REPOSITION A PRIVATE MORTGAGE FROM FIRST TO SECOND LEVEL
Suppose you find a seller with property for sale for $60,000, having a $30,000 first mortgage which was taken out through a private lender. In this case you would approach that private lender and ask if there might be a way to move that first mortgage from a senior, or primary level, position to a junior, or secondary level, position if, for example, you pay $10,000 in cash and thereby reduce that mortgaged amount to $20,000. However, you need to make it clear that you’ll pay that cash if a new first mortgage can be secured.
If this is agreeable, the next thing you do is take out a $40,000 first mortgage on the property, using $10,000 of this to satisfy the cash payment offered to the now-secondary level mortgage lender. The remaining $30,000, of course, goes to the seller in payment of his full asking price.
You have just financed the property at 100%, using two mortgages; the seller has received his full equity; the private lender has his debt repaid by one-third; and the new lender holds a first mortgage for an amount just two-thirds of what the property is worth. This is truly a win-win-win-win proposition for all parties concerned, is it not?
You’ll find that this method is also quite useful when the private mortgage lender doesn’t want to discount the original loan in exchange for payment in full. Another time to use this method could be when you yourself own property on which a private lender holds the first mortgage, if that lender will agree to reposition your loan in similar fashion, you could free up your equity to make another real estate investment purchase.
NOTE: This method is briefly summarized in the following chart.
METHOD NUMBER 11 IN BRIEF
What it is designed to do:
Reposition a private mortgage from first to second level
What you need:
Good credit history
What your terms are:
Property asking price $60,000
Privately mortgaged amount $30,000
How you proceed:
1. Offer to pay private mortgage cash
in exchange for lowering to 2nd level $10,000
2. This makes 2nd mortgage amount $20,000
3. Secure brand-new 1st mortgage $40,000
4. Deduct/pay to private mortgagor $10,000
5. Remainder to seller to pay equity $30,000
What you can expect:
Seller realizes full sale price and cash payment of equity.
You have 100% financing with two affordable mortgages.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-15-10
This is one of many variations on the previous method. Sometimes there’s a particular reason why a seller might become anxious to sell. Sometimes he or she is merely interested in something else besides real estate or in making a profit or in taking away cash from a property sale. But no matter what it is to your best advantage to find out exactly what the seller really needs.
Maybe the seller is selling in the first place to acquire something different or to pay off a debt or maybe just to take early retirement. If the first is true, you might just acquire it beforehand and after that as your down payment. If the second is true, you could provide that you will assume the seller’s debt. If the last is true, you could help the seller see the benefit of a larger continuing monthly income (by financing your purchase 100%) rather than relying on one payment only (via traditional financing) upon which the seller may be obligated to pay much more tax.
Perhaps the seller has “maxed -out” a credit card (and you have not). This could mean that the seller simply cannot purchase something he desperately needs — a new car, perhaps, or furniture for this personal residence — or may only desire and believes he deserves — like a long vacation or a trip to Europe. With good credit, you could make the purchases yourself, or pay in advance for the travel, in exchange for a down payment with the seller then holding your mortgage.
If the seller is already in a great deal of debt — perhaps he owes a doctor or hospital for something not covered by insurance — you could arrange to make a good offer on his property by first simply contacting his creditor. You might be able to assume the debt or pay it off in full using your credit (and thereby obtain perhaps even a discount from the creditor) or you could offer to cosign the seller’s debt and use that as your bargaining chip to secure 100% financing from the seller. There are seemingly endless possibilities.
The bottom line here is: never assume you know what the seller needs; find out for sure — and from the seller himself — what it is exactly. With this method, your most important technique is simply to talk to the seller and , of course, to ask a lot of questions.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-14-10
Please reread the previous text dealing with creative financing, leverage, OPM, and ROI. Note again that those creative sources for financing. You’ll need to retain that knowledge as you study the new and different methods for 100% financing which are explained in the following text presentation.
Bear in mind that the methods’ numbering system described here or the order in which they are described, is merely a convenience device. There is no “rule” that says, for example, you first have to use method number one before you can go on to method number two. You may very well find yourself using a much more complicated method even while buying your very first property. What these methods are really are individual plans for acquiring typical investment properties that always involve unique circumstances. These are essential plans only, not blueprints that cover every aspect of every single purchase. They are typified in order to aid your understanding of how each essential plan works.
In actual fact, you may never purchase a property by strictly following any one method. You will most likely be buying every property using modified steps from a combination of plans. Every situation is unique. These various methods are designed to serve as guides only. After awhile, you might even develop additional 100% financing methods that are uniquely your own. If that happens, perhaps you’ll share them with those who taught you these original methods to begin with.
METHOD NUMBER 9
MAKE A NEW NOTE AND SELL IT FOR CASH.
Suppose you can find a property with an asking price of $50,000 which also carries a $40,000 assumable mortgage. This means the seller has $10,000 in equity which he expects to receive in cash. But this property has been on the market already for half a year or more, and this seller is getting anxious.
Offer to the seller a cash down payment of $6,000 instead, which is contingent on your being able to secure a new second mortgage. In effect, this amounts to offering to buy the property for $46,000 (the $40,000 assumable mortgage plus a $6,000 new mortgage). This may not seem a bad deal to this particular seller in view of the fact that he’s been unable to sell the property for so long at his original asking price. If this seller accepts your offer — with its contingency — you can then proceed to locate a lender that is willing to loan you $6,000 secured by a second mortgage.
Of course, you need to be aware that most banks and traditional lending institutions will hesitate to make a second mortgage in cases like this because there already exists a mortgage on the property for 80% of its FMV ($40,000 is 80% of $50,000) This usually means you’ll have to scout out private parties or less traditional lenders in order to make this deal happen.
Always make a habit of reading the classifieds in your local daily or weekly newspaper. Very often you will find ads from private lenders who state their willingness to pay cash for mortgages. Buying and selling mortgages happens all the time, even among the most traditional lenders. If you cannot find such a buyer at the time you need one, consult with a local mortgage broker who actually represents such private investors.
Next, contact one of these investors and say that you have an investment property which has been appraised at $50,000 (make sure this is true, of course) and has an existing first mortgage of $40,000 but that you now need $6,000 in cash. Then ask how big would a note and mortgage need to be with him, and for what term and interest rate, for him to lend the $6,000. For illustrative purposes, suppose the lender responds by saying the note would have to be for $7,500 at 12% for a term of five years.
So now you must do a financial analysis to see if this deal is worth your while. You do this by calculating the rents this property already earns less your operating expenses. Now deduct what you’ll be paying on the assumed first mortgage. Lastly, deduct what your payments will be under this proposed second mortgage.
If you now show a net profit, you should go ahead confidently and make the deal. If you now show a net loss, forget this deal and continue scouting for another one. By showing a profit and executing the deal, the seller will actually receive a cash down payment (not excessively less than he’s originally hoped for) and you will be able to buy a property using none of your own money and financing it 100 percent. Please see a summary of this method in the following illustration.
METHOD NUMBER 9 IN BRIEF
What it is designed to do:
Make a new note, and sell it for cash.
What you need:
Some credit
Somewhat anxious seller
What you terms are:
Property asking price $50,000
Current seller’s equity $10,000
This property has long been on the market, it remains unsold, and the owner is not more anxious to sell it.
How you proceed:
Make this offer contingent upon your locating a 2nd mortgage $6,000
Search out lender willing to loan $6,000
Find local mortgage broker for this, or look for private lender
Do financial analysis. Will N.O.I. support assumable mortgage and new second mortgage and satisfy seller’s terms?
If yes, buy property. If no, continue to search
What you can expect:
Seller realizes some (or most) actual cash for equity
You have obtained 100% financing
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-10-10
MAKE CAPITAL FOR DOWN PAYMENTS THROUGH LOANS AND OTHER RESOURCES.
This last creative financing method harkens back to the earlier text on how to build good credit. You might want to reread it now in light of a these creative solutions as o how you can acquire investment property by putting down none, or very little, of your own money.
In essence, this eighth basic method involves being able to take out unsecured (or minimally secured) loans, just by signing your name. But this is almost like a “last resort” because these kinds of loans always carry high rates of interest. Still, as in method number 7, the ability to come up with cash in a hurry is a tremendous asset to have. Many times, if you can put a lot of money down on a choice property immediately, you can acquire ownership and then refinance later with more leisure. At that time you will be able to pay back whatever high-interest loans you took out by using this method number 8.
What you’re doing with this method is building better credit, or, to put it more accurately, developing your ability to borrow a lot of money in a hurry. You can do this, as described in the previous text, by taking out small-then-larger bank loans in succession, and paying them off before they are due. Nothing pleases bankers more than getting their money back, with interest, ahead of time.
This is one way to start building a line of credit. Another way is to buy something (a car, boat, etc.) and finance the purchase through a traditional lending institution. Again, if you pay it off ahead of schedule, that lender may very well turn around and offer you your own line of credit (similar to a credit card’s credit line) which you can access any time you need to borrow money simply by writing yourself a check. You could also, of course, write such a check to a property seller as part, or all, of his required down payment.
Consider the seller as a possible lender or extender to you of a credit line. Sometimes, the seller will appreciate the efforts you’re making to satisfy his down payment requirement. He may take your bank line-of-credit check, whatever cash advance you can pull from a credit card, and even the contents of your “piggy bank” — and then do you the courtesy of delaying the down payment balance for maybe six months to a year.
Try offering a seller a higher interest rate than the bank or credit card charges to see if he will do this. A rate of 15 to 19 percent might be all it takes to have the down payment balance come due a year or two after the closing. Remember that a high rate of interest on just a few thousand dollars really doesn’t amount to all that much money. Besides, the interest you have to pay on any loan to buy property is fully tax deductible. And lastly, don’t forget that if you can defer payment on the down payment until well after closing, you’ll be earning rents on the property in the meantime and should have no trouble paying off the seller when his little loan to you comes due.
IN CONCLUSION: BUYING SOMETHING WITH NOTHING
These have been eight practical methods for creatively buying property with 100% financing. They include getting the seller, a lender, a partner, or something you already own to come up with enough to cover the deal. There really is nothing secret or fancy about these methods. They are in fact pretty basic. But they all point to one simple truth: you can buy property using nothing more monetary than you own mind.
Thus, you don’t already have to have something in order to acquire something else. That means you don’t need to be rich to get rich. All you have to be is willing: willing to learn and willing to work. It is, in fact, no more and no less than anybody ever has to be in order to do — even if all you have to do is survive.
While these are the basic methods for purchasing real estate with 100% financing, they aren’t the only ones. The next blog carries creative financing a bit further, and teaches you more complicated ways to do this, whenever those situations arise.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-1-10
This is actually a variation of 100% financing whereby, if you can come up with a lot of cash, you can quite often “steal” a property at an incredible bargain. For example, you might sometimes be able to purchase properties from desperate owners for 75% to 80% of their fair market values. Critical emergencies in a property owner’s life quite often dictate such deals. He might need to unload an apartment building in a big hurry to raise cash himself for some urgent reason, and if you can come up with it for him, he’ll deed you that property for three-fourths what it’s worth. This is a deal you really don’t want to pass up. So in this case, the financing aspect may exist in how well and how fast you can borrow to the max.
It might involve, for example, a partner or two. Many a lasting partnership in real estate ventures were started for just this reason. One person might only be able to borrow maybe tens of thousands (by borrowing against credit cards, taking out unsecured loans, second mortgaging, and borrowing against home equity, for example), but three or fur persons together can sometimes come up with hundreds of thousands of dollars. And maybe two or three hundred grand is all you need to set up a fortune for life.
Don’t forget this too: after you pay cash for a property and acquire the deed free and clear, you can then turn around and refinance it completely (100% financing again) for what it is truly worth. That, in turn, will bring all of that borrowed cash back to you. You can then repay all of those loans and usually stuff you own pockets besides. How guess what? You’ve just generated more capital that you can use for buying more properties!
One more thing you may be able to do with a real “bargain” property is come up with a little more money to make repairs and improvements, so that is becomes worth more than the original FMV on which you discount-for-cash was based. Now when you refinance at 100%, or even at the traditional 80%, the property value is higher and you’ll receive back considerably more cash than you originally put in; and that means even more profit (capital) that you can apply to future purchases. Plus you can charge more rent and make more money month after month. If you decide to sell the property later, your profit will be even greater yet because it cost you so little to begin with.
Going back to the partnership idea, you should consider this too: Most really successful professional people have cash on hand that they are always looking to invest profitable, but they don’t have the time or know-how to accomplish this wisely. Have you ever heard of wealthy doctors taking a bath on worthless oil wells, gold mining operation, or even out-and-out scams? It happens all too often. You, on the other hand, may have the opposite problem. You have the knowledge about great investments in real estate, for example, but very little money to act on them. This is where a partnership can really pay off.
You might consider approaching such professionals and leave them with a portfolio of real estate investment opportunities which could be shared in terms of partnership. Many a lasting and lucrative arrangement has been created in just this fashion, with one partner scouting out the deals and the other supplying the capital. Even with a 30-70 percent of 20-80 percent partnership agreement, if you earn just 20% of the profits on some lucrative deal, you are still 20% more ahead of the game than you would be without such a partner. And after awhile, you should be earning enough to enter into 50-50 arrangements or go it completely alone. Once again, this is truly a win-win situation for all parties concerned.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-25-09
Similar to the previous method, this way to obtain 100% financing also utilizes the equity you have accumulated in your own home or in other investment properties that you have already purchased. Many traditional lending institutions will make loans that are secured by your home’s or another owned property’s equity up to 75% of their fair market value. Sometimes you may even be able to make a loan up to 80% or 85% of the collateral property’s FMV. If you can acquire such a loan, you’ll be able to buy yet another property in the traditionally mortgaged way.
You should be aware that the interest rate on this type of loan (often referred to as a home equity loan) is generally tied to the “prime rate” which amounts to the lowest rate which most banks will extend to their very best corporate borrowers. Sometimes banks define this in terms of what some major New York City bank (such as Chase Manhattan) has decided should be their ” prime rate,” because that is how they’ll translate the interest rate which they intend to charge you. Some banks and other mortgage lenders might say they offer home equity loans at the prime rate or even one-half percent below prime, while others will say their rates are “only” 2% to 4% above prime. You might also be given a better rate depending on the amount you borrow. Usually the greater the loan, the lesser the rate.
You also need to be aware of “fixed” versus “variable rate” APRs (annual percentage rates). The difference between such terms as “effective annual yield” and “actual cost of financing” are more technical than you need to be concerned with here, but you should at lease recognize that a fixed loan has an interest rate that never changes throughout the life (term) of the loan, and a variable rate loan has an interest rate that may indeed change according to some criteria which the lender decides should be used.
For example, if the variable rate is tied to the prime rate, your lender might specify that the home equity loan rate will change whenever the prime rate changes, or at four or six month intervals, or according to some other plan or schedule. For the most part, you’re better off sticking with a fixed interest rate loan, although in times of economic prosperity you can make out with a variable rate when the prime rate in fact goes down, which can sometimes happen. You might, for example, start out making payments calculated on an interest rate of 10% which steadily decreases along with the prime rate until you end up paying back a loan based on a 7% interest rate.
Some aspects of home equity loans that may work to your advantage include the variable terms of payback that may be offered, depending on the lender, and the fact that the interest rate on the home equity loans may be tax deductible. The term, or life, of most such loans can vary between five and 15 years. Most home equity lenders do not change “points” (each point equals one percent of the amount of the loan) which a borrower sometimes must pay as a fee to the institution for making the loan. Another type of fee, called “loan origination costs,” might possibly be charged for a home equity loan, but this fee is usually quite small.
You can begin to see why negotiating with a seller for financing is always better and easier than negotiating with a bank. But when the bank is your only hope, it’s nice to know that you can at least take out a loan based on the equity in your very own home.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-18-09
if all sellers could trust you, of course, they might all be willing to give you 100% financing on all their properties and expect no cash whatsoever at closing. After all, it’s easy to see how well sellers make out when they simply replace the bank and hold your mortgage themselves. For example, do you realize that a basic $80,000 mortgage paid back over 30 years at 10% interest will yield to the mortgage lender over a quarter million dollars? Not a bad ROI by any-one’s standards.
Unfortunately, most sellers (and all banks) cannot afford to trust you, and that’s why they require such things as cash down payments. The reason they can’t afford to trust you is because you could easily take over their property, trash it completely, renege on the mortgage, and then they-re suck holding the property again in much worse condition which they may not be able to resell at all. You might only be out a few payments, while they have lost a fortune. Hence the reasoning that if they make yu pay a lot of your own money up front, you’ll be much less likely to abandon the place later.
Always remember the second most basic rule of real estate. Sellers and mortgage lenders do not want the property back! The reason they sell and extend mortgages in the first place is to make money, not keep property. Therefore, by proving yourself trustworthy you become a much better “risk” to them for taking non-moving property off their hands than you ever are for offering creative terms of sale. If you make sure that they’ll make money, you’ll make money, too.
And so another creative financing method is called the “blanket mortgage,” which you can offer to an apparently inflexible seller who seems overly concerned that your offer of no down payment will translate later into your walking out on the deal. The blanket mortgage will help assure him or her that you won’t because it covers more than just his individual property. For example, you might offer some of your own assets in addition to the sale property as collateral to back the mortgage. You could include the equity in your own home, another property that you’ve purchased, and even your own car as additional collateral in securing a mortgage that requires no down payment.
One thing about the blanket mortgage that you need to be aware of, however, is the fact of the time-frame for releasing your additional securities. If the seller requires a long term for the mortgage (and you should try to keep it under five years if possible), you should also include additional clauses that allow you to free up your assets from the long-term agreement in exchange for prompt payments for a specified period. In other words, if your own home and car are included along with the sale property as additional collateral, you might have the seller agree to release them from under the blanket mortgage following your prompt payments to him or her after perhaps a year or 18 months.
Remember, the blanket mortgage is just one more bargaining chip that you can use to obtain 100% financing. It is not meant to put you under any more hardship or risk than the seller is taking by selling his property to you. And it’s your job to convince him or her of that fact.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-15-09
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