Exactly how can it be feasible for you to find away from a real estate closing with more cash in your pocket than you shared? In a similar way, exactly how can you acquire a home for cash — if that is the only way an owner will sell it — if you don’t have any cash? how is it possible for a seller to convert your promissory note to cash when thee isn’t any cash to begin with which is why you made the notes in the first place?
Usually you make promissory notes to cover the cash that you don’t have, in order to make down payments or otherwise come away with even money. Rarely have you ever hoped to go to a closing — where you are the buyer — in order to collect! Isn’t that right? Aren’t generally closings the kind of events where you spend, not earn?
This text is designed to show you that, too, is limited, non-creative thinking. It doesn’t have to be that way at all at a closing. In the next several pages you will learn some of the ways you can leave a closing with cash in your pocket, and several other creative ways to utilize promissory notes in solving purchase problems that arise in the first place because you have no cash. You will also learn how to combine several different methods, all designed with one goal in mind: Buying property and financing it 100%.
CASH COMING FROM CLOSING
The following methods actually seem better than making a zero down payment and still being able to buy the property. These methods teach you how to put money into your pocket where there wasn’t any before. In effect, you’re buying with negative numbers, not even zero! You buy by leaving the transaction with more money than you spend! How is this even possible?
One of the key “secrets” is equity. That is, the greater the equity the seller has, the easier these cash-back methods can work. This is the situation that permits the greatest flexibility, and therefore allows you the greatest creative financing opportunities. You may finance so creatively in fact, that you don’t even stop at 100%. No you may be talking about financing at 105% or 110% or more!
Here’s yet another little “secret”: Become a licensed real estate broker yourself. You can utilize every single one of these creative financing methods and, at closing, you’ll always be able to walk away with your broker’s commission. Or, at least you’ll be able to put in you pocket whatever amount of that commission you didn’t already use to buy the property. Typically, you can count on putting in your pocket as much as 2% to 3% of the entire purchase price of the property.
METHOD #1: REBATES FROM THE SELLER
This method of taking cash out at closing depends on the amount of the seller’s equity and your ability to procure financing for more than what’s absolutely necessary. You simply work a rebate “deal” with the seller. The following is a good illustration:
Suppose you find a nice two-unit residential property with an agreed selling price of $100,000. The seller’s existing mortgage has an outstanding balance of $35,000, meaning that his equity amounts to almost two-thirds of the property’s market value. You now go to a new lender and procure a 55% mortgage (not an 80% or even 75%). What you’re asking for is $55,000 to finance a $100,000 property. Most lenders will accede to this readily. Furthermore, they should be willing to make you a “no-doc” loan, which means that the lender will believe whatever you put down on your loan application without demanding documented proof. But you will need good credit. Lenders generally make no-doc loans based on your credit report as well as your equity in the property. The lender further believes that, because you’re only asking for a 55% loan, you must therefore already be able to pay the 45% balance price. Hence, you must have $45,000 in equity.
Meanwhile, the rebate deal you work with the seller is this: Once his original mortgage is paid off, you’ll split the cash balance 50-50. In other words, $35,000 of your new $55,000 mortgage pays off his outstanding balance, leaving $20,000 in cash left over. At closing, the seller pockets $10,000 and so do you!
Of course, that isn’t the end of the picture. You will still owe the seller the balance of the purchase price, which is another $55,000. (Price of $100,000 minus $35,000 to pay off existing mortgage minus $10,000 cash to seller at closing leaves a $55,000 balance.) As part of the deal, the seller must agree to finance this $55,000 himself as a second mortgage. If, however, this or any other property cannot support such mortgages as these, which combined equal $110,000, you should refer to the creative financing text discussed earlier for such alternative methods as deferring interest and/or offering to pay a higher interest rate in exchange for a lower purchase price. In this particular case, while it appears on paper that you are paying $110,000 for this property, you’re still purring $10,000 into your own pocket as closing.
As mentioned above, no-doc loans depend on a good credit report. If your own credit history will not satisfy typical no-doc lenders, you may not yet be out of the ball game. You might try seeking a first mortgage loan from a private investor, using the property as collateral, with, again, the seller agreeing to the second mortgage. Consult with various mortgage brokers for example, because you may find that they already represent private investors who are quite often willing to make loans for up to 50% of the collateral value without looking into any credit history whatsoever. (This almost works like a pawn shop for real estate. The value of the goods always exceeds the amount of the loan.) You can even obtain a privately financed loan like this if you’re bankrupt.
Yet another variation on Method #1 would be for the property to be in dire need of repair. The seller might still obtain his $100,000 but with the added stipulation that $10,000 of this price be allocated for repairs. Since the seller is getting out of the business of property ownership, it makes more sense for yo to manage the repairs and, hence, that $10,000 fund for accomplishing them. Thus, the seller would rebate to you his $10,000 at closing as well, and still his original mortgage ($35,000) is paid off and still he receives your $55,000 second mortgage with interest. His “net” at closing is then $90,000, but he’s already agreed to pay for all the needed repairs. Your total cost remains the same, and you still stuff you pockets with $10,000 in cash.
METHOD #2: POSSIBILITIES WITH BANK FORECLOSURES
The following example shows a combination of 2 imaginative funding strategies which could in some cases place money in the purchaser’s pocket in a foreclosure. The first technique (explained elsewhere in the post) includes purchasing bank-foreclosed residential or commercial properties at a discount and also the 2nd technique is referred to as being able to trade equity in one residential or commercial property that you do not also have for yet one more property.
REOs are often required by banks to be disposed of as quickly as possible, so many times you are able to make acceptable offers that will come under such properties’ appraised market values. Always remember that REOs make no money for the bank, they’re actually a burden, and really the only thing the bank wants is to recoup its lost mortgage investment. By acquiring a property in this way — at a price well below market value — you obtain instant equity ( which is the difference between true market value and the price you actually paid). Do you see how this equity “creatively applied” might possibly produce that second technique mentioned above?
Here in the following example is a fuller explanation:
In this case a buyer went to a bank and asked the head loan officer about all the properties whose mortgages had been foreclosed, and then asked him which of those properties the bank would most like to sell. Surprisingly, the loan officer described a tract of vacant land. The bank had originally lent $60,000 in a mortgage on that land and, because if had apparently been “sitting” for a long time following foreclosure, the bank was very eager to recoup its investment. This buyer, who was particularly savvy in the ways of the industry, knew that banks generally have appraisals done on properties upon which they intend to foreclose. The buyer also know that banks typ0ically make vacant land mortgage only up to 50% at most of that land’s appraiser value. He asked the loan officer to show him that appraisal report, which revealed the estimated fair market value for the land was $120,000. (Notice here how vacant land rarely, if ever, is sold for the full amount of its appraised value. One reason is simply — and it’s the scourge of land foreclosure, as the banks all know — because vacant land generally produces no rent or any other income.)
The buyer thanked the loan officer and went on his way. He next consulted with a real estate broker and, using information provided by the Multiple Listing Service, proceeded to make offers to purchase on a number of different properties. And this was his “genius”: he used the full appraised value of that land he didn’t even own (that is, $120,000) as part of his offered payment plan on those properties he was proposing to buy. (The broker, by the way, was only to happy to help him in this because he stood to earn a commission on each MLS property that sold.) So, guess what happened? Two of this buyer’s offers wee accepted! And, because he had built escape clauses into each offer, the buyer was free to go with either one.
This is what he did. He selected to run with the offer he had made on a large, multi-apartment residential building which had an asking price of $260,000. More “genius”: This buyer offered to pay $275,000 if the seller would take that vacant land in trade which was appraised at $120,000. The seller accepted. Further to this deal, the buyer was able to assume the original mortgage which carried an outstanding balance of $115,000. This, plus the land, made a combined payment of $235,000, and the buyer was able to come up with an additional $40,000 in cash to satisfy all terms of the sale. Hence, a purchase made for $275,000 — $120,000 of which the buyer never had to begin with.
How did he manage to come up with the $40,000 in cash, not to mention the money he actually had to pay to the foreclosing bank for that tract of vacant land in the first place? Recall that the bank’s asking price was $60,000 — the amount it needed to recoup its original investment. This meant that the buyer had to come up with a total of $100,000.
The answer is simple: the buyer went to that bank and applied for a second mortgage on the apartment building. He knew that banks will traditionally make mortgage on such good properties for up to 80% of their appraised value. In this case, 80% of the value ($275,000) turns out to be $220,000. As a further note, whenever a bank-hired appraiser is called in, chances are very good that the value he’ll come up with will equal or exceed the amount of the sale contract — as long as it was an “arm’s length” contract to begin with (meaning that neither the buyer nor the seller are related to each other, or are otherwise connected in any meaningful personal or financial way).
With the bank then being willing to lend $220,000, the actual transaction broke down like this: Since the first mortgage of $115,000 was now being assumed by the buyer, all he really needed was the difference, or $105,000 as a second mortgage. With this $105,000, the buyer quite easily paid the bank’s price of $60,000 for the land, $40,000 in additional cash for the building’s seller, and then guess what? He put the remaining $5,000 in his pocket!
Here’s a quick summary of how every party to this transaction actually fared:
- The Seller: of the apartment building sold his property quickly and, amazingly, at a price higher than he was asking. The sales total? $275,000. He passed on his existing mortgage of $115,000 to the buyer. He acquired a tract of vacant land (fully paid for) free and clear, and which was appraised at $120,000. He also put $40,000 in his pocket at closing!
- The Bank: succeeded in recouping its initial loss by disposing of the very property it most wanted to sell, and that the bank itself had had appraised at $120,000. The bank was paid it’s own price of $60,000. It further made a newer, sounder mortgage on a much better income-producing property; or, a $105,000 loan against an appraised value of $275,000, even with an existing mortgage of $115,000 which, both totaled, still doesn’t equal the full appraised value. Hence, it’s a good loan (one that will produce new income for the bank)
- The Buyer: makes out exceptionally well. He now owns the apartment building (one that will produce new income for the buyer), and he bought it without spending any of his own money. He has succeeded in buying an investment property and financing it 100%. Actually, he financed it at 105% because he put $5,000 in his pocket at the closing! His total mortgaged amount is $220,000 which is 80% of the appraised value and would be all he could expect a bank to be willing to lend in the first place. He traded $60,000 in equity in land he didn’t even own as a down payment on a much more valuable property, which is actually worth $260,000. Minus the mount he owes on it, suddenly this buyer has obtained an instant equity of $40,000 in a property he just now bought. The equity plus the $5,000 he put in his pocket has thus netted him a cool $45,000 in profit at the exact moment of closing — and not one nickel of his own money did he have to invest in order to attain that level of profit.
- The True Net Result: is a win-win-win situation for everybody!
This is indeed an excellent example of not only how to realize cash at closing, but also how to combine more than one creative financing method in order to do it.
One other amazing fact associated with this example? The entire process — from asking the loan officer about the bank’s REOs to the day of closing — was accomplished with six weeks. This illustrates, once again, that making big money in real estate can be done fairly quickly and without being rich to start with. You don’t need any money at all to begin. In fact, with real estate you really can make something out of nothing!