has have the has the whole area of lease option caused some of
you to say inside aha maybe this is an area I haven't been I haven't been concentrating
on or I've forgotten about the opportunities or whatever boy they're there so powerful
and if you're just getting started and you've got no cash or credit a great way to go if
you're trying to buy a home to live in a great way to go risk-free low-cost zero interest
financing it was what it boils down to okay let's review chapter 15 you know we've talked
about a lot of creative ways to buy property no money down but in my opinion one of the
most powerful ways is using options I really mean that it's a wonderful way to buy income
producing property like a single-family home or even a multi-family property and is a fantastic
way to buy yourself a new or a bigger personal residence an option is nothing more than a
seller giving to a buyer in exchange for some consideration some money the right to purchase
their property at a predetermined time and at a predetermined price a lease option is
where you as the eventual buyer pay rent to a seller with the right to buy the property
at some point in time in the future the beauty of a lease option is where you get a portion
of the rent payment applied to the future purchase price another great part is when
you and the seller agree now about the future purchase price and during the lease period
you through an increase in rental income or improvements you make not only raise the value
of the property beyond the up the option pricing you've agreed to but you're going to get a
positive cash flow as well in essence by letting you live there or letting you sublease the
property the seller is lending you your down payment at an extremely low interest rate
I spent many years and many dollars perfecting my residential lease with option to purchase
agreement and I give it to you in this chapter it's an incredible tool in dealing with options
one of the most important components of this pre-printed contract is that it gives you
the less or the right to assign the lease this means that you can do many of these transactions
for investment purposes and believe me they do work you should become very familiar with
all of the subsections in this lease and all of them as you may find necessary for your
convenience this lease is included with your legal forms portfolio and feel free to copy
it as much as you wish if you have access to a computer you may be interested in obtaining
my real estate computer toolkit which contains this and many other of the forms which you
can easily alter and print right out of your computer you can also do what if calculations
and perform other real estate functions you can obtain this by contacting the professional
education institute now that you've been exposed to all these ways to acquire property you're
probably wondering how am I going to be able to talk to and convince a seller to sell me
his property and how am I going to be able to convince him that I have chosen the best
technique not only for me but for him as well and chapter 16 is on how to negotiate a transaction
and really how to negotiate for just about anything you may want or need in life it's
incredibly valuable Carlton I watched you so faithfully for four and a half years and
finally I realized that I can do it too finally I got the courage to go ahead and and order
your course and since that point I have generated a net worth of seven hundred thousand dollars
and we're doing about nine thousand dollars a month positive cash flow of nine thousand
a month over a hundred thousand dollars a year are you a full-time investor not yet
we're still working you wish you'd have ordered it seven years ago absolutely that's I wish
I had ordered earlier but I'm very happy that I ordered it when I did it I saw your course
ten years ago and I wish I'd gotten into it then I was laid off from my job at General
Motors after fourteen and a half years I ordered your course and it's really changed things
I now own twelve properties I'm up to a net worth of now over three hundred fifty thousand
dollars and I got a net income of about twenty eight hundred a month I hope by hearing and
seeing these techniques explained in detail perhaps rewinding every so often to fully
understand a particular concept you're beginning to reach a comfort level with the whole area
of creative financing I urge you to go through this material as often as you feel is necessary
in order to truly understand it as I mentioned earlier if you found these five chapters on
video to be very helpful as a convenience to you you can obtain the remaining nineteen
chapters on VHS videotape for a very nominal price contact the Professional Education Institute
I thank you for watching and congratulate and applaud you for making the decision to
change your financial future by investing in real estate my very best regards to you
and good luck in your investing.