Seller/Exchanger Motivation Scale
As a Seller of real estate, what are you willing to do to close the transaction and move on? In a strong Seller's Market the top half of this chart dominates। In a declining or "soft" market, the mid portion begins to show influence। In a Buyer's Market, the lower portion dominates। Each Seller's indivdual circumstances will ultimately determine their level of motivation।
As a real estate investor, I have utilized many of these techniques
Won’t sell - Exchange only - Wants to do a 1031 exchange to avoid paying capital gains taxes.
Price firm (All cash or cash to loan) - The traditional method used by most real estate brokers.
Price firm (Cash and paper to loan)- They feel the need to receive their price, but will be flexible enough to put the deal together.
Price soft (Cash and paper to loan) - Are flexible with price and willing to find buyers who may not be able to qualify for conventional financing.
Paper for Equity - Willing to be the banker and know they can use the paper to exchange, or use as an option, sell the paper, and use it as a down payment for other property.
Will take free and clear land for equity - They use the land as a bank for their money, it doesn’t cost much to hold and they know it most likely will go up in value over time.
Anything of equal and verifiable value - Very flexible method to move out of a property that may be out of your area or you just don’t want to bother with it anymore.
Anything of value for equity - Very flexible method to move out of a property that may be out of your area or you just don’t want to bother with it anymore and are even willing to take a loss.
Will walk from equity - The property is costing you money, may be in foreclosure, or may be behind in payments, etc.
Will pay to walk from equity - The property is costing you money, may be in foreclosure, or behind in payments, to settle a divorce or partnership, etc. Most likely reason is it will give you peace of mind.
If you are competing against foreclosures, short sales, and an increasing inventory of available homes for sale, what are YOU going to do to attract a Buyer?
Tuesday, July 21, 2009
Saturday, July 18, 2009
Brainstorming for Condo, Part II
48 hours have passed (plus or minus), so here goes:
BTW - this scenario occurred before the market collapse for condos in Florida, and just like Old School Rap (you didn't think I'd let you forget that one, did you) Old School Real Estate investing principles never go out of style - just, adjust you numbers accordingly. (My numbers reflect the original answer given to this investor previously).
The Seller wants to invest in real estate, needs/wants some cash, and is willing to owner finance a portion of your purchase. Why not assist them in starting their investing future with this unit? You can offer to do a Lease with Option to Purchase, a “Split Funding” deal, or an “Equity Participation” venture, to name a few.
A. Lease w/Option: You negotiate a purchase price with the Seller at a pre-determined time in the future. You put down a specified dollar amount as down payment on the purchase price. You execute a Lease w/Option to Purchase and pay a monthly rental amount. At the designated point in time, you execute the purchase of the property at the pre-negotiated price. For example: Purchase price of $110,000 (factors - current estimated value, needed repairs, anticipated future profit margin, closing costs). $7,000 down payment, $700/month rent, purchase price of $110,000 (minus $7,000) in 2 years. Since this is to be your primary residence, “holding cost/rent” is not been factored in. Also appreciation is not factored. In doing your homework, you would have discovered if Leasing/Renting is allowed in the condo complex. A fair deal.
B. Split Funding: You negotiate a purchase price with part of the money due at closing and the remainder due in the future. For example: Purchase price of $120,000 (factors - current estimated value, needed repairs, appreciation, closing costs). $60,000 1st mortgage, Seller held 2nd mortgage for the remainder due in 3 years. 2nd mortgage has no payments and is a single payment lump sum balloon. 2nd mortgage may or may not include accrued interest (negotiable), but should not have any payments (remember, the condo monthly maintenance fee will likely increase with title transfer). If the Seller wants monthly payments on the held 2nd, you can reduce the overall purchase price, increase the time frame that the 2nd balloon is due or lower the amount of the 1st mortgage. The property appreciation between closing date and the due date of the 2nd mortgage is you anticipated profit margin. The Seller gets their price, you get your terms. A fair deal.
C. Equity Participation: You negotiate a lowered purchase of the property, factor in a profit spread for yourself and agree to share any amount above that amount with the Seller in the future. For example: purchase price of $100,000. Your initial (future) estimated profit spread of $12,000 (factors current estimated value, current needed repairs, and closing costs). Combined “costs” equal $112,000. You agree to share with the Seller all proceeds above and beyond a sells price of $125,000 when you sell the property (3-5 years). Your 2nd estimated profit spread is $13,000 (spread from $112,000 combined cost to split adjusted price of $125,000, PLUS a percentage of the proceeds above $125,000. Potential profit to you: $25,000 plus a share of the appreciation. (The upfront amount, the sales price participation point and split percentages are all negotiable). Seller gets a larger lump sum of cash up front and a share of the appreciation. A fair deal.
In Summary, sometimes with a willing Seller, you can walk then through the deal and show them the “nuts and bolts” of the transaction and your exit strategy. The key is to make a fair offer and then demonstrate WHY it is a fair offer. It is very difficult to defend a “lowball” offer if you walk someone through the transaction. Many Real Estate Investors would not walk the Seller through the transaction under any circumstances. They would explain the offer, but not their exit strategy, anticipated profit margin or how that margin is obtained. Explaining the inner workings of the transaction is up to you. However, you have identified a Seller with an interest in knowing more about RE investing and they have what you want – the property AND the willingness and flexibility to owner finance. How you choose to gain their trust, purchase the property and develop a possible friendship is ultimately up to you.
BTW - this scenario occurred before the market collapse for condos in Florida, and just like Old School Rap (you didn't think I'd let you forget that one, did you) Old School Real Estate investing principles never go out of style - just, adjust you numbers accordingly. (My numbers reflect the original answer given to this investor previously).
The Seller wants to invest in real estate, needs/wants some cash, and is willing to owner finance a portion of your purchase. Why not assist them in starting their investing future with this unit? You can offer to do a Lease with Option to Purchase, a “Split Funding” deal, or an “Equity Participation” venture, to name a few.
A. Lease w/Option: You negotiate a purchase price with the Seller at a pre-determined time in the future. You put down a specified dollar amount as down payment on the purchase price. You execute a Lease w/Option to Purchase and pay a monthly rental amount. At the designated point in time, you execute the purchase of the property at the pre-negotiated price. For example: Purchase price of $110,000 (factors - current estimated value, needed repairs, anticipated future profit margin, closing costs). $7,000 down payment, $700/month rent, purchase price of $110,000 (minus $7,000) in 2 years. Since this is to be your primary residence, “holding cost/rent” is not been factored in. Also appreciation is not factored. In doing your homework, you would have discovered if Leasing/Renting is allowed in the condo complex. A fair deal.
B. Split Funding: You negotiate a purchase price with part of the money due at closing and the remainder due in the future. For example: Purchase price of $120,000 (factors - current estimated value, needed repairs, appreciation, closing costs). $60,000 1st mortgage, Seller held 2nd mortgage for the remainder due in 3 years. 2nd mortgage has no payments and is a single payment lump sum balloon. 2nd mortgage may or may not include accrued interest (negotiable), but should not have any payments (remember, the condo monthly maintenance fee will likely increase with title transfer). If the Seller wants monthly payments on the held 2nd, you can reduce the overall purchase price, increase the time frame that the 2nd balloon is due or lower the amount of the 1st mortgage. The property appreciation between closing date and the due date of the 2nd mortgage is you anticipated profit margin. The Seller gets their price, you get your terms. A fair deal.
C. Equity Participation: You negotiate a lowered purchase of the property, factor in a profit spread for yourself and agree to share any amount above that amount with the Seller in the future. For example: purchase price of $100,000. Your initial (future) estimated profit spread of $12,000 (factors current estimated value, current needed repairs, and closing costs). Combined “costs” equal $112,000. You agree to share with the Seller all proceeds above and beyond a sells price of $125,000 when you sell the property (3-5 years). Your 2nd estimated profit spread is $13,000 (spread from $112,000 combined cost to split adjusted price of $125,000, PLUS a percentage of the proceeds above $125,000. Potential profit to you: $25,000 plus a share of the appreciation. (The upfront amount, the sales price participation point and split percentages are all negotiable). Seller gets a larger lump sum of cash up front and a share of the appreciation. A fair deal.
In Summary, sometimes with a willing Seller, you can walk then through the deal and show them the “nuts and bolts” of the transaction and your exit strategy. The key is to make a fair offer and then demonstrate WHY it is a fair offer. It is very difficult to defend a “lowball” offer if you walk someone through the transaction. Many Real Estate Investors would not walk the Seller through the transaction under any circumstances. They would explain the offer, but not their exit strategy, anticipated profit margin or how that margin is obtained. Explaining the inner workings of the transaction is up to you. However, you have identified a Seller with an interest in knowing more about RE investing and they have what you want – the property AND the willingness and flexibility to owner finance. How you choose to gain their trust, purchase the property and develop a possible friendship is ultimately up to you.
Thursday, July 16, 2009
As of this week, my step-daughter, Angel (Angelica) has been declared "cancer free" with a low probability of recurrance. Sharon and I want to thank everyone for their thoughts and prayers. Angel is recovering well from her second operation two weeks ago - to the point that she went to see the Harry Potter movie at midnight, Tuesday with her friends. Again, thank you all. Sylvester, Sharon & Angel
Brainstorming for Condo, Part I
A real estate investor who was relatively "new" asked me to help brainstorm the following scenario:
Q: I found a lead on a condo that I would like to live in as my primary residence. How can I structure the deal? The condo is free and clear, the monthly maintenance fee is about $190/month, the Seller needs some cash (they want to start investing in real estate too), but is willing to owner finance a part of my purchase. The after repaired value of the unit is about $120,000 and it needs updating of the kitchen and interior painting. I have good credit and can put down up to 20% ($24,000), but would rather not… Any ideas?
A: Congratulations on taking the first steps toward buying this unit. There are several ways you can approach structuring this transaction. With the condo being free and clear, you and the Seller have quite a bit of flexibility to find an equitable solution.
I. First, order of business is due diligence or “doing your homework”. I would further evaluate and define your “exit strategy”. You stated that this would be your primary residence – for how long? What are your plans for the unit when you leave? What circumstances would make you leave? These factors help shape your purchase offer.
II. Secondly, I would evaluate the condo complex – are there any ongoing or upcoming assessments that will increase your monthly maintenance fee? Is there any current or pending litigation against the condo association? Are there any specific restrictions outlined in the Condo Association Bylaw documents that would be a concern?
Any ideas from YOU the reader? 48 hours from now, I'll post 3 ways this investor can choose to proceed. Until then, I'd like you to brainstorm and post your ideas in comments. There are no "wrong" answers, just different viewpoints.
Thank you
Q: I found a lead on a condo that I would like to live in as my primary residence. How can I structure the deal? The condo is free and clear, the monthly maintenance fee is about $190/month, the Seller needs some cash (they want to start investing in real estate too), but is willing to owner finance a part of my purchase. The after repaired value of the unit is about $120,000 and it needs updating of the kitchen and interior painting. I have good credit and can put down up to 20% ($24,000), but would rather not… Any ideas?
A: Congratulations on taking the first steps toward buying this unit. There are several ways you can approach structuring this transaction. With the condo being free and clear, you and the Seller have quite a bit of flexibility to find an equitable solution.
I. First, order of business is due diligence or “doing your homework”. I would further evaluate and define your “exit strategy”. You stated that this would be your primary residence – for how long? What are your plans for the unit when you leave? What circumstances would make you leave? These factors help shape your purchase offer.
II. Secondly, I would evaluate the condo complex – are there any ongoing or upcoming assessments that will increase your monthly maintenance fee? Is there any current or pending litigation against the condo association? Are there any specific restrictions outlined in the Condo Association Bylaw documents that would be a concern?
Any ideas from YOU the reader? 48 hours from now, I'll post 3 ways this investor can choose to proceed. Until then, I'd like you to brainstorm and post your ideas in comments. There are no "wrong" answers, just different viewpoints.
Thank you
Tuesday, July 14, 2009
Real Estate is like Rap Music
Now wait. You got this far. Hear me out before you bounce out to another site... Like Rap music, Real Estate saw a rapid rise, a quick plateau, and then a sudden fall. Real estate and rap music are both down, but not out for the count. In both instances, cooler heads and better talent will prevail. "Old School Rap" endures while most of the newer stuff hurts my ears and offends my intelligence. "Old School Real Estate" endures: principles like location, cash flow, proper structuring, great management, and orderly liquidation. The newer real estate "stuff" offends the senses of prudent investors and, like mosquitoes drawn to a backyard cookout has drawn the unwise, unskilled, and unappreciative into the industry. Nearly every newly minted real estate investor with a hammer and a circular saw bought and sold everything they could get their hands on - winning a bidding war on a fixer-upper was seen as a merit badge: the cost of doing business until you could flip it to a greater fool, pay your capital gains and repeat the cycle… Similarly, some music execs throw signing bonuses at every 4th place act at the local talent show hoping they can “add value” and then string enough of these one hit wonders together to create a career and justify their salary. Can you say, "Who let the Dogs Out?" It had a catchy beat and hook, but overall was just another "one hit wonder."
I've had my share of "dogs", but unlike a music exec (and some investors), I don't hope to string along one one hit wonder after another...
Like I said previously, Real Estate and Rap music are down but not out. I hold out hope for both.
PS. If you see that you've strung along a series of one hit wonders and want to change, give me a call.
To Our Mutual Success
I've had my share of "dogs", but unlike a music exec (and some investors), I don't hope to string along one one hit wonder after another...
Like I said previously, Real Estate and Rap music are down but not out. I hold out hope for both.
PS. If you see that you've strung along a series of one hit wonders and want to change, give me a call.
To Our Mutual Success
Freebie - Give away to Rehabbers
I previously bought a house that needed about 2 weeks worth of rehab. During my rehab, I got a letter on my door from a roofing company that was doing a job a couple of doors down. I liked the letter so much, I copied it for my own uses (imitation IS the best form of flattery). Feel free to modify this in any way to suit your needs.
Any Date
Hello Neighbor,
My name is Sylvester Fordoms and I am the project manager for a company that has purchased the home of Danny & Barbara MXXXXXX at 123 XXXXXXX Street.
I want to let you know that there are going to be several repairs made to the property. You may have already noticed some activity. We intend to make these repairs as quickly as possible and with the least amount of disruption to you or the other neighbors.
Once the repairs are completed, the house will be offered for sale (or rent). I don’t have the details yet, but will have them available shortly. If you know someone that would like to be your new neighbor, please have them give me a call.
Also, if you or anyone you know is interested in selling their property, please have them give me a call. We buy real estate directly from the owner in “as-is” condition, in any location - even out of state.
Sincerely,
Sylvester Fordoms
Any Date
Hello Neighbor,
My name is Sylvester Fordoms and I am the project manager for a company that has purchased the home of Danny & Barbara MXXXXXX at 123 XXXXXXX Street.
I want to let you know that there are going to be several repairs made to the property. You may have already noticed some activity. We intend to make these repairs as quickly as possible and with the least amount of disruption to you or the other neighbors.
Once the repairs are completed, the house will be offered for sale (or rent). I don’t have the details yet, but will have them available shortly. If you know someone that would like to be your new neighbor, please have them give me a call.
Also, if you or anyone you know is interested in selling their property, please have them give me a call. We buy real estate directly from the owner in “as-is” condition, in any location - even out of state.
Sincerely,
Sylvester Fordoms
Monday, July 13, 2009
Back to Basics, Part II: Why Carry a Note?
As a Seller, Why should I carry a Note?
Selling a home with Seller Financing (Carrying the Note) can yield substantial benefits for the Seller. Here’s how:
1. By offering Seller Financing, the seller may increase the pool of potential Buyers looking at their home and not competing homes for sale.
2. The Seller, in some cases, can ask a higher purchase price.
3. The Seller’s risk is mitigated by the collateral securing the Note (most often the home for sale). (Food for thought: If the Seller won't accept the subject home as collateral, why should the Buyer consider purchasing??)
4. The monthly payments received, often far exceed the returns offered by bank CD’s, Savings/Checking accounts.
5. Capital gain taxes (if applicable) are paid as payments are received and not one lump sum.
In the following examples, the Seller wants to sell their home and also receive a $750.00 monthly payment to supplement their other income.
A. Bank (Traditional or all cash transaction)
$100,000.00 capital gain/nest egg harvested
$15,000.00 lost to taxes
$85,000.00 put into bank @ 5% interest
$750.00 / month P & I available for 154 Mos.
- Their monthly income stream runs out just over 12½ years from sale.*(**)
B. Note (100% Seller financed)
$100,000.00 capital gain/nest egg harvested
$0.00 lost to taxes
$100,000.00 purchase money note @ 7.5% interest
$750.00 / month P & I available for 288 Mos.
- Their monthly income continues for a total of 24 years*(**)
* Monthly payments can go to Seller, Seller’s heirs, favorite charity, or any designated party.
** Each scenario did not take into consideration down payment funds or accelerated payoff terms.
Ask yourself as a Seller, "All else being the same, would you rather have a 5% return for 12 1/2 years or 7.5% return for 24 years?"
Selling a home with Seller Financing (Carrying the Note) can yield substantial benefits for the Seller. Here’s how:
1. By offering Seller Financing, the seller may increase the pool of potential Buyers looking at their home and not competing homes for sale.
2. The Seller, in some cases, can ask a higher purchase price.
3. The Seller’s risk is mitigated by the collateral securing the Note (most often the home for sale). (Food for thought: If the Seller won't accept the subject home as collateral, why should the Buyer consider purchasing??)
4. The monthly payments received, often far exceed the returns offered by bank CD’s, Savings/Checking accounts.
5. Capital gain taxes (if applicable) are paid as payments are received and not one lump sum.
In the following examples, the Seller wants to sell their home and also receive a $750.00 monthly payment to supplement their other income.
A. Bank (Traditional or all cash transaction)
$100,000.00 capital gain/nest egg harvested
$15,000.00 lost to taxes
$85,000.00 put into bank @ 5% interest
$750.00 / month P & I available for 154 Mos.
- Their monthly income stream runs out just over 12½ years from sale.*(**)
B. Note (100% Seller financed)
$100,000.00 capital gain/nest egg harvested
$0.00 lost to taxes
$100,000.00 purchase money note @ 7.5% interest
$750.00 / month P & I available for 288 Mos.
- Their monthly income continues for a total of 24 years*(**)
* Monthly payments can go to Seller, Seller’s heirs, favorite charity, or any designated party.
** Each scenario did not take into consideration down payment funds or accelerated payoff terms.
Ask yourself as a Seller, "All else being the same, would you rather have a 5% return for 12 1/2 years or 7.5% return for 24 years?"
Wednesday, July 8, 2009
Blunt Talk and Awkward Silence
Blunt Talk & Awkward Silence
I'd like to talk about something that we all have experienced at one point of another in communicating with others: blunt talk and awkward silence. In today’s society, everyone is obsessed with “political correctness”. Don’t say this or do that for fear of offending an individual, group or specific segment of society. As individuals we are often criticized for being too forward, and also criticized for not being forward enough.
Here’s a well known "secret" – most people prefer blunt talk.
Now, don’t confuse bluntness with rudeness. Manners (and spelling) do count. “The Golden Rule”, is just that, GOLDEN. The vast majority of real estate sellers are everyday people, who work everyday jobs to support themselves and their families. Sellers can be very blunt when approached by a potential buyer who tries to be too politically correct. If the Seller feels that you are talking “above” them or “down” to them – your deal is dead, no matter the price or terms. Save the executive jargon for the office and talk to your seller on their level. That does not mean insincere mimicking. Now this can be a bit touchy. If the seller is in foreclosure, getting divorced, dealing with the estate, or any other reason that brings them to sell – talk about it. You don’t want to force the conversation, but you do want to bring all the facts out into the open. Sometimes, the seller may not have faced these facts in a realistic fashion and is waiting for someone (you) to offer them a solution that they can live with. Empathize with the seller; ask probing questions, present multiple options that may provide a solution, enlist the seller to support an outcome that is mutually beneficial.
This leads into the second half of our title, awkward silence. If you as a Buyer are asking probing questions, following up the answers with additional questions and not getting sidetracked, there will be an opportunity presented by an awkward silence. Either you or the Seller have asked a question that the answer is not known or ready to be disclosed. Don’t be afraid of silence. Silence in the course of fact finding or negotiation is a very powerful tool. Usually, someone pipes up to fill the awkward void with information that is useful to the other party. You want the Seller to fill that void and provide information to you. Silence can be calming, thought provoking, reassuring, intimidating, or an excellent closing, depending on its context.
I'd like to talk about something that we all have experienced at one point of another in communicating with others: blunt talk and awkward silence. In today’s society, everyone is obsessed with “political correctness”. Don’t say this or do that for fear of offending an individual, group or specific segment of society. As individuals we are often criticized for being too forward, and also criticized for not being forward enough.
Here’s a well known "secret" – most people prefer blunt talk.
Now, don’t confuse bluntness with rudeness. Manners (and spelling) do count. “The Golden Rule”, is just that, GOLDEN. The vast majority of real estate sellers are everyday people, who work everyday jobs to support themselves and their families. Sellers can be very blunt when approached by a potential buyer who tries to be too politically correct. If the Seller feels that you are talking “above” them or “down” to them – your deal is dead, no matter the price or terms. Save the executive jargon for the office and talk to your seller on their level. That does not mean insincere mimicking. Now this can be a bit touchy. If the seller is in foreclosure, getting divorced, dealing with the estate, or any other reason that brings them to sell – talk about it. You don’t want to force the conversation, but you do want to bring all the facts out into the open. Sometimes, the seller may not have faced these facts in a realistic fashion and is waiting for someone (you) to offer them a solution that they can live with. Empathize with the seller; ask probing questions, present multiple options that may provide a solution, enlist the seller to support an outcome that is mutually beneficial.
This leads into the second half of our title, awkward silence. If you as a Buyer are asking probing questions, following up the answers with additional questions and not getting sidetracked, there will be an opportunity presented by an awkward silence. Either you or the Seller have asked a question that the answer is not known or ready to be disclosed. Don’t be afraid of silence. Silence in the course of fact finding or negotiation is a very powerful tool. Usually, someone pipes up to fill the awkward void with information that is useful to the other party. You want the Seller to fill that void and provide information to you. Silence can be calming, thought provoking, reassuring, intimidating, or an excellent closing, depending on its context.
Have you been drinking the Kool-aid?
As homeowners: an ENTIRE generation (or two) has been "sold" a bunch of Bullsh*t. First, that your home is an investment. Secondly, that home ownership is an American "right". Your primary home is shelter, not an investment. It keeps you warm and dry when its cold and wet outside... You really have control over only three basic factors: where you buy (location), how much you paid for it (price/terms)and the rate in which you amortize (pay down) that debt. Everything else is speculative. Speculation in and of itself is not bad, yet when applied to an illiquid product such as real estate, you either "win big" or lose big". As for the 'right' to homeownership, I feel homeownership is a privilege. Not everyone is cut out to be a homeowner. We all know someone who bought a home in this past era of easy credit and lax underwriting who we know deep down inside (but would never say it to them directly) - that they were not cut out to be a homeowner, yet there they were drinking the real estate Kool-aid* and boasting of how easy it was. Now unfortunately to the pain of us all, that privilege which should not have been extended to so many is being taken away via foreclosure (that's a different topic).
Investors: "Buy, fix, and flip" was supercharged by the access to easy credit, fueled by lending institutions, wall street institutions, and others wanting their slice of the real estate boom. There are many, many ways to invest in real estate profitably, most of which work wonderfully when used during the correct market/business cycle. I myself, am primarily a "buy and hold" investor. I could care less if any home I buy appreciates in value. Appreciation is nice, don't get me wrong, but it is not in the top 5 criteria I look to in buying property. How much I pay for a property and how quickly I (or more aptly, my tenants) pay down that debt are the most direct influences on my bottom line.
As for the current market condition - this is likely the best time to buy real estate that I or my children will see in our lifetimes. The problem currently lies in the credit market's inability or unwillingness to fund investment purchases. Of course, if you have 30% down payment, stellar credit, 6 month's reserves for each property owned, own less that the FHA cut-off number of financed properties, you may convince an institutional lender to CONSIDER financing your transaction. For my transactions, I don't rely on institutional lenders or the credit markets to supply the capital needed (I also very rarely use hard money lenders).
Bottom line, as an investor if you are calculating on appreciation to make up for mistakes made elsewhere in the buying process, you have better odds in Las Vegas.
* My apologies to Kool-aid (I loved that stuff as a kid)
Investors: "Buy, fix, and flip" was supercharged by the access to easy credit, fueled by lending institutions, wall street institutions, and others wanting their slice of the real estate boom. There are many, many ways to invest in real estate profitably, most of which work wonderfully when used during the correct market/business cycle. I myself, am primarily a "buy and hold" investor. I could care less if any home I buy appreciates in value. Appreciation is nice, don't get me wrong, but it is not in the top 5 criteria I look to in buying property. How much I pay for a property and how quickly I (or more aptly, my tenants) pay down that debt are the most direct influences on my bottom line.
As for the current market condition - this is likely the best time to buy real estate that I or my children will see in our lifetimes. The problem currently lies in the credit market's inability or unwillingness to fund investment purchases. Of course, if you have 30% down payment, stellar credit, 6 month's reserves for each property owned, own less that the FHA cut-off number of financed properties, you may convince an institutional lender to CONSIDER financing your transaction. For my transactions, I don't rely on institutional lenders or the credit markets to supply the capital needed (I also very rarely use hard money lenders).
Bottom line, as an investor if you are calculating on appreciation to make up for mistakes made elsewhere in the buying process, you have better odds in Las Vegas.
* My apologies to Kool-aid (I loved that stuff as a kid)
When all else is failing, turn back to the basics
Seller Financing. What it is and what it isn’t…
Seller financing IS NOT a loan. It is more accurately described as “the terms of the sale”. Many an Attorney, Realtor (and their Broker) will argue that it is indeed a loan. They are wrong. Let me explain.
First, let’s begin with a couple of definitions and descriptions.
- Purchase Money Mortgage: A mortgage pledging collateral (most usually the subject home) to secure a Purchase Money Note.
- Purchase Money Note: A Note promising payment (also commonly called a Note)
- Mortgage: A pledge of collateral (most usually the subject home) to secure a Note.
- Promissory Note: A note promising re-payment (also commonly called a Note)
The confusion centers on the Purchase Money Note and Promissory Note being used interchangeably. They are NOT the same.
Let’s walk through 2 transactions to illustrate the danger of interchanging the two:
Transaction 1: Buyer wants to buy home. Agreed upon price is $100,000. Buyer does not have $100,000 in bank account. Buyer goes to a bank (3rd party to the transaction) to get a loan. At closing, bank gives $100,000 to the Buyer; Buyer then gives the Seller $100,000, Seller then transfers to Buyer the Title/Deed to property. Buyer promises to re-pay the bank (see where this is going?) by signing a Promissory Note and also pledging the home as collateral (Mortgage) in the event he does not re-pay the bank.
Moral: The Buyer borrows (gets a loan) from a 3rd party (bank) to complete the transaction. With the loan, money (in this case $100,000) is exchanged.
Transaction 2: Buyer wants to buy home. Agreed upon price is $100,000. Seller agrees to the following terms: Seller financing at the rate of $1,000 per month for 100 months. At closing Seller transfers Title/Deed to Buyer, Buyer promises to pay (not “re-pay”) Seller via a Purchase Money Note. The Purchase Money Note is then secured by a Purchase Money Mortgage which pledges the home as collateral.
Question: How can you “re-pay” a Title/Deed transfer? Answer: You can’t. You can re-transfer the property, but you can’t re-pay a transfer of ownership. (It was a trick question). If your Attorney, CPA, Realtor, or brother-in-law can’t grasp this concept, get a better Attorney, CPA, Realtor or brother-in-law…
Moral: The Buyer and Seller transfer Title/Deed. What is exchanged is a promise to pay (not re-pay).
Seller financing IS NOT a loan. It is more accurately described as “the terms of the sale”. Many an Attorney, Realtor (and their Broker) will argue that it is indeed a loan. They are wrong. Let me explain.
First, let’s begin with a couple of definitions and descriptions.
- Purchase Money Mortgage: A mortgage pledging collateral (most usually the subject home) to secure a Purchase Money Note.
- Purchase Money Note: A Note promising payment (also commonly called a Note)
- Mortgage: A pledge of collateral (most usually the subject home) to secure a Note.
- Promissory Note: A note promising re-payment (also commonly called a Note)
The confusion centers on the Purchase Money Note and Promissory Note being used interchangeably. They are NOT the same.
Let’s walk through 2 transactions to illustrate the danger of interchanging the two:
Transaction 1: Buyer wants to buy home. Agreed upon price is $100,000. Buyer does not have $100,000 in bank account. Buyer goes to a bank (3rd party to the transaction) to get a loan. At closing, bank gives $100,000 to the Buyer; Buyer then gives the Seller $100,000, Seller then transfers to Buyer the Title/Deed to property. Buyer promises to re-pay the bank (see where this is going?) by signing a Promissory Note and also pledging the home as collateral (Mortgage) in the event he does not re-pay the bank.
Moral: The Buyer borrows (gets a loan) from a 3rd party (bank) to complete the transaction. With the loan, money (in this case $100,000) is exchanged.
Transaction 2: Buyer wants to buy home. Agreed upon price is $100,000. Seller agrees to the following terms: Seller financing at the rate of $1,000 per month for 100 months. At closing Seller transfers Title/Deed to Buyer, Buyer promises to pay (not “re-pay”) Seller via a Purchase Money Note. The Purchase Money Note is then secured by a Purchase Money Mortgage which pledges the home as collateral.
Question: How can you “re-pay” a Title/Deed transfer? Answer: You can’t. You can re-transfer the property, but you can’t re-pay a transfer of ownership. (It was a trick question). If your Attorney, CPA, Realtor, or brother-in-law can’t grasp this concept, get a better Attorney, CPA, Realtor or brother-in-law…
Moral: The Buyer and Seller transfer Title/Deed. What is exchanged is a promise to pay (not re-pay).
I recently closed on a property in the Tampa Bay area of Florida using a technique of "equity" financing as opposed to "debt" financing. In a nutshell: rather than borrowing the funds to complete the transaction and compiling additional debt, I offered 50% of the deal to a joint venture "partner". The JV partner gets OWNERSHIP (not a mortgage), cashflow, tax benefits (write-offs), and appreciation/debt amortization and ZERO management duties rather than interest payments. Is anyone else using this technique or a variation thereof?
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