An amazing fact of modern life is that it is possible to borrow against a life insurance policy on fairly short notice in order to come up with additional cash.
Things to note about this fact include: 1) the value of a whole life policy earns a very low ROI; 2) that cash value can also be borrowed at a very low interest rate (6% or even less); and 3) you can borrow against your own life insurance policy, or that of others, in order to obtain c ash to buy real estate.
Say, for example, you find a good income property that requires a down payment of $10,000, and still you do not own a whole life insurance policy. What you can do is call around to the various life insurance agents in you area and ask if they have any clients holding a whole life policy with a cash value of at least $10,000. You do not have to disguise your intent, either, because what you want to do is to take an offer to such a client that could ultimately pay off handsomely for both the client and the agent. (He or she might be offered a finder’s fee, for example, or the profit to the client might result in the purchase of additional life insurance.)
In any event, what you will propose to the client is that he or she borrow the $10,000 against his or her own policy, and then lend it to you at an interest rate that is 1% or 2% (or more) above what that insurance policy value is earning now. You could then use that loan to put the down payment on the property, and you might sweeten the deal even further by extending a 10% to 15% co-ownership to the policy lender as a reward (similar to method number 13).
Here you have a situation that’s win-win-win. In effect: 1) you obtain the property with none of your money and retain 85% ownership; 2) the life insurance policy holder still has the same amount of insurance, now earns more interest on the same investment, and in addition owns 15% of a new income property; and 3) the insurance agent has effectively sold a new term life insurance policy (because you new lender may require this in case you die before he or she is fully repaid for the loan).
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 2-9-10
Many times when you see a property on the market that requires only a 10% down payment, that percentage has been designed to cover the seller’s closing costs as well as his real estate agent’s commission. Typically, that real estate sales commission runs from 5% to 7% of the actual purchase price. Sellers’ closing costs can often eat up the remainder of the 10%. You should also be aware that if a particular real estate agent is both the listing broker and the selling broker, he or she is entitled to the entire sales commission. If a different broker either lists or sells, then the real estate commission is split half-and-half between the agents involved.
You should also know that it is sometimes possible to “borrow” a part of that real estate commission in order to help the sale go through, and an agent who hasn’t sold anything for awhile might just be willing to do this. You then can offer the agent a partial ownership as collateral for his or her loan. This can work especially well when there is only one broker involved, because he or she isn’t already splitting the commission and therefore has more money to bargain with. Perhaps 50% of that commission amount is all you will need. You should be able to convince the broker that 50% already amounts to income he or she would not have if another broker were involved in the sale.
If the sales agent is reluctant to bargain, you might sweeten the deal by offering either a higher rate of interest on his loaned amount or the same rate of interest based on a larger amount. If, for example, you only need to borrow $5,000, and his commission is $6,000,m you could offer to pay 10% interest based on his full commission, and he gets to pocket the $1,000 difference. He will also receive a higher monthly payment which can be amortized over the length of the term, which means he will have earned when it’s over a compounded 10% interest on his investment plus a repaid principal of $6,000 — not $5,000 which is really all he loaned you to begin with.
If you work up the math an arrangement like this, you may be surprised how inexpensive it is when compared to the revenues you should be receiving once the property is in your hands. Perhaps all you’ll need to do is raise rents 10% and your payments to the lending broker will be more than covered.
But before you make offers to brokers about borrowing their real estate commissions, you should really understand how the commission-splitting process works in the real world; that is, within the broker’s officer itself for whom the real estate agents work. Whenever a listing agent signs with a seller to market the property, the sales commission amount and/or percentage is stated right on the contract. Generally this means 7% of the actual selling price, whatever that amount turns out to be. Within that agent’s brokerage, however, further splits of that commission are immediately determined. That is, the individual agent splits the sales commission with his office’s broker (owner) for whom that agent actually works. Usually, this too is 50-50, although 60-40 and 70-30 are also possible splits that the broker will use depending on the agent’s productivity. These are internal personnel management issues with which a property seller is almost never familiar. But a savvy seller will also know that the overall rate of commission he agrees to on the contract is negotiable at the time that listing agreement is signed. Hence, the rate of commission does not always need to be 7%.
You should also be aware of “the Alternative Method.” The agency compensation structure within this large brokerage firm often enable its agents to entertain more creative financing purchase options than, perhaps, other firms do. What “the Alternative Method” does is lease office space and charge advertising fees to its individual agents. The company doesn’t therefore split any commissions internally, since it get its money from rents and fees. Every selling agent keeps 100% of whatever sales commission is due to him or her, but if other agents are involved in a sale, of course, splits are then required. Because each agent has this autonomy, he or she might be more willing to negotiate commission loans to you as a buyer than, say other agents representing other brokerage firms might be. (Please see illustration below.)
METHOD NUMBER 14 IN BRIEF
What it is designed to do:
Borrow the agent’s commission
What you need:
A flexible real estate broker or agent (ideally the listing broker).
Agent’s willingness to lend commission to produce a sale
What your terms are:
Real estate commission is usually 5% to 7% of actual sale price
How you proceed:
First to borrow the entire amount of commission and secure the loan with note ad mortgage for a reasonable rate.
Next try to borrow, only what’s necessary, secured with note and mortgage for a higher amount and/or a higher interest rate.
What you can expect:
Agent makes a sound investment with good return
You have a down payment and/or important additional financing.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 2-5-10
USE RAISED RENTS AS SELLER’S PARTICIPATION REWARD.
This is a slight variation on the previous method, in that your bargaining chips are derived from rents which, under your ownership, you can raise as soon as possible. In essence, you can offer some of this increased revenue to the seller as a fair reward for his financing your purchase to begin with. This could work especially well with a seller who has not raised rents for a number of years in hopes of luring a buyer. For such a seller, managing tenants and dealing with inevitably changing occupancies is probable something he just doesn’t want to handle any longer. A seller like this wants out, and it’s your perfect opportunity to negotiate a creative 100% financing method.
Perhaps, in exchange for your funneling to him a portion of your later rental increases, you can talk such a seller into transferring the property without any down payment, or perhaps for a greatly reduced interest rate on the mortgage amount, or even a loan that is interest-free for a specified time, as, for example, until you’re able to raise the rents.
An example of this method might be the following: Say you are negotiating to buy a single-family home that is leased for $500 a month, or $6,000 per year (12 months times $500). You could offer to the seller anywhere from 10% to 25% of any rental income that goes over %6,000 per year, and you could throw forfeited security deposits into the deal as well. That excess income every year could be used to satisfy any unpaid interest on his mortgage to you, or it could simply serve as a seller’s reward in its own right — for giving you a 100% financing deal in the first place. Furthermore, you could agree on the length of term in which the seller would be paid this reward, maybe offering him three to seven years or even longer if his financing is generous enough to warrant it.
As a result of this method, the seller still participates in the rewards (and risk) of management without having to manage anything himself. On the other hand, you as the buyer can acquire a nice income-producing property without having to put down any of your own money. Once again, this is a win-win situation.
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-4-10
USE SECURITY DEPOSITS, RENTS, AND TAX CREDITS DUE AT CLOSING.
Whenever you close on any property, there are always computations to be figured to assure that, for example, what ever real estate taxes are owed by the seller get paid by the seller and not by you. On the seller’s side, of course, these computations also guarantee that he will pay only what he owes and not what afterwards is taxed to you. This is only fair, after all. But be assured of the following as well.
The most basic rule of transacting income-producing real estate that you need to remember is this: Rents are paid in advance of thetime they cover, and real estate taxes are paid in arrears. Hence, the seller will generally have all your applicable rents collected before the property sale closing, but you’re going to get stuck with his tax bill afterwards. That’s why you as a buyer are entitled to credits, both for prepaid rents and post-levied taxes.
Your local property tax assessor will, by law of course, notify you in advance of any reassessments of your property’s value (and give you time to protest any increase if need be) but the taxing bodies that apply their levies to that value won’t tell you their increasing tax needs in advance unless you attend their individual public hearings. In addition to other headaches, this can also produce computational errors at the time of closing.
The plain fact of the matter is this: neither the seller, his attorney, nor anyone else connected with the sale and transfer of any property anywhere can possible know how much is going to be charged next year for taxes applicable to property this year. Governments simply levy taxes afterwards, not beforehand, and thus no one can predict at closing how much exactly in tax is owed to that given point, nor how much the new owner is going to have to pay from that point onward. And while it is probably at good thing that citizens are, in effect, billed for governmental “goods and services” only after they’ve received them, it can become somewhat of a pain whenever someone new takes over something already existing that the government hasn’t yet decided how much to “bill for.”
But as in all governmental things else, transferring property is not impossible. Generally what happens is a kind of real estate tax averaging is done, and both parties simply agree to what amounts to a “best guess” of how much tax will later be owed, and work from there. Quite ofter language is written into the closing contract to the effect that such-and-such amount is used as a basis for computing taxes now owed, but if that amount varies by so-and-so amount from the actual taxes charged at the time they become know, the seller will then pay such-and-such in addition to the buyer or the buyer will then be entitled to collect so-and-so additionally from the seller. But in practical terms, if that language specifies an allowable variance from the guesswork of, say, no more than fifty dollars, no one gets too excited and nobody send anybody any bills afterwards.
However, you should also rest assured that, if you really do press this issue as a buyer, you can indeed be legally protected so as to recover any excess tax you are forced to pay on behalf of the seller — even to the exact penny — if you so insist. But again, your attorney may charge you more to rewrite the language than you could ever hop to recover later from a seller who really isn’t at fault anyway for the backward way that governments work.
That’s taxation for you. But most things, on the other hand, work much more precisely — rents, for example, and security deposits. These are always paid in advance, and for good reason. In practical terms, the only guarantee a landlord has that a tenant will stay where he says he will stay is the money the tenant has already paid to stay there. Also, the only guarantee the landlord has that the tenant won’t likely destroy the place is whatever bond money the tenant has allowed the landlord to hold as non-refundable in case he does.
These things, of course, are paid in advance to the owner of the property from whom the tenants rent, and when that owner changes those advance payments much change as well. Unlike with taxes, such payments to owners can be figured right to the penny for the precise duration of ownership. If, for example, you buy an income property and close on the first of April, all March rents belong to the seller but all April rents now belong to you. And, unless tenants move out as of that date, all moneys paid as security deposits to the previous owner much now be passed along to you to hold (until they later move an/or settle any applicable property damages incurred).
IT’S THE LAW!
Note too that sometimes you can legally demand more security deposit be paid by each tenant to you as the new property owner, but almost everywhere such things are covered by existing signed leases which, by the way, also transfer to the new owner. But more to the point, this means you can’t raise tenants’ rents until their leases expire. Some state laws may vary on this point, but as another practical hint: It is always a good idea to check all the leases conveyed with any property before you buy that property.
In some instances, landlords also collect first and last months’ rents — in addition to security deposits — before any tenants move into their property. In cases like these, not only are security deposits turned over to a buyer of the property but also all those last months’ rents as well.
All rents and security deposits to be turned over to a new owner are almost always handled through credits made on behalf of the property buyer at the time of closing. These credits can substantially reduce the amount of cash that may be required with such a transaction. It is sometimes even possible to walk away from the closing with cash in you pocket, as the buyer, which had to be paid by the seller in transferring all such rents and deposits that are now due to you.
Suppose you are buying a 10-unit building. The security deposits involved could easily amount to $4,500 (say $450 for each unit time 10 units). These could also, quite easily, be a credit for yet-to-pay real estate taxes in an amount ranging from $3,000 to $5,000. Then when you add credits due you for previously collected rents (including last months’) which will now apply to the time of your ownership, you can easily see how the total of all credits could reach $14,000 or more. There’s an amount right there that could be utilized at closing to satisfy a down payment, couldn’t it?
Here’s something else to remember. During the first 30 days of your new property ownership, you should have zero expenses. This is because mortgage and other payments for such things as utilities are always billed and paid in arrears. (You get the use first and pay afterward.) Meanwhile, all your rents are collectible and paid in advance. Therefore, you will have one “pure profit” month where everything comes in and nothing goes out. You can always figure out how much that will be ahead of time and put that to good use, too.
Here’s a good example of how this method number 12 can give you very usable cash that you might not otherwise have thought you had.
Suppose you buy a 10-unit apartment building, and your closing date is set for February 21st. Say in this case that February has its usual allocation of 28 days, so this means you will e closing three-fourths of the way through the month. Total monthly rents come to $5,000 ($500 per apartment times 10) and at the time of closing all rents for March have been collected already. In addition to the March rents, you are also entitled to rents for the rest of February (one-fourth the total) which, of course, have also been previously collected by the seller. The total credit due you so far stands at $6,250 ($5,000 for March plus 1/4 of that for February, or $1,250).
Security deposits, already held by the seller, amount to an additional $3,500 ($350 per unit time 10 units). Real estate taxes you both figure will amount to $9,000 for a full year, which for the sake of this example is a fiscal year ending some time after you acquire ownership. Based on this best guess of $9,000, you and the seller agree that his portion will be $8,000 and your portion will be $1,000. What this all means is that, at the time of closing, you combined credits from the seller amount to $17,750 ($6,250 rents + $3,500 security deposits + $8,000 unpaid real estate taxes).
Finally, for the sake of this example, the seller’s mortgage is paid off at closing and yours begins. For arbitrary convenience, say that your new mortgage (which always begins as of the day of closing) requires your payment as of the 21st of each month. But it also means that your first payments won’t be due till the 21st of March. So now you can always count on using the rents you collect as of the first of the month to pay your mortgage 21 days later. You already have March rents in you credits at closing, so your first mortgage payment is already in hand.
However, you could also do this: ask your mortgage holder to change your payment due date to the first of the month, beginning the following full month as of April 1st. Naturally, you will be charged additional interest for the ten-day extension (March 21st to 31st), but then you’ll have even more cash from the rents due to you on the first of April, and surely the full month’s rents will greatly exceed the expense of your ten-day interest extension; so this, too, can result in extra cash to cover a down payment, to make repairs or improvements, to put to use to buy yet another property!
Any way you look at it, this amounts to yet another method for buying property with none of your own money and financing it completely at 100%. The chart, below, illustrates this method in brief.
METHOD NUMBER 12 IN BRIEF
What it is designed to do:
Use security deposits, rents, and tax credits due at closing
Example of typical transaction:
You’re buying a 10-unit property
You’ll close three-fourths of the way through the month
Combined rents income is $5,000 per month ($500 x 10 units)
Combined transferable security deposits equals $3,500 fixed ($350 x 10 units @ one-time charge)
Rents are paid in advance; seller has already collected for next month $5,000 (totally due to you)
Seller’s previously collected rent means one-fourth of the current month ($1,250) is also due to you
Taxes are paid in arrears; those to be paid sometime after closing total $9,000 (your portion will be $1,000)
How you proceed:
Since there will be money owned to you because of this income-producing property, you may legally incorporate those funds into your closing settlement. Most likely those funds will be figured at closing as credits due to you from the seller,. Because these credits are so substantial, you may not need any closing cash at all. In fact, you could easily emerge with cash in your pocket instead of the seller’s.
Example of what to expect:
1. full credit of prepaid rents $5,000.00
2. Proportional credit for current rents $1,250.00
3. Full credit of security deposits $3,500.00
4. Proportional credit for taxes due $8,000.00
5. Total credit due to you, the buyer $17,750.00
Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-30-10
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
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