The American Education Institute

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

MAKE THE PURCHASING LOW AND THE REFINANCING HIGH

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

FREE UP CAPITAL WITH A HOME EQUITY LOAN.

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

MAKE A BLANKET MORTGAGE.

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

USE ONE PROPERTY’S EQUITY TO BUY ANOTHER PROPERTY.

Another classic method of 100% financing is to make a promissory note and/or mortgage on the existing equity that you may have in some tangible asset (income property, land, boat, car, even you own home) and then use that to make a down payment on some other property.  Remember that equity is the property value minus whatever you still owe on that property.

Suppose a seller has a solid two-family income property for sale with an FMV of $60,000 and carrying a $25,000 mortgage.  From this you can see that the seller’s equity is $35,000 (the value minus the mortgage).  Suppose further that you have a tangible asset available for you own use showing an equity of $15,000.  You can create a promissory note and mortgage for that amount secured by that asset itself as collateral.

Now you can use that note as your down payment on the seller’s property, and then offer him or her either a $20,000 second mortgage to make up the difference in equity or else a $45,000 wraparound mortgage on the full balance, as described in method number three.  Note that when the deal does through, you will automatically have a $15,000 equity in the newly acquired property because of the down payment mortgage note you made that is secured by equity in your other property.

Further to this, the mortgage note which you have used in this way would contain a clause known as “substitution of collateral.” This clause allows you later on to move that mortgage, which you created when buying the two-family property, to still another property where you have equal or greater equity.  In other words, you can later move this mortgage for equity to be secured by the two-family property, in order to put a down payment on yet another attractive property.  In effect, then, you are using your mortgage note as a down payment on the two-family property, your $15,000 equity in that property to secure a down payment on a future property, and then later that equity on still another future property, and so on and so forth.  Lastly, with the substitution of collateral clause, you could then move your original mortgage note now to be secured by the equity you’ve created in your latest purchase.  In this way, you absolutely maximize every dollar of equity you have.  Every amount of equity is used to secure a mortgage on some other property.

If at any point along the chain a seller objects to using a secured mortgage note for a down payment, you can sell the property you originally used as collateral (substituting equities as needed to secure all other mortgages) and then use the cash from that sale for the down payment instead.  (This is discussed later more fully in how to convert paper to cash and take cash at closing.)

METHOD NUMBER 4 IN BRIEF

What it is designed to do:

• Use one property’s equity to buy another property

What you need:

• One asset with equity

What your terms are:

1.  Two-family property price                              $60,000.00

2.  Outstanding mortgage                                       $25,000.00

3.  Present equity                                                      $35,000.00

How you proceed:

1.  Offer note seucred by asset                            $15,000.00

2.  Offer 2nd mortgage ($20K) and

assume 1st mortgage ($25K) totaling      $45,000.00

3.  OR, offer full wraparound                             $45,000.00

What you can expect:

• Seller realizes full asking price & full down payment.
• You have $15,000 instant equity in two-family property.
• You have also obtained 100% financing.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-9-09

MAKE A WRAPAROUND MORTGAGE

This is another 100% financing method that happens to be based on a new type of financing called the “wraparound” mortgage.  The best way to explain this is throug the following example.

Suppose a seller has a property that has an FMV (fair market value) of $50,000.  It also carries an existing, and assumable , mortgage for $30,000 with an 8% interest rate and a monthly payment of $245.  From this you can see that the seller’s equity (FMV minus mortgage owed)  is $20,000.

The usual 100% financing on a property like this would entail the buyer to assume the first mortgage and offer the seller a second mortgage on the $20,000 balance at a little higher interest rate, perhaps, 10%.  This would give the seller $200 a month and the payment to the original mortgage holder would stay at $245.  The buyer would then be paying $445 every month, which should certainly be less than the rent he or she receives every month.  It would have to be.

With this new financing method, however, you as the buyer can avoid all costs and liabilities involved with assuming the first mortgage by simply offering the seller a wraparound mortgage for the full amount of the sale,  $50,000.  This is a completely legal financing method.  In fact, it is known in some states as an All Inclusive Trust Deed (AITD)  You should offer this full mortgage to the seller of whatever interest will keep your payment to $445 per month.  It looks like much the same deal as before, doesn’t it?  Actually, it is quite different.

The wraparound mortgage literally “wraps around” the existing mortgage and is payable directly to the seller, not the mortgage holder.  The seller, meanwhile, continues to make those payments on that mortgage.  The buyer’s payments to the seller, of course, are considerably larger than the payments to the mortgage holder,  and the seller retains the difference.

Your total annual wraparound payment to the seller would be $5,340 ($445 multiplied by 12), while the seller’s total annual payment to the mortgage holder is $2,940 ($245 multiplied by 12).  The seller’s income ($5,340 minus $2,940) would then be $2,400 a year.  Meanwhile, the seller’s equity is $20,000, so his actual return on investment is 12% ($2,400 divided by $20,000 equals this percentage).

Also, the first mortgage happens to be older and so more of each payment is going toward reducing the principal.  Thus it is being paid off at a faster rate.  And when it is finally paid in, say, 20 years, the wraparound mortgage will still show an unpaid balance of approximately $33,000.  Then the seller’s equity will have increased from $20,000 to $33,000 and returned him 12% annually in the meantime.  You, of course have bought the property with none of you your own money and produced your own net profits from the rents you’ve received.  This is another classic win-win situation, it is not?  (Please see chart below.)

METHOD NUMBER 3 IN BRIEF

What it is designed to do:

Make a wraparound mortgage

What you need:

Only somewhat flexible seller

What your terms are:

1.  Property asking price                                            $50,000.00

2.  Existing assumable mortgage                            $30,000.00

3.  Current rate                                                                                   8%

4.  Existing monthly payment                                           $245.00

5.  Present seller’s equity                                            $20,000.00

How you proceed:

1.  Offer full wraparound mortgage                        $50,000.00

2.  Buyer’s annual lpayments                                   $    5,340.00

3.  Existing mortgage remains                                 $30,000.00

4.  Seller’s annual payments                                     $    2,940.00

5.  Seller’s annual profit                                              $   2,400.00

What the seller can expect:

• Seller retains $2,400 in annual income
• Seller’s $20,000 equity earns 12% yearly return on investment
• Seller’s mortgage is paid off on schedule
• Seller’s equity in 20 Years grows to $33,000

What you, the buyer, can expect:

• You avoid traditional costs and liabilities of assumed mortgage.
• You acquire income property with 100% financing.

Dr. Eric T. Martin / 100% Financing When BUying Real Estate / 12-5-09

MAKE 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