HOW TO BUY REAL ESTATE WITH NOTHING- METHOD #2
December 2nd, 2009 . by Eric MartinMAKE THE PRICE LOWER AND THE INTEREST RATE HIGHER.
Sometimes a bigger monthly income is more attractive to a seller than a greater sale price. Offering a higher rate of interest to such a person in exchange for holding the mortgage might just be the ticket you need to make the seller more flexible. Under current tax law, for example, this creative financing method could allow the seller to postpone a significant amount of capital gain from an installment sale that might otherwise need to be reported now., This could ultimately reduce the seller’s tax obligation, while still improving his or her monthly income level.
Suppose a seller has income property for sale at the asking price of $100,000. This property also has an existing, and assumable, mortgage of $50,000 with a monthly payment of $450. This particular seller expects $10,000 at closing, but she is willing to make the remaining balance into a $40,000 mortgage at 10% interest.
The best way to proceed with this is to offer her $95,000 (instead of $100,000) with zero down payment. You then agree to assume the existing $50,000 bank mortgage and offer to pay her 15% interest only on the remaining $45,000 over a five-year period. This produces a monthly payment to her of $563 ($45,000 multiplied by 15% yearly interest, divided by 12 for each monthly payment). You offer to pay this every month for five years, and the entire principal of $45,000 will come due with the final interest payment at the sixtieth month (12 x 5 = 60).
This is commonly known as a “balloon loan.” At the time the balance comes due, you will either have accumulated enough to pay it through savings and other investments utilizing what you’ve saved each month by not paying principal; or, of course, you can refinance through another mortgage or else sell the property and pay off the balloon from your proceeds.
Remember the number one rule of real estate investing: the rents you receive here will determine how high you can go on you interest offer. But if your combined monthly payments (to the bank for the assumed mortgage and to the seller for her loan) of $1,013 ($450 plus $563) produce a negative cash flow, you could still make out at the rate by restructuring the seller’s loan so only a portion of the 15% is payable monthly. The balance each month would then be accumulated without being compounded (this is simple interest, remember, and you are advised to insist upon it), and this would also become due in full after five years along with the ballooned principal.
Again, at that time you could pay the balance if possible, refinance everything (using your then-equity as down payment), or sell and satisfy everyone from the proceeds of your sale and potentially still make an excellent profit.
A capsulated summary of this financing method is chartered for you below.
CREATIVE FINANCING METHOD NUMBER 2 IN BRIEF
What it is designed to do:
- Make the price lower and the interest rate higher.
What you need:
- A seller more interested in monthly income than cash at closing.
What your terms are:
1. Property asking price $100,000.00
2. Total assumable mortgage $ 50,000.00
3. Current monthly payments $ 450.00
4. Total money down $ 10,000.00
5. Amount financed (by Seller @ 10%) $ 40,000.00
How you proceed:
1. Offer less price $ 95,000.00
2. Assume existing mortgage $ 50,000.00
3. Offer more/higher finance (to seller @ 15% $ 45,000.00
4. INterest-only monthly payment $ 563.00
5. Restructure payment (if cash flow = neg.)
What you can expect:
- Seller realizes a good price with higher monthly income.
- You have obtained 100% financing with affordable payments.
NOTE: Dr. Martin will present and discuss financing method # 3 in his next blog.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-2-09
