Augie 
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With the mortgage meltdown and liquidity crisis, sellers are having trouble selling and buyers are having trouble buying unless they are prepared to pay all cash.
Virtually all loans for buyers with a marginal credit score are gone. Even good credit buyers are being left wanting. This lack of mortgage money has created a growing demand for rentals and the need for creative owner financing. This is the “Perfect Storm” that I wrote about earlier in the year (March 2008). This awesome technique is the solution. BE THE BANK!
When you’ve created 0% owner financing on a house you’ve bought, you’re like a bank borrowing from the Fed! How quickly do you want to pay it off? Never! Then how can you sell? You simply sell to a tenant buyer and insist they close with a wrap-around mortgage or similar owner financing instrument (just like a bank) after they complete their term in a lease option. Or, find a buyer with more money down and close now with ‘wraparound owner financing’ (just like a bank). Or just rent it and let your tenant buy the property for you. Using a “Wrap Around Mortgage,” “Contract for Deed” or “Agreement for Deed” (whichever is the standard in your part of the country), your buyer will make a mortgage payment to you and you make your payment on the underlying owner financing to your seller. The difference is your monthly cash flow. This is how it works:
Option #1: Give your seller some cash now and some cash later
Your seller has a pretty house worth $220,000 in today’s market, it needs no repairs and is owned free and clear but the seller has difficulty finding a buyer and wants to sell now. The market is slow, they need to sell and you estimate that within 60 days you can find a buyer that will pay $220,000 if you finance $200,000 at 6% or $1,000 a month interest-only payments with a $20,000 down payment.
While it would be easy to show the seller that $200,000 is a fair price when taking into account 10% for normal sales costs but the seller demands his full price of $220,000 with $20,000 down. Could you actually pay that much? Yes, you can. The only question is how long could you wait to come up with the money? What if you gave the seller $20,000 now and $200,000 as a lump sum balloon payment due in 7 years? They get their price and some cash now with the balance coming later. What do you get in return? You get $1,000 a month for 84 months or $84,000 with no property management! At the end of 7 years you owe $200,000 to the seller and your buyer still owes you $200,000 (as the $1,000/month was interest-only payments; nothing was paid towards the principal). In spite of the fact that you owe and are owed $200,000, you’ve earned $84,000. So now you see the power that comes when you choose to “Be the Bank”!
Option #2: You give the seller the cash flow and you get cash at both ends
Using the same scenario as above but the seller agrees to nothing down. Now you can pay the seller $1,000 principle-only payments each month instead. In this case you keep the $20,000 from your buyer. In 7 years you owe the seller $136,000 (as you paid $1,000 per month for 84 months towards the principle) but your buyer still owes $200,000. That’s a $64,000 back-end payday! This gives you tremendous leverage, not to mention the impact on your financial situation if you did 10 or 20 of these transactions. The cumulative effect can be staggering.
Option #3: You give the seller monthly payments and arbitrage the money
With everything being the same, you give the seller $20,000 down and 200 payments of $1000, (an interest free loan) no balloon. You finance your buyer at 6% amortizing or $1,199.10 per month for 360 months. Effectively you have just created a cash machine which will generate $200 per month cash flow for 200 months or $40,000. Plus the buyer will make an additional 160 payments of $1,199.10 each which means another $192,000. The total profit on this deal is $232,000 (assuming the loan goes the full 30 years). The beauty of this strategy is that even if your buyer sells in the future, your underlying loan is paying down at a much faster rate, thereby providing you an increasing equity position.
If you would like to learn more about these and other great Transaction Engineering strategies and techniques while starting, building or growing your real estate business, you can shorten your learning curve and increase your effectiveness with PACT, Personal Action Coaching Tracks
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As a noob to real estate investing, I understand the numbers but as far as writing up the contracts, would you let a real estate attorney handle these details?
A good real estate attorney is a valuable member of your team. Once they have prepared a set of documents for you study them, understand them and at some point you may become comfortable enough to do your own paperwork. In some of my home study programs, I provide sample paper work along with forms audio that describes how each form is completed. The key is to first understand what it is you are trying to accomplish and then do it. In the beginning, get the best talent you can to work with you. It is worth the investment. when it comes t wraps and other non-standard transactions, I still prefer to use an attorney to prepare the paperwork, handle the closing or both. In my market the paperwork can also be done by the title company.
Good luck and happy investing!
If you were to deal with a tenant buying the property it can be a risky process and all precautions should be put in place safeguard your money. Also make sure on a legal standpoint that this is legal and what contract you are creating the opposite party is all drawn up properly so that you will give what money is owned and receive what money is owed to you and everybody is happy.
I agree. Everyone involved should be aware of and understand all aspects of the transaction. A HUD Settlement Statement needs to be prepared and the transaction closed be either an attorney, title company or escrow agent depending what is customary for your area. This is not a DYI transaction.
I am not an attorney and never give legal advice. What you’ll find pretty standard is that most realtors can handle a simple purchase and sale agreements. If it is a private transaction and you are new, a good real estate attorney can be very valuable. Once they have done one or two for you, you can simply negotiate your deals and fill in the blanks yourself then forward the paperwork to a title or escrow company to handle the closing. When it comes to more sophisticated paperwork like notes, mortgages, options etc. I always recommend new investors consult a good real estate attorney.
I agree,we should be aware from risk.If we are new we should get a good real state attorney doing some process with our property to make our money put in place and safety.
This definitely can be helpful tips due to the huge Melt down in the housing market. I don’t see values going up until we get main stream America back to work.
I agree, we should be aware from risk. If we are new we should get a good real state attorney doing some process with out property to make our money put in place and safety.
Another thing learnt from this site. Having a good real estate attorney on your team is essential. Will make this a priority in the next few days.
Thanks again for the heads up.
It has been my lifes work and pleasure advising people about Home Loans and I am an expert in this financial field. But since the housing market has gone into a deflationary spiral, not only has it been more difficult obtaining a home loan, it has been nearly impossible to keep the value of that newly purchased property up or at best, to the level of the purchased price. Housing prices must “Bottom-Out” before the whole housing industry comes back to normal. Some experts say it will botton-out in 2013, well lets hope it is sooner than that!
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We welcome back links to our content. You may also reprint with proper credit. Thanks and good luck with the new site!!
I have a bad credit rating because of debt, which I am paying off, but I want to get a mortgage with my fiance but we are finding it impossible although we would be able to meet the payments easily.
It sounds like you need to find a lease option opportunity or a seller who is willing to finance you. Check out your local real estate investment association and you just might find some creative folks who can help you achieve your goal of owning a home.
Good luck,
Augie