The American Education Institute

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