The American Education Institute

OPPORTUNITIES WITH BANK FORECLOSURES

The example that follows actually illustrates a combination of two creative financing techniques which can sometimes put cash in the buyer’s pocket at closing.  The first technique (described elsewhere in this text) consists of buying bank-foreclosed properties (called REOs  or  “Real Estate owned”)  at a discount and the second technique is known as being able to trade equity in one property that you don’t even own for yet another property.

REOs are often required by banks to be disposed of as quickly as possible, so many times you are able to make acceptable offers that will come  under such properties’ appraised market values.  Always remember that REOs make no money for the bank, they’re actually a burden, and really the only thing the bank wants is to recoup its lost mortgage investment.  By acquiring a property in this way — at a price well below market value — you obtain instant equity ( which is the difference between true market value and the price you actually paid).  Do you see how this equity “creatively applied”  might possibly produce that second technique mentioned above?

Here in the following example is a fuller explanation:

In this case a buyer went to a bank and asked the head loan officer about all the properties whose mortgages had been foreclosed, and then asked him which of those properties the bank would most like to sell.  Surprisingly, the loan officer described a tract of vacant land.  The bank had originally lent $60,000 in a mortgage on that land and, because if had apparently been “sitting” for a long time following foreclosure, the bank was very eager to recoup its investment.  This buyer, who was particularly savvy in the ways of the industry, knew that banks generally have appraisals done on properties upon which they intend to foreclose.  The buyer also know that banks typ0ically make vacant land mortgage only  up to 50% at most of that land’s appraiser value.  He asked the loan officer to show him that appraisal report, which revealed the estimated fair market value for the land was $120,000.  (Notice here how vacant land rarely, if ever, is sold for the full amount of its appraised value.  One reason is simply — and it’s the scourge of land foreclosure, as the banks all know — because vacant land generally produces no rent or any other income.)

The buyer thanked the loan officer and went on his way.  He next consulted with a real estate broker and, using information provided by the Multiple Listing Service, proceeded to make offers to purchase on a number of different properties.  And this was his “genius”:   he used the full appraised value of that land he didn’t even own (that is, $120,000) as part of his offered payment plan on those properties he was proposing to buy.  (The broker, by the way, was only to happy to help him in this because he stood to earn a commission on each MLS property that sold.)  So, guess what happened?  Two of this buyer’s offers wee accepted!  And, because he had built escape clauses into each offer, the buyer was free to go with either one.

This is what he did.  He selected to run with the offer he had made on a large, multi-apartment residential building which had an asking price of $260,000.  More “genius”:  This buyer offered to pay $275,000 if the seller would take that vacant land in trade which was appraised at $120,000.  The seller accepted.  Further to this deal, the buyer was able to assume the original mortgage which carried an outstanding balance of $115,000.  This, plus the land, made a combined payment of $235,000, and the buyer was able to come up with an additional $40,000 in cash to satisfy all terms of the sale.  Hence, a purchase made for $275,000 — $120,000 of which the buyer never had to begin with.

How did he manage to come up with the $40,000 in cash, not to mention the money he actually had to pay to the foreclosing bank for that tract of vacant land in the first place?  Recall that the bank’s asking price was $60,000 — the amount it needed to recoup its original investment.  This meant that the buyer had to come up with a total of $100,000.

The answer is simple:  the buyer went to that bank and applied for a second mortgage on the apartment building.  He knew that banks will traditionally make mortgage on such good properties for up to 80% of their appraised value.  In this case, 80% of the value ($275,000) turns out to be $220,000.  As a further note, whenever a bank-hired appraiser is called in, chances are very good that the value he’ll come up with will equal or exceed the amount of the sale contract — as long as it was an “arm’s length” contract to begin with (meaning that neither the buyer nor the seller are related to each other, or are otherwise connected in any meaningful personal or financial way).

With the bank then being willing to lend $220,000, the actual transaction broke down like this:  Since the first mortgage of $115,000 was now being assumed by the buyer, all he really needed was the difference, or $105,000 as a second mortgage.  With this $105,000, the buyer quite easily paid the bank’s price of $60,000 for the land, $40,000 in additional cash for the building’s seller, and then guess what?  He put the remaining $5,000 in his pocket!

Here’s a quick summary of how every party to this transaction actually fared:

• The Seller: of the apartment building sold his property quickly and, amazingly, at a price higher than he was asking.  The sales total?  $275,000.  He passed on his existing mortgage of $115,000 to the buyer.  He acquired a tract of vacant land (fully paid for) free and clear, and which was appraised at $120,000.  He also put $40,000 in his pocket at closing!
• The Bank: succeeded in recouping its initial loss by disposing of the very property it most wanted to sell, and that the bank itself had had appraised at $120,000.  The bank was paid it’s own price of $60,000.  It further made a newer, sounder mortgage on a much better income-producing property; or, a $105,000 loan against an appraised value of $275,000, even with an existing mortgage of $115,000 which, both totaled, still doesn’t equal the full appraised value.  Hence, it’s a good loan (one that will produce new income for the bank)
• The Buyer: makes out exceptionally well.  He now owns the apartment building (one that will produce new income for the buyer), and he bought it without spending any of his own money.  He has succeeded in buying an investment property and financing it 100%.  Actually, he financed it at 105% because he put $5,000 in his pocket at the closing!  His total mortgaged amount is $220,000 which is 80% of the appraised value and would be all he could expect a bank to be willing to lend in the first place.  He traded $60,000 in equity in land he didn’t even own as a down payment on a much more valuable property, which is actually worth $260,000.  Minus the mount he owes on it, suddenly this buyer has obtained an instant equity of $40,000 in a property he just now bought.  The equity plus the $5,000 he put in his pocket has thus netted him a cool $45,000 in profit at the exact moment of closing — and not one nickel of his own money did he have to invest in order to attain that level of profit.
• The True Net Result: is a win-win-win situation for everybody!

This is indeed an excellent example of not only how to realize cash at closing, but also how to combine more than one creative financing method in order to do it.

One other amazing fact associated with this example?  The entire process — from asking the loan officer about the bank’s REOs to the day of closing — was accomplished with six weeks.  This illustrates, once again, that making big money in real estate can be done fairly quickly and without being rich to start with.  You don’t need any money at all to begin.  In fact, with real estate you really can make something out of nothing!

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 4-28-10

TO BEGIN

How is it possible to come away from a real estate closing with more money in your pocket than you went in with?  Similarly, how can you buy a property for cash — if that is the only way an owner will sell it — if you don’t have any cash?  how is it possible for a seller to convert your promissory note to cash when thee isn’t any cash to begin with which is why you made the notes in the first place?

Usually you make  promissory notes to cover the cash that you don’t have, in order to make down payments or otherwise come away with even money.  Rarely have you ever hoped to go to a closing — where you are the buyer — in order to collect!  Isn’t that right?  Aren’t generally closings the kind of events where you spend, not earn?

This text is designed to show you that, too, is limited, non-creative thinking.  It doesn’t have to be that way at all at a closing.  In the next several pages you will learn some of the ways you can leave a closing with cash in your pocket, and several other creative ways to utilize promissory notes in solving purchase problems that arise in the first place because you have no cash.  You will also learn how to combine several different methods, all designed with one goal in mind:  Buying property and financing it 100%.

CASH COMING FROM CLOSING

The following methods actually seem better than making a zero down payment and still being able to buy the property.  These methods teach you how to put money into your pocket where there wasn’t any before.  In effect, you’re buying with negative numbers, not even zero!  You buy by leaving the transaction with more money than you spend!  How is this even possible?

One of the key “secrets” is equity.  That is, the greater the equity the seller has, the easier these cash-back methods can work.  This is the situation that permits the greatest flexibility, and therefore allows you the greatest creative financing opportunities.  You may finance so creatively in fact, that you don’t even stop at 100%.  No you may be talking about financing at 105% or 110% or more!

Here’s yet another little “secret”:  Become a licensed real estate broker yourself.  You can utilize every single one of these creative financing methods and, at closing, you’ll always be able to walk away with your broker’s commission.  Or, at least you’ll be able to put in you pocket whatever amount of that commission you didn’t already use to buy the property.  Typically, you can count on putting in your pocket as much as 2% to 3% of the entire purchase price of the property.

METHOD #1:  REBATES FROM THE SELLER

This method of taking cash out at closing depends on the amount of the seller’s equity and your ability to procure financing for more than what’s absolutely necessary.  You simply work a rebate “deal” with the seller.  The following is a good illustration:

Suppose you find a nice two-unit residential property with an agreed selling price of $100,000.  The seller’s existing mortgage has an outstanding balance of $35,000, meaning that his equity amounts to almost two-thirds of the property’s market value.  You now go to a new lender and procure a 55% mortgage (not an 80% or even 75%).  What you’re asking for is $55,000 to finance a $100,000 property.  Most lenders will accede to this readily.  Furthermore, they should be willing to make you a “no-doc” loan, which means that the lender will believe whatever you put down on your loan application without demanding documented proof.  But you will need good credit.  Lenders generally make no-doc loans based on your credit report as well as your equity in the property.  The lender further believes that, because you’re only asking for a 55% loan, you must therefore already be able to pay the 45% balance price.  Hence, you must have $45,000 in equity.

Meanwhile, the rebate deal you work with the seller is this:  Once his original mortgage is paid off, you’ll split the cash balance 50-50.  In other words, $35,000 of your new $55,000 mortgage pays off his outstanding balance, leaving $20,000 in cash left over.  At closing, the seller pockets $10,000 and so do you!

Of course, that isn’t the end of the picture.  You will still owe the seller the balance of the purchase price, which is another $55,000.  (Price of $100,000 minus $35,000 to pay off existing mortgage minus $10,000 cash to seller at closing leaves a $55,000 balance.)  As part of the deal, the seller must agree to finance this $55,000 himself as a second mortgage.  If, however, this or any other property cannot support such mortgages as these, which combined equal $110,000, you should refer to the creative financing text discussed earlier for such alternative methods as deferring interest and/or offering to pay a higher interest rate in exchange for a lower purchase price.  In this particular case, while it appears on paper that you are paying $110,000 for this property, you’re still purring $10,000 into your own pocket as closing.

As mentioned above, no-doc loans depend on a good credit report.  If your own credit history will not satisfy typical no-doc lenders, you may not yet be out of the ball game.  You might try seeking a first mortgage loan from a private investor, using the property as collateral, with, again, the seller agreeing to the second mortgage.  Consult with various mortgage brokers for example, because you may find that they already represent private investors who are quite often willing to make loans for up to 50% of the collateral value without looking into any credit history whatsoever.  (This almost works like a pawn shop for real estate.  The value of the goods always exceeds the amount of the loan.)  You can even obtain a privately financed loan like this if you’re bankrupt.

Yet another variation on Method #1 would be for the property to be in dire need of repair.  The seller might still obtain his $100,000 but with the added stipulation that $10,000 of this price be allocated for repairs.  Since the seller is getting out of the business of property ownership, it makes more sense for yo to manage the repairs and, hence, that $10,000 fund for accomplishing them.  Thus, the seller would rebate to you his $10,000 at closing as well, and still his original mortgage ($35,000) is paid off and still he receives your $55,000 second mortgage with interest.  His “net” at closing is then $90,000, but he’s already agreed to pay for all the needed repairs.  Your total cost remains the same, and you still stuff you pockets with $10,000 in cash.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 4-4-10

BUY BY DEFERRING SOME PORTION OF THE PURCHASE PRICE

Sometimes, in some highly, competitive areas of the country, prevailing prices and rents for real estate are such that it might seem impossible to break even or achieve a positive cash flow.  But this problem can be overcome sometimes by negotiating no-or low-interest financing on the part of the seller or else by deferring something of the purchase price itself.  The second alternative is often much easier to negotiate and works just as well.  What usually is deferred is some portion of the price or some interest on the loan.

Suppose you find where a seller has a three-bedroom home on the market for $95,000.  It also carries an existing $46,000 assumable first mortgage.  You may be able to negotiate with this seller a deferred purchase deal that works something like this:  In return for you offering to pay the full purchase price, the seller should be willing to carry another mortgage on the balance for whatever is the going rate of interest.  As a further consideration, the fair market rental on a house like this is approximately $750 per month.

You might offer this seller that you will assume the existing $46,000 mortgage and make the second mortgage for the $49,000 balance with him by using two notes, one for $25,000 at prevailing interest and the second for $24,000, also at a prevailing rate but with payment of this interest being deferred for six years.  But you can assure him that when the six years are up, both notes plus the unpaid interest on the second note would become due and payable.

Or better yet, stipulate that the first note should remain on the property while just the second note with its deferred interest becomes due and payable in full.

Now here is the “secret”:  Be sure to stipulate that the deferred interest on the second note for $24,000 is accumulated and not compounded.  If you don’t, you will be paying interest upon interest, which would cause the note’s unpaid balance plus interest to skyrocket, making it cost prohibitive for to pay.  Please the following illustration.

ILLUSTRATION FOR METHOD NUMBER 20

Simple vs. Compound Interest:

This shows the total difference between computing interest two different ways on a $2,4000 loan at 9% per year after six years.

Example of what to expect:

• Total interest compounded monthly                      $17,100.00
• Total simple interest                                                      $12,960.00
• How much more you pay for compounding        $   4,140.00

When the six years are up, in this example, you could refinance and then pay off the entire first (assumable) mortgage to that lender plus both notes to the seller.  Preferably, however, you would like him to agree to your paying off only the second note (for the $24,000 plus accumulated interest)  and leave the first one ride on the property.  Then just the seller’s first note (for $25,000 plus prevailing interest) and your new mortgage (through refinancing) would sty with the property.

But if the seller’s note for $25,000 plus interest is in fact to remain after refinancing, you must first have included a subordination clause in that note at the time you bought the property and assumed the first mortgage.  This legalese will allow for the possibility of future mortgages to be subordinated to this note, or else enable this note to become subordinate to some future larger mortgage.  Which ever works out for the best, you will need to safeguard and ensure your ability to take out a future longer mortgage in order to fulfill the six-year term you negotiated with the seller in the first place.  (More about subordination clauses in contained in this text discussing how to make real estate offers.)

One more thing you need to consider.  If you believe the rents you are able to charge will not support a refinanced mortgage plus the original note for $25,000, you’ll need to have the seller agree that the interest on that note could be adjusted downward to a point where the property rent can support repayments.  At the same time, the second ($24,000) note’s simple interest could be correspondingly increased.  This is another creative way to make end meet.

IN CONCLUSION:  MORE THINGS FOR NOTHING

These have been four more “advanced” yet practical methods for creatively financing property at (or very nearly at)  100%.  They include:  making a pledged asset mortgage, using discounted bonds, entering into a purchase agreement or land contract, and deferring a portion of the purchase price.  Again, they positively reinforce the fact that you can indeed buy real estate using none of your money.

With the previous text and now this text, you have at your disposal 20 different and creative methods on how to do just that.  And there are still other 100% financing methods and variations to be discovered in the text material ahead!

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 3-28-10

ENTER A PURCHASE OR LAND CONTRACT AGREEMENT TO BUY PROPERTY.

What this boils down to is an installment agreement similar to the types of installment financing you might use in buying most any valuable item at retail.  It is fairly common in some states, but almost completely unknown in others.  It is commonly called a “land contract” because it’s used most often when buying vacant land, but it certainly also applies to improved land as well.  Basically what this type of contract in real estate does is require the purchaser to pay all of most of the balance due on a property before even the title is transferred.  Almost like buying a car, the financier of your purchase won’t give you the car’s title until you pay off the debt.

In real estate, of course, you have both a title and a deed.  In a land contract simplest form, you don’t get title until an agreed amount of the full price has been paid and you don’t get the deed until that price has been completely paid.  Again, as in the previous method, entering into such a contract as this almost always involves seller financing.

In theory, a land contract gives the seller some protection in case the purchaser defaults. It actually gives greater protection to the seller, but also requires greater risk on the part of the seller.  A land contract will stipulate that if the purchaser fails to make payments as required, whatever money he has paid will thus be considered “rent” from the date of closing to the date of default.  In effect, this means that the seller hasn’t yet sold anything;  he has merely been the landlord.

But to protect that seller’s interests, land contracts usually — and should — require that the purchaser file a “quit claim deed” with the seller (usually held in escrow by the title, or title insurance, company or some other appropriate third party) and this should be done at closing.  This is most especially true if the land contract itself, or “affidavit and memorandum of agreement” or “articles of agreement for warrant deed” or some other such legal document, has been filed with the county recorder of deeds or governing public records office.  That this does, in effect, is guarantee to all parties concerned that, if the purchaser defaults, property ownership reverts to the seller.

Land contracts always specify whatever exact dollar payments are required.  You can generally count on these being the specific monthly payments that you as the buyer will be required to make.  These contracts will further specify that, for each payment, money is first applied to pay interest on the loan amount; secondly to specific charges like real estate taxes, property insurance, and any special assessments; and only thirdly to the outstanding principal balance.  Further, a land contract may specify exactly when, how, and for how long such payments will need to be made before title to the real estate is transferred to the purchaser.  Generally, if legal title passes before the loan if fully paid, the contract will specify a “balloon” type final payment that will come due on a specified date.  A balloon payment usually means “payment in full”  of the entire remaining balance.  But the contract could  also specify that a in lieu of such balloon payment, the seller can simply take back the mortgage and resume ownership of the property.

It isn’t actually true that land contract sales give a legal way to bypass the term known as “due-upon-sale” which is found in many mortgages.  This is not true because a due-upon-sale clause is effected by any transfer of legal or equitable title to real estate.  It may well be that the transfer of legal title is delayed by the provisions of a land contract, but in the eyes of the law equitable title has indeed passed to the purchaser.  And in actual practice, however, this due-upon-sale clause is only invoked with the transfer and recording of a deed, and such things as property insurance, for example, will continue in the name of the seller and not the purchaser.

It is actually possible for a purchaser to borrow from a lender to buy property on a land contract, and that lender would not know this because no deed was recorded showing any change of ownership.  Deed are public record, remember, and anyone who wants or need to know such things can easily find out exactly what properties you do own — but not what properties you happen to be buying but don’t own yet.

IT’S THE LAW

What all this means that ownership remains with the seller until he has been completely paid for his property.  If a traditional lender makes a mortgage, that lender does in fact pay off the seller completely and that property deed is transferred to that lender.  In most states, it is title to the property that passes to the purchaser.  A deed to real estate is never conveyed to a purchaser until all payments have been satisfied.  If you have a mortgaged property, you do not have the deed to that property.

Here is a practical example of a land contract deal that enables a purchase with 100% financing.  Suppose you find a two-family duplex with an asking price of $75,000.  The property has an existing non-assumable mortgage of $40,000 that requires a monthly payment of $350.  The seller wants a cash down payment of $7,500.  He is also willing to agree to a wraparound mortgage for $67,500 at 9% interest.  Suppose further that the seller is getting a little desperate and you are able to talk him down to a sale price of $70,000.

You do not, however, want the deed to be recorded with a new lender because this would trigger the due-upon-sale clause forcing the first mortgage to be paid in full.  You want only to deal with this seller who has already agreed to help your financing by means or a wraparound mortgage.  You want to make payments only to him, and he will in turn continue to pay the first mortgagee — making a slight profit for himself with each payment.  So now assume you are able to negotiate a land contract sale.  In exchange for his keeping title and his first mortgagee keeping the deed — which, you tell him, puts you at greater risk — you are now able to get him to reduce his required down payment to just $3,000.  Furthermore, you get him to accept this over the course of three years, at two semiannual payments each of $500 and at 0% interest.

The remaining balance of $67,000 will be paid through terms of the land contract at an 8% rate of interest.  After five years, you agree to take title to the property from him.  Meanwhile your monthly payments to him are going to be %580, calculated to be broken down and specified to be allocated like this:  $447 for principal and interest, and $133 for insurance and taxes.  Recall that his full monthly payment is $350 (plus the hazard insurance and real estate taxes).  So at the very least, this seller will be making a profit each month of $97.

But you also know that renting out both family units in the duplex will bring income of $900 per month.  Even if you add, say, a 10% ($90) management fee and $80 a month for maintenance on top of your $580 monthly expense ($90 + $80 + $580 = $750), you will be earning a profit yourself each month of $150 ($900 – $750 = $150).  This is what’s called a positive cash flow.

Obviously, this agreement is win/win for both the seller and the buyer.  Your initial cash outlay under these terms if $500.  And yet you  acquire a property that will net you $150 per month.  On the other side, the seller has the security of retaining title and leaving the financing right like it is.  The first mortgagor retains the deed.  And on top of all this,  the seller himself make nearly $100 profit per month!  This there’s a positive cash flow for both parties concerned.

But, of course, there are cautions to this that you need to be aware of.  If you enter into a land contract agreement extending for many years, perhaps 10 to 15 or longer, there are some possible events that could happen which would put you in a bad position.  For example, if that original mortgage contained the due-upon-sale clause, the longer your land contract deal extends, the longer that lender has to discover this “sale” and thereupon call the mortgage due and payable immediately. Of course, the longer the time, the less will be due, and you may well be able by that time to afford the risk.  Or, you might also at that time be able to refinance conveniently and pay off that first mortgage without much hardship.  Or, by that time the original lender might even let you assume the mortgage (no doubt for higher interest or less attractive terms) but by then you might be able to afford this.  But to safeguard against this, it is always prudent to decide ahead of time how you and the seller will handle this if the original lender calls in the loan.  Stipulate your agreement right in the land contract itself.  A reasonable stipulation would be for you both to agree to split whatever cost increases might arise from such a forced refinancing arrangement.

Another important consideration to spell out on the land contract is exactly who should be the recipient of any insurance damage claims or proceeds from condemnation.  In other words, you need to state in advance what will happen if the duplex burns down.  It would also be prudent to spell out what should happen during the term of your contract if the seller were to divorce, die, go bankrupt, become seriously ill, or even mentally incompetent.  Generally, you can protect yourself by stipulating that the seller execute a “quit claim deed” of his own, which would also be held by the same “arms-length” third party that holds your “quit claim deed” to him.  Finally, whenever the payment terms of your land contract are satisfied, the agreement should specify exactly how the deed is to be conveyed to you as the new owner.

One more consideration might be how to guarantee that this seller will in fact actually continue to make his monthly payments to the original mortgage lender.  It might be best actually to have the same third party that holds your quit claim deeds receive and process all payments. Or, you might possibly agree to have a lawyer do this.  But whatever you agree, be sure it’s in writing and included as part of the legal land contract agreement itself.

Lastly, be sure a title search is done on the property before you enter into any land contract purchase agreement with the seller.  You want to be guaranteed that title to the property is in fact “clear.”  This means:  no other outstanding loans (for example, home equity loans), no liens, and no encumbrances of any kind.  To ultimately protect yourself, you might consider recording the land contract itself (or “memorandum” of such) with the county recorder or public records office.  The only risk here, of course, is that such is public and that original mortgage lender can easily discover this and call that loan due a lot sooner than either you or the seller might expect.

So as a final thought, be creative in your financing, but also be cautious in your dealings with people you may not always be able to trust.  Being a skeptic is much better than being a victim.

This land, or purchase, contract method for obtaining 100% financing (or very close) is summarized in the following chart.

METHOD NUMBER 19 IN BRIEF

What it is designed to do:

• Enter a purchase or land contract agreement to buy property

What you need:

• Flexible seller who doesn’t seriously need cash at closing, who is more interested in monthly income and positive cash flow, and who may also be concerned about loan security.

What your terms are:

1.  Property asking price                                $75,000

2.  Present mortgage                                       $40,000

3.  Present payment per month                 $        350

4.  Equity to seller                                           $35,000

How you proceed:

1.  Negotiate a land contract agreement based on a sale price of $70,000

2.  Negotiate with the seller to accept $3,000 as down payment, but payable in six semiannual installments of $500 at no interest

3.  Negotiate the contract agreement on the remaining balance of $67,000 at 8% interest with P&I payments of $447 with title passing after five years

4.  Agree to monthly tax and insurance payments corresponding to seller’s own at $133 (added to $447 equals $580).

What the seller can expect:

• Seller gets some money up front, a monthly income producing a positive cash flow, a very well secured loan upsetting none of his present arrangements, and a property sale realizing approximately 92% of his original asking price.

What you the buyer can expect:

• You have secured a “mortgage” even without establishing any credit whatsoever.
• You have negotiated an investment resulting in a $150 positive cash flow each and every month, even after paying additional management and maintenance fees, and you don’t have to occupy the premises personally.
• You have acquired an income-producing property for almost entirely 100% financing.  In fact, if you collect rents and security deposits at closing (that is, have no vacancies), you’ll walk away from the deal with money in your pocket!

100% Financing When Buying Real Estate / Dr. Eric T. Martin / 3-21-10

USE DISCOUNTED BONDS.

This and the following three methods are further derivations based on seller financing.  Using discounted bonds, the first of the three, is a relatively simple method, but it also has probably the greatest potential.

Most likely, some collateral will usually be required whenever a seller helps finance a property.  Usually, of course, this collateral amounts to the property itself.  Usually, of course, this collateral amounts to the property itself.  But it’s also a fact that physical property deteriorates, required upkeep, and quite possibly will fall into some disrepair by the time a seller would be forced to foreclose should you ever default on his mortgage.  This is why you should try offering to such a seller a mortgage secured not by real estate but by good quality bonds.

You can easily find such bonds listed in the daily papers.  In the Wall Street Journal, for instance, private corporate bonds (sometimes called “New Your Exchange Bonds”) and U.S. Government bonds are listed every day.  You need to contact a stockbroker regarding tax-free bonds, but these are the kinds of securities most attractive to potential lenders and mortgage makers.  City, state, and county revenue bonds are usually solid, zero-interest, and tax-free bonds that come due usually within ten years.  Such bonds are not exactly interest-free (because then they would not be very much of an investment, would they?)  but they pay their dividends at maturity.  In other words, when you buy such a bond now for between $500 to $700, after it matures in ten years it may well be worth $1,000 (depending upon interest rates at the time you bought it).  And remember, there’s no tax liability to you (or the seller) based on the amount of these earnings.

Here is an example where you can use such bonds in lieu of collateral secured by real estate.  Suppose a seller has a four-family apartment building for sale at a price of $100,000.  A single mortgage in the amount of $25,000 already exists on the property, which means that this seller has attained $75,000 in equity.  He is requiring a cash down payment of $10,000, but he’s willing to accept $65,000 in the form of a second mortgage payable in ten years.  You’ll also have to satisfy the existing $25,000 mortgage to make this deal go through.

Now you can ask this seller if he’ll accept good quality bonds as security for the %65,000 loan in lieu of a second mortgage.  If he will accept this creative type of financing, you then offer to buy the building with the $10,000 cash due in 90 days along with a $65,000 note secured with these bonds.  You must also ask the seller to actually deed the property to you with its $75,000 equity secured by yet another property which is already owned by you or a friend or partner of yours.  As may well be necessary, you can protect this seller’s interest by issuing back to him a “quit claim deed” (with a title company holding the deed in escrow) that covers the property he’s selling to you.

This maneuvering will then make you the owner, and you can proceed to satisfy the remaining financing requirements.  Now you go about the task of securing you own mortgage on the property in the needed amount of $75,000 (which should be easy because you now have that much equity).  When you obtain this new mortgage, simply disburse the money as follows:  $25,000 to pay off that existing first mortgage, $35,000 to buy the necessary $65,000 in bonds that mature in nine or ten years, $10,000 in cash goes to the seller at the closing (within 90 days, remember), and the remaining $5,000 can go in your pocket.

What has happened?  The existing mortgage has been paid off.  The seller has obtained a $65,000 note for the balance which will be payable in ten years with the redemption of good quality bonds which will indeed be worth that much at that time.  The original mortgagor, the seller, and the bond issues are all satisfied.  Now you own a $100,000 income-producing property with a $75,000 mortgage which already has produced for you $25,000 in equity.  And, in addition to all of that, you now have $5,000 more yourself which you didn’t have before you started negotiating this deal.  Creative financing at its very best!  You might even think of this as 105% financing!  is that possible?

It certainly is possible, but there are several things you need to watch out for.  The method really works best when there is, quite specifically, a low existing mortgage on a highly valuable property.  Also, not all good quality bonds are tax-free.  It the bonds you’ll be using are taxable, it’s the seller who will incur the tax liability in the form of an annual gain as those bonds increase each year in value, and you’re going to have to make sure the seller knows and agrees to this.  But you both can still avoid this taxation by using what’s called “zero-coupon municipal bonds.”  In the example cited above, the bonds used to produce the $65,000 at maturity are in fact zero-coupon municipal bonds.  So the seller therefore has no annual tax obligation because those bonds effectively don’t increase at all in value until they mature.

Additionally, you are basically asking the seller to hold a $65,000 mortgage at zero interest.  (Remember, those bonds earn nothing until after their term expires, or matures.)  But this might be asking too much, so if necessary you can sweeten the deal for the seller by offering to pay him a fair rate of interest annually yourself.  (Remember, too, that what becomes available at maturity is not interest; it’s principal only.  You therefore might well have to pay yearly interest based on that $65,000 principal to your mortgagor himself — the seller.)  But, if you budget yourself well paying annual interest like this should no be that much of a problem.  You would have to pay it anyway to a traditional mortgage company.  You also have you $5,000 “extra” at closing.  And you will also have rental income every month, certainly throughout the term of this discounted-bonds-backed “mortgage.”

Another thing to remember is that you are not double-dealing here.  None of this is “below board” or illegal, and you are not trying to deceive anyone — especially not the seller.  He mush know that your discounted bonds are today worth just $35,000, but also that they will be worth what his own government tells him they’ll be worth when the government says they’ll mature.  This is faith in the American system, is it not?  Hence, the seller should not worry.  His actual only risk is lack of interest, but if you agree to pay that too, he should then have no more risk than any other mortgage lender takes in “betting” on a sure thing.

One final thought concerns actually assuaging the seller’s risk by backing your guaranteed payments of interest through, perhaps, another mortgage taken out on another property you already own.  Or, you could offer the seller several years worth of interest payments in advance.  (Your initial $5,000 paid to him in this way will do a lot to calm his fears.)  Or you might also buy additional zero-interest bonds to cover the full amount of whatever the total comes to for this annual interest at the time all such mortgage terms and bond mature dates come due.

METHOD NUMBER 18 IN BRIEF

What it is designed to do:

Make  a mortgage using only discounted bonds as security

What you need:

• Fairly low existing mortgage on comparatively valuable property
• Equitable property that you or a partner already owns

What your terms are:

1.  Income property asking price                          $100,000

2.  Present mortgage                                                  $  25,000

3.  Equity to seller                                                       $  75,000

4.  Cash down payment                                             $  10,000

5.  Bonds-backed mortgage                                     $  65,000

How you proceed:

1.  Make the offer to a seller’s mortgage backed by good quality bonds redeemable for the full mortgage amount at bond maturity.

2.  Agree to pay required cash down payment in 90 days and secure the $65,000 balance to seller with good quality bonds.

3.  The seller mush agree to deed the property to you, securing his equity with another property you or a partner owns; or otherwise hold in escrow a “quit claim deed” that repossesses the property should you default.

4.  Use you property deed to secure your own $75,000 mortgage.  With these funds:  pay off the present $25,000 mortgage; pay $35,000 to buy $65,000 worth of bonds;  pay $10,000 down payment;  pocket the remaining $5,000.

What the seller can expect:

• Seller obtains his required cash down payment.
• Seller’s own mortgage is paid off.
• Seller is guaranteed full payment of his selling price balance within ten years.

What you the buyer can expect:

• You have instant equity in an income-producing property.
• You have obtained 100% (possibly even 105%) financing, pocketing extra cash at closing.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 2-26-10

TO BEGIN

You should reread all of the other 16 methods presented in this text and make sure that you’re familiar with all 16 methods.  the following text builds upon that material and also points to some governmental programs that are available in the United States which might well be used to help you make purchases or other wise sustain your real estate investment efforts.

After you’ve begun to master the 100% financing methods described so far, you might want to do a little research into governmental grants, loans, subsidies, and insurance programs that could possibly be available to you.  Remember,  these programs are not free.  They are almost always established from revenue sources which are funded by taxes you (and other) have already paid.

ADVANCED METHOD NUMBER 17

TAKE OUT A PLEDGED ASSET MORTGAGE.

Most real estate investors think of bank financing only as a last possible resort, and even that borders on desperation.  Why is this?  Because almost everyone knows that bankers are among the least “creative” people on earth when it comes to financing property.  Banks only bet on sure things.  This is probably the biggest reason why, in almost every American city you drive through, the tallest downtown buildings carry the signs and logos of banks or, of course, insurance companies.   And you can bet those buildings are not very creatively financed.

Inasmuch as “pledged assets” are regarded by most banks as risky, speculative, and “creative,” there are still some banks in this country that have made such (in effect) 100% financing mortgages.  Partly because those ventures have been reasonably successful, today pledged asset mortgages are gained a bit in feasibility.

A pledged asset mortgage works like this:  Instead of a cash down payment, other assets are offered by the borrower as collateral to satisfy the cash portion of the bank’s mortgage requirements.  If you’re the borrower, you might offer as collateral assets that you own or even that a friend or someone else in your family owns.  The agreement mush stipulate that the mortgage lender cannot convert those assets to cash unless you default on your loan and the lender is forced to foreclose.  Finally, banks that will make this type of loan generally won’t charge you any more than the current lending rates for making such a pledged asset mortgage.

The downside of this program is that the only types of assets these banks will presently accept are certificates of deposit from federally insured banks or credit unions.  Furthermore, their rules generally require that collateral, such as  CDs  amount to 10% of the purchase price for an owner-occupied parcel of real estate, and 20% of the property’s purchase price if the owner doesn’t intend to occupy it personally.

The upside is that the owner of such pledged collateral continues to earn interest on these CDs, and once an agreed payment history or amount of equity has been reached, the mortgaging bank will release that collateral back to the person who pledged those assets.

But don’t ever let contemporary practice, current banking policies, or somebody else’s  rules stop you from asking questions or offering “creative” ways around them.  For example, you should always approach loan officers with the reasonable suggestion that they consider each proposition on a case-by-case basis.  If you are credit -worthy, you might be able to pledge as an asset which is not in the form of a certificate of deposit.  Some banks have been known to accept blue chip stocks or pension funds, annuities, or other financial securities in lieu of cash or CDs.  Another possibility you may be able to negotiate is a property seller’s pay-down of rates of interest.  This means that, for a negotiated amount. a seller can pay down the bank loan’s rate of interest for a few years to a rate sometimes as much as 3% to 4% less than the usual current rate.

You might also be able to procure a bank mortgage based on a gift down payment.  You might even be able to have that gift asset be pledged again so that it won’t be cashed out unless you default on the loan.  Or, you could agree with whoever is giving you the “gift,” that (so long as they trust you)  they turn it over for you to use as your own pledged asset, and then of course you’ll give it back to them once you’ve satisfied the bank’s payment and equity requirements and the bank releases this collateral back to you.  In addition to pledged CDs or other securities, you might try to see if a bank will accept titles to other property, such as a fine automobile, jewelry, a luxurious boat, business inventory or even accounts receivable!

What about a Letter of Credit?  This would guarantee from a substantial creditor full payment of your mortgage to the bank in case you ever defaulted.  If you own another property, you might even be able to secure that Letter of Credit yourself with the equity you have in that other property.  In other words, what all these things are doing is guaranteeing to the bank that it will get its money back if you don’t pay the money you owe back to the bank on its mortgage.

So don’t hesitate to negotiate a creative 100% financing method with a bank and its mortgage lending personnel.  As long as you can present such “sure things” to the officer, you’re going to make it very difficult for him or her to refuse your loan proposal.  Remember that banks do indeed like sure things, but they also mush make loans.  Otherwise, banks make no money at all.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 2-17-10

USE FEDERAL HOUSING AUTHORITY LOAN NO. 203 (B).

As a professional investor in real estate, you may or may not be able to qualify for a government loan to help finance a property purchase.

If you can qualify, of course, you’ll receive the advantages of low interest rates coupled with generally lenient terms and extended time of pay-back.  But one of the very real reasons why you might not qualify has to do with where you actually reside.  The government is (really) in the bushiness of helping voters find shelter for themselves;  it does not generally make public fund available to further the investing purposes of private individuals.  Still, there are federal programs available that provide inexpensive means to obtain housing, and at least you should know about some of them.  One such is know as the FHA 203(b) loan.

The National Housing Act Section 203 (b) provides a source for loans, made by local lenders and insured by by the Department of Housing and Urban Development (HUD).  The federal government insures these loans to protect the lenders in case the borrowers default, and that insurance is funded by special premiums paid by the borrower.  In general, FHA loans may be used to finance or refinance single-family homes on up to four family dwellings.  The maximum amount you can borrow depends on the property’s location within each HUD region.  FHA loans are made primarily on properties that are owner occupied, but properties that are non-owner occupied may be eligible as well.  You should contact HUD in a large city near you or call the HUD office in Washington, D.C.  for further information on these loans.

For your general information, the required down payment with such federally insured loans is about 5% of the FMV and rates are usually about 1% below the market rate for conventional mortgages.  Loans are made for 30 years, and if they were made prior to December 15, 1989, they are fully assumable without qualifying by paying a $45 assumption fee.  The original borrower, however, remains liable on the mortgage for five years ofter the assumption date.  And effective as of December 15, 1989, purchases of FHA financed property may only assume the mortgage by qualifying as if they were the original borrower.  But by so qualifying, they release the original mortgagor (the property seller) from any further liability.

For more information on how you can qualify for this 203 (b) or other FHA loans administered by the Department of Housing and Urban Development, you should contact a HUD Customer Service representative or visit the web site:  www.hud.gov. 

IN CONCLUSION:  MORE THINGS FOR NOTHING

These have been eight more practical methods for creatively buying property with 100% financing.  They include;  making and selling a new note for cash;  supplying the seller’s real estate needs;  repositionioning mortgages;  using closing credits;  making sellers’ rewards;  and borrowing from commissions, life insurance policies, and the FHA.  Again, they positively reinforce the simple truth that you can buy property without using any of your own money. 

With regard to the previous text material and now this text documentation, you have at your disposal 16 different and creative methods on how to do just that.  And you’re about to learn even more 100% financing methods in Dr. Martin’s next blog that will be coming to you soon.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 2-12-10