It seems that many times something that is a bad situation for some, creates a situation that is good for others. Case in point: Today’s housing market is really bad in many areas of the country for people who would like to sell their homes. Also, many in these bad market areas are in danger of losing their homes because they are having difficulty in making the mortgage payments. The lease with an option to purchase can be a Win-Win situation for both home owner (seller) and buyer or entrepreneur.
Let’s build a hypothetical situation wherein you are in Las Vegas, Nevada. I hear the housing market there is pretty bad. You buy the local newspaper, pick up a free “Thrifty Nickle” and another freebie classifieds. You go to Starbucks, get yourself an Americana, and settle down to a table with your drink, cell phone & classifieds, and start “Dialing For Dollars”. You look for ads in the Homes for Sale by Owner, and look for ads that seem to be urgent. For example: “Owner Desperate”; “No Money Down, Take Over Payments”; “Rent To Own”; “Must Sell”; etc.
You locate a home which the owner has been unable to sell. He must move to Dallas for a new job and he doesn’t want to have two mortgage payments so he is willing to rent. The owner values the home at $125,000 with an existing, non-assumable mortgage of $120,000. Monthly payments are $900.00 (including taxes and insurance). You offer a three year contract to lease the house at $900.00 per month with an Option to Buy for $120,000. You require the right to assign the lease (or sub-lease) and the option to purchase to a third party. You agree to pay $1,000 as option money to include the first month’s rent. Your offer is subject to you finding that third party prior to closing. This will give you a simultaneous closing on both deals which means you won’t have to come out of pocket to close.
Now your marketing begins. You put up bandit signs all over town offering “Rent To Own” and run the following ad in the papers: “Rent To Own Your Future Home. $1,000 per month with 100% rent credit for one year. NO QUALIFYING, Upscale neighborhood – 3 bedroom, 2 bath – Call 433-2424 for details.” Your phone rings off the hook! You find a couple, Mr. & Mrs. Smith, who want to move in right away. Their credit is not too good due to Mr. Smith being laid-off from a previous job. He’s solidly employed now and they anticipate that they can improve their credit situation in a couple of years enabling them to qualify for a bank loan. Your terms are $4,000 Option Money including first month’s rent. They have a two year Option to Buy for $135,000 with rent at $1,000 per month. Full rent credit for one year ($12,000). They have only $2,000 to put down now, so you take a Note for $2,000 payable at $100.00 per month.
THE PROFIT: $1,000 cash now, $100 per month for 20 months with Option Note, $100 per month in lease difference, and $3,000 if they exercise their Option. This kind of deal can be done over and over, in any part of the country and in many cases for MUCH MORE PROFIT.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, July 30, 2010
More On Investing In Mortgages, Trust Deeds, or Contracts
How much money do I need as an investor to buy mortgages? This, of course, can vary; and you can probably find investments available as low as $15,000 to $20,000; however, more likely there are plenty available under $50,000.
How do we find opportunities to invest in mortgages? You can advertise in your local newspaper or look up Note Brokers, of which there are plenty to choose from. I suggest that you interview Note Brokers until you find one you are comfortable with and have him (or her) find mortgages for you to invest in.
The Note Broker should know how to protect your interest and ensure that all the “due diligence” (previously discussed) is performed. Question him prior to buying any notes through him, and then check his work.
Let’s talk a little bit about Risk -vs- Yield. Further, in looking at Risk -vs- Yield, how is that affected by the type of mortgage investing one does – Direct Lending or Buying existing loans?
Direct Lending - is usually safer than buying existing notes because the lender has more control, such as requiring credit information on the borrower and requiring a thorough appraisal of the property. In addition, there are numerous licensed Mortgage Brokers who specialize in Private Money Lending. These people can help the lender locate people who want to borrow money.
Mortgage Brokers can be of great assistance in the due diligence phase, however, they do charge a fee which is usually called points. One percent of the loan amount would be one point. Some Mortgage Brokers tend to get a little greedy and may charge “excessive” points. The points charged are negotiable and the borrower pays the points. Normally the borrower pays ALL costs to make the loan: points, escrow fees, Title insurance, appraisals, document preparation fees, etc.
The advantages over other investments (Stocks for example) is that the investor has something TANGIBLE as security. One very important thing that a Mortgage Investor MUST keep foremost in mind is this: anytime the investor makes a loan or buys an existing loan, there is a possibility that the investor may end up OWNING the property which is the security for the loan.
Here is the CRUCIAL QUESTION: If that happens, can the investor recover the money he has invested? If the answer is “no” – then the investor should NOT MAKE THE INVESTMENT. This means that the investor needs to know how the reasonable market for Real Estate in the area where the security property is located. Obviously, if the investor has to foreclose on the security property, he will then have to re-sell the property to recover his investment. There might be repairs to be made or other improvements done to make the property marketable.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
How do we find opportunities to invest in mortgages? You can advertise in your local newspaper or look up Note Brokers, of which there are plenty to choose from. I suggest that you interview Note Brokers until you find one you are comfortable with and have him (or her) find mortgages for you to invest in.
The Note Broker should know how to protect your interest and ensure that all the “due diligence” (previously discussed) is performed. Question him prior to buying any notes through him, and then check his work.
Let’s talk a little bit about Risk -vs- Yield. Further, in looking at Risk -vs- Yield, how is that affected by the type of mortgage investing one does – Direct Lending or Buying existing loans?
Direct Lending - is usually safer than buying existing notes because the lender has more control, such as requiring credit information on the borrower and requiring a thorough appraisal of the property. In addition, there are numerous licensed Mortgage Brokers who specialize in Private Money Lending. These people can help the lender locate people who want to borrow money.
Mortgage Brokers can be of great assistance in the due diligence phase, however, they do charge a fee which is usually called points. One percent of the loan amount would be one point. Some Mortgage Brokers tend to get a little greedy and may charge “excessive” points. The points charged are negotiable and the borrower pays the points. Normally the borrower pays ALL costs to make the loan: points, escrow fees, Title insurance, appraisals, document preparation fees, etc.
The advantages over other investments (Stocks for example) is that the investor has something TANGIBLE as security. One very important thing that a Mortgage Investor MUST keep foremost in mind is this: anytime the investor makes a loan or buys an existing loan, there is a possibility that the investor may end up OWNING the property which is the security for the loan.
Here is the CRUCIAL QUESTION: If that happens, can the investor recover the money he has invested? If the answer is “no” – then the investor should NOT MAKE THE INVESTMENT. This means that the investor needs to know how the reasonable market for Real Estate in the area where the security property is located. Obviously, if the investor has to foreclose on the security property, he will then have to re-sell the property to recover his investment. There might be repairs to be made or other improvements done to make the property marketable.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, July 27, 2010
Investing in Mortgages, Trust Deeds, or Contracts
It is not difficult. It’s just you loaning your money to another party. The loan is secured by a Mortgage, Trust Deed or Contract, on Real Estate. There are different ways you can invest in these loans. You can make the loan yourself to another party or you can buy an existing loan. There are several different names for these security instruments, and they are structured differently as well. Let’s briefly examine some of them. Mortgages and Trust Deeds are the documents securing the loan on the Real Estate. These documents are recorded showing the evidence of debt. There is one significant difference between the two. With the Trust Deed there is a separate note which is not recorded. With Mortgages and Trust Deeds, the borrower owns and has a deed to the Real Estate.
There are other debt instruments which have different names (depending on what part of the country you are in). They may be called Contracts For Deed, Agreement For Sale, Land Contract, or perhaps other names I am not familiar with.
The significant difference between these instruments and Mortgage and Trust Deeds is that the borrower DOES NOT have a deed to the Real Estate until the loan is paid off. The lender holds the title to the property and when the loan is paid, the lender deeds the property to the borrower. Sometimes these instruments are recorded but most often probably not.
In our subsequent discussions, to keep it simple, let’s just refer to all these debt instruments as mortgages. Investing in mortgages can be very lucrative with yields (return on your investment) that can range anywhere from 10% to 18% (more or less). Obviously the greater yields will normally go along with greater risk. However, if the investor is prudent and does proper “due diligence”, I can’t think of any investment today which offers a better and more predictable return.
Now, let’s talk about that “due diligence”. With investing in mortgages as with any investment, there are some risks. However, these risks can be minimized if the investor takes prudent precautionary measures. So, lets discuss the preliminary steps to take to substantially reduce the risk.
1. Be sure you get Title Insurance -normally paid by the borrower if you are making a direct loan or by the mortgage seller if you are buying a loan; however, this is negotiable.
2. Have an independent Escrow company, Title company or an attorney prepare the correct documents to ensure that the necessary documents are recorded in your name.
3. It is a good idea to have the property securing the loan appraised unless you as the investor are knowledgeable enough to know that you have adequate security and equity above the loan.
4. If it is an improved property (has buildings on it – not just land) insist on Fire insurance on the property.
Look for the continuation of this article in next week’s Paper Chase section of Jack’s blog www.realestatejack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
There are other debt instruments which have different names (depending on what part of the country you are in). They may be called Contracts For Deed, Agreement For Sale, Land Contract, or perhaps other names I am not familiar with.
The significant difference between these instruments and Mortgage and Trust Deeds is that the borrower DOES NOT have a deed to the Real Estate until the loan is paid off. The lender holds the title to the property and when the loan is paid, the lender deeds the property to the borrower. Sometimes these instruments are recorded but most often probably not.
In our subsequent discussions, to keep it simple, let’s just refer to all these debt instruments as mortgages. Investing in mortgages can be very lucrative with yields (return on your investment) that can range anywhere from 10% to 18% (more or less). Obviously the greater yields will normally go along with greater risk. However, if the investor is prudent and does proper “due diligence”, I can’t think of any investment today which offers a better and more predictable return.
Now, let’s talk about that “due diligence”. With investing in mortgages as with any investment, there are some risks. However, these risks can be minimized if the investor takes prudent precautionary measures. So, lets discuss the preliminary steps to take to substantially reduce the risk.
1. Be sure you get Title Insurance -normally paid by the borrower if you are making a direct loan or by the mortgage seller if you are buying a loan; however, this is negotiable.
2. Have an independent Escrow company, Title company or an attorney prepare the correct documents to ensure that the necessary documents are recorded in your name.
3. It is a good idea to have the property securing the loan appraised unless you as the investor are knowledgeable enough to know that you have adequate security and equity above the loan.
4. If it is an improved property (has buildings on it – not just land) insist on Fire insurance on the property.
Look for the continuation of this article in next week’s Paper Chase section of Jack’s blog www.realestatejack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Monday, July 26, 2010
Paper Magic
Next To Cash (and sometimes BETTER than cash), paper (Mortgages, Notes, Deeds of Trust, Land Contracts, etc.) is the most flexible negotiation instrument in the buying and selling of Real Estate. In our last discussion I stated that the creation of paper (wherein a seller finances the property purchase for the buyer by taking back a mortgage) seemed to benefit the buyer more than the seller, but this type of transaction can greatly benefit the seller also.
Example: Seller owns a property that just can’t seem to get sold. Maybe just because of the slow market or because it’s unfinanceable by an institutional lender because it’s land, mobile home & land, and any number of other reasons.
There is a very viable market for Seller-Finance paper. There are many investors, to include banks and other entities (pension funds, private investors, etc.) who buy paper on a regular basis. There are a multitude of brokers who are eager to help an owner sell this paper. In addition there are many buyers & brokers who advertise on the Internet.
In order to have “Salable” paper, the seller of the property shouldn’t accept just any buyer. I would suggest requiring an application outlining employment, etc. Also, I recommend a fair amount down payment – 5% to 10% (the more, the better) – Then, I would require a credit report on the potential buyer. Things I look for is their past pay history on home loan payments or rent and car loan payments. I have found that people who have a good history of paying their housing cost & car payments will probably make the payments on a mortgage secured by their new purchase.
Paper also makes a good investment to put in ones 401K or other Retirement Program. In fact, you can have your 401K purchase paper. We will discuss this more of this later.
The seller can also use the paper to purchase other Real Estate with. I have purchased a lot of Real Estate with paper; buying the real estate at face value of the paper, which I purchased at substantial discount. This builds an immediate profit in the property being acquired.
More on Paper Magic to come - We haven’t even scratched the surface yet!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Example: Seller owns a property that just can’t seem to get sold. Maybe just because of the slow market or because it’s unfinanceable by an institutional lender because it’s land, mobile home & land, and any number of other reasons.
There is a very viable market for Seller-Finance paper. There are many investors, to include banks and other entities (pension funds, private investors, etc.) who buy paper on a regular basis. There are a multitude of brokers who are eager to help an owner sell this paper. In addition there are many buyers & brokers who advertise on the Internet.
In order to have “Salable” paper, the seller of the property shouldn’t accept just any buyer. I would suggest requiring an application outlining employment, etc. Also, I recommend a fair amount down payment – 5% to 10% (the more, the better) – Then, I would require a credit report on the potential buyer. Things I look for is their past pay history on home loan payments or rent and car loan payments. I have found that people who have a good history of paying their housing cost & car payments will probably make the payments on a mortgage secured by their new purchase.
Paper also makes a good investment to put in ones 401K or other Retirement Program. In fact, you can have your 401K purchase paper. We will discuss this more of this later.
The seller can also use the paper to purchase other Real Estate with. I have purchased a lot of Real Estate with paper; buying the real estate at face value of the paper, which I purchased at substantial discount. This builds an immediate profit in the property being acquired.
More on Paper Magic to come - We haven’t even scratched the surface yet!
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Everybody Uses Options!
Well, almost everybody. All of the following are Options:
1. Putting down a deposit for a seller to hold something for you that you can buy later. Example: You put down a $500.00 deposit for the dealer to hold a car you really like for 60 days, giving you time to arrange financing or come up with the balance of the purchase price. If you do not come up with the purchase price in 60 days – the dealer may keep your deposit (the option money).
2. What about the Real Estate Buy – Sell agreement? The buyer USUALLY puts up some “earnest money” – say $1,000 – with the agreement to close on the purchase in 45 days. This is an option. The purchaser could lose his earnest money if he fails to complete the purchase.
3. A developer finds a piece of land he would like to develop into a subdivision, however, there is much he needs to know before he buys the land – Example: Zoning requirement; environmental impact; availability of utilities; drainage problems, etc. Let’s say the asking price of the land is $200,000. The developer negotiates an option wherein he agrees tp purchase the land in 90 days (or less) for $10,000.00 option money. Also, he might agree that in the event he does not buy the land, he will give the seller all of the pre-development work the developer had done.
This is a good deal for both parties.
a) The developer does not have to put up the $200,000, then find out later he can’t use the land or he just wants to back out.
b) The seller receives $10,000 now and maybe the balance later and if the sale doesn’t close, he keeps the $10,000, plus he now has valuable information regarding the land use.
Let’s go a step further – Let’s say that the sale has not closed and another party comes along who really wants the land. Let’s say he is willing to pay $250,000 for the land.
Can the owner of the land give the $10,000 back to the developer and sell to the new 3rd party? NO WAY! HOWEVER, CHECK THIS OUT! The developer can sell his option to the new party for whatever he can get, for example $60,000.00 – Not a bad profit within less than 90 days.
Many fortunes have been made by investors buying options, then selling the option to other parties.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
1. Putting down a deposit for a seller to hold something for you that you can buy later. Example: You put down a $500.00 deposit for the dealer to hold a car you really like for 60 days, giving you time to arrange financing or come up with the balance of the purchase price. If you do not come up with the purchase price in 60 days – the dealer may keep your deposit (the option money).
2. What about the Real Estate Buy – Sell agreement? The buyer USUALLY puts up some “earnest money” – say $1,000 – with the agreement to close on the purchase in 45 days. This is an option. The purchaser could lose his earnest money if he fails to complete the purchase.
3. A developer finds a piece of land he would like to develop into a subdivision, however, there is much he needs to know before he buys the land – Example: Zoning requirement; environmental impact; availability of utilities; drainage problems, etc. Let’s say the asking price of the land is $200,000. The developer negotiates an option wherein he agrees tp purchase the land in 90 days (or less) for $10,000.00 option money. Also, he might agree that in the event he does not buy the land, he will give the seller all of the pre-development work the developer had done.
This is a good deal for both parties.
a) The developer does not have to put up the $200,000, then find out later he can’t use the land or he just wants to back out.
b) The seller receives $10,000 now and maybe the balance later and if the sale doesn’t close, he keeps the $10,000, plus he now has valuable information regarding the land use.
Let’s go a step further – Let’s say that the sale has not closed and another party comes along who really wants the land. Let’s say he is willing to pay $250,000 for the land.
Can the owner of the land give the $10,000 back to the developer and sell to the new 3rd party? NO WAY! HOWEVER, CHECK THIS OUT! The developer can sell his option to the new party for whatever he can get, for example $60,000.00 – Not a bad profit within less than 90 days.
Many fortunes have been made by investors buying options, then selling the option to other parties.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, July 23, 2010
Are All Mortgage Brokers The Same?
Absolutely Not ! The traditional Mortgage Broker locates borrowers for Institutional Lenders. This would include Banks, Savings & Loans, Credit Unions, and Mortgage Companies like Prudential or Country Wide, and a host of others. These brokers primarily are able to help qualified buyers to buy homes and other properties. In our previous (and future hopefully) posts have discussed Private Loans, Notes, Trust Deeds, etc. In our last post we discussed whether you, as an investor who desired to make Private Loans or buy existing such loans, should use the services of a Mortgage Broker who specializes in these kinds of loans. Our recommendation was, and is, that unless you are a VERY experienced investor who has made these loans direct to private borrowers, that you consider using the services of a Mortgage Broker.
If you do decide to use a broker, we recommend you check the broker out. You should find out what types of borrowers they have been brokering loans to. How long they have been doing it, and ask for referrals of other investors, or maybe from Title Companies or Attorneys where they close their loans through. Also, have the broker walk you through a typical, and maybe some unusual, loans they have brokered.
Many of these same brokers can assist the investor who wants to buy existing Private Loans. These type of purchases usually can produce even greater yields, posibley as high as 14% – 16% or even higher. Remember high yields usually come with high risks. A good question investors should ask themselves is, “If I have to foreclose on the property that this loan is secured by, can I get my investment back?”
Be aware that some Private Money Mortgage Companies may be simply a front to raise funds for their own use to buy other mortgages or make loans. There is nothing wrong with this as long as full disclosure is made to the investor. A good question when dealing with a Mortgage Broker or company is, “Am I loaning this money to your company; some entity your company is connected to, or am I loaning it to a third party?”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
If you do decide to use a broker, we recommend you check the broker out. You should find out what types of borrowers they have been brokering loans to. How long they have been doing it, and ask for referrals of other investors, or maybe from Title Companies or Attorneys where they close their loans through. Also, have the broker walk you through a typical, and maybe some unusual, loans they have brokered.
Many of these same brokers can assist the investor who wants to buy existing Private Loans. These type of purchases usually can produce even greater yields, posibley as high as 14% – 16% or even higher. Remember high yields usually come with high risks. A good question investors should ask themselves is, “If I have to foreclose on the property that this loan is secured by, can I get my investment back?”
Be aware that some Private Money Mortgage Companies may be simply a front to raise funds for their own use to buy other mortgages or make loans. There is nothing wrong with this as long as full disclosure is made to the investor. A good question when dealing with a Mortgage Broker or company is, “Am I loaning this money to your company; some entity your company is connected to, or am I loaning it to a third party?”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, July 20, 2010
Powerful Option
“Introduction To Options”: The least expensive and most powerful way, that I know of, to control a property without fully paying for it is to use an option. What is an option? An option is a unilateral agreement between two (or possibly more) parties wherein the OPTIONOR (the owner/seller of the property that is the subject of the option) has agreed to sell the property with a certain price and terms, to the OPTIONEE (the prospective buyer of the property) as some time in the future.
In the typical option agreement, the OPTIONOR (seller) is obligated to sell the property with the agreed price and terms; however, the OPTIONEE (buyer) is not obligated to buy. This is why the option is referred to as a unilateral agreement.
During the time period from the date of the option to the agreed upon time for the option to be exercised (the buyer completes the purchase of the property) the OPTIONOR (seller) can’t sell the property to another party, even though he may be offered a higher price.
Why would an owner/seller of a property agree to an option? There are many reasons why. Here are a few:
1. The owner has had no other interest by prospective buyers.
2. The owner does not want a sale at this time for tax reasons.
3. The owner does not have to pay taxes on the option payment from the prospective buyer until the option is either exercised or forfeited.
4. In many cases, the prospective buyer, with permission of the owner, will add value to the property by conducting research fro development or use. If the option is not exercised, this benefit will revert to the owner.
5. The owner may need the option payment to pay other expenses; taxes due on the property, for example.
By using options you can control huge assets with little risk. In addition, you can sell your option to another party. This, in my opinion, is a better way to go than “Flipping” (buying the property from one party and immediately selling to another party). Instead, a better way is to buy an option on the property and sell the option. If you own an option, you can sell it at any price you can get. What you sell it for has nothing to do with what you paid for it. More on options later.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
In the typical option agreement, the OPTIONOR (seller) is obligated to sell the property with the agreed price and terms; however, the OPTIONEE (buyer) is not obligated to buy. This is why the option is referred to as a unilateral agreement.
During the time period from the date of the option to the agreed upon time for the option to be exercised (the buyer completes the purchase of the property) the OPTIONOR (seller) can’t sell the property to another party, even though he may be offered a higher price.
Why would an owner/seller of a property agree to an option? There are many reasons why. Here are a few:
1. The owner has had no other interest by prospective buyers.
2. The owner does not want a sale at this time for tax reasons.
3. The owner does not have to pay taxes on the option payment from the prospective buyer until the option is either exercised or forfeited.
4. In many cases, the prospective buyer, with permission of the owner, will add value to the property by conducting research fro development or use. If the option is not exercised, this benefit will revert to the owner.
5. The owner may need the option payment to pay other expenses; taxes due on the property, for example.
By using options you can control huge assets with little risk. In addition, you can sell your option to another party. This, in my opinion, is a better way to go than “Flipping” (buying the property from one party and immediately selling to another party). Instead, a better way is to buy an option on the property and sell the option. If you own an option, you can sell it at any price you can get. What you sell it for has nothing to do with what you paid for it. More on options later.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Want To Buy Real Estate But Short On Cash?
Contrary to what many people think, there are MANY ways to buy Real Estate without either having the cash necessary to buy or borrowing from the bank. In order to accomplish this type of purchase the buyer must think “Outside The Box”, or to use an overworked term employ Creative Real Estate Techniques. In most cases the motivation of the Owner/Seller will determine their being receptive to offers to purchase with little or no cash being part of the deal. As situations change in people’s personal and business lives, their motivation to do many things also change.
To quote from an old mentor of mine, Richard Reno, “Properties don’t have problems, people do.” This being the case, if you can solve a problem for someone, you can probably deal with them. As stated in the “Paper Chase” section, these initial strategies may be very basic to some of the readers, but not to others. I can assure they will be much more interesting as we progress. I personally learn best from examples of how something works. Therefore; I will use that method to illustrate ways to acquire real estate other than with cash down.
Finance One Property With Another Situation: Jones wants to buy Smith’s house priced at $100,000 but has no cash except for closing. Jones also owns a free & clear lot which has a value of $15,000.
Possible Solutions:
Jones gives Smith his lot as a down payment and Smith finances the balance.
Jones creates a note on his lot for $10,000 and gives the note to Smith as down payment.
Jones sells his lot discounted to $10,000 cash to a builder then uses cash as down payment on Smith’s house.
Jones creates a note on his lot for $12,000 then sells the note to a note buyer/investor, discounted to $10,000.
Jones uses cash as down payment on Smith’s house.
Comment: This same formula can be used with personal property. For example: Jones may have a car, boat, airplane, etc. which he could give Smith as down payment or create a note on the personal property and use the note as down payment.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
To quote from an old mentor of mine, Richard Reno, “Properties don’t have problems, people do.” This being the case, if you can solve a problem for someone, you can probably deal with them. As stated in the “Paper Chase” section, these initial strategies may be very basic to some of the readers, but not to others. I can assure they will be much more interesting as we progress. I personally learn best from examples of how something works. Therefore; I will use that method to illustrate ways to acquire real estate other than with cash down.
Finance One Property With Another Situation: Jones wants to buy Smith’s house priced at $100,000 but has no cash except for closing. Jones also owns a free & clear lot which has a value of $15,000.
Possible Solutions:
Jones gives Smith his lot as a down payment and Smith finances the balance.
Jones creates a note on his lot for $10,000 and gives the note to Smith as down payment.
Jones sells his lot discounted to $10,000 cash to a builder then uses cash as down payment on Smith’s house.
Jones creates a note on his lot for $12,000 then sells the note to a note buyer/investor, discounted to $10,000.
Jones uses cash as down payment on Smith’s house.
Comment: This same formula can be used with personal property. For example: Jones may have a car, boat, airplane, etc. which he could give Smith as down payment or create a note on the personal property and use the note as down payment.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Private Mortgages
PRIVATE MORTGAGES: These are debt instruments that are created when a seller sells a real estate property to a buyer and finances the property for the buyer. Example: Mr. Jones sells a house to Mr. & Mrs. Smith for $100,000. Mr. Jones agrees to accept $10,000 cash as a down payment and to carry back a note or mortgage for $90,000 payable at $789.81 per month for thirty years. The debt instruments may be in many different forms and have different names depending primarily in what part of the country the transaction takes place. Some of the various names include: Mortgage, Note & Deed of Trust, Land Contract, Agreement of Sale, Contract for Deed, etc. They all have one thing in common. That is, they are created when a seller sells a real estate property and finances it for the buyer. This is commonly called Seller Financing.
Now I know that this very basic information for many of you reading this; however, for others it is not. We are going to discuss here and in the future, advantages to both seller and buyer in the use of Seller Financing.
First off, there are numerous reasons why sellers would be willing to sell their property using Seller Financing, such as:
Property has been on the market a long time with no buyers.
Property may be un-financible by a lending institution such as a bank. Why? – It could be:
Land – hard to get banks to loan on land
Mobile Homes on land
Property in improper zoning area.
Poor condition of property etc., etc.
The seller may not want to receive all cash for tax reasons etc. etc.
Secondly, the buyers may have any number of reasons why they would prefer Seller Financing, such as:
Buyers may have some glitches on their credit and can’t get bank financing.
Buyers may be self-employed and have trouble getting financing.
Buyers may desire for many other reasons not to use bank financing.
I would say, all in all, the advantages here may appear to be in favor of the buyer; however, as we progress in our discussion, I think you will see many advantages and benefits for the seller as well.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice.
If such advice is required or desired, the services of competent professional persons should be sought.
Now I know that this very basic information for many of you reading this; however, for others it is not. We are going to discuss here and in the future, advantages to both seller and buyer in the use of Seller Financing.
First off, there are numerous reasons why sellers would be willing to sell their property using Seller Financing, such as:
Property has been on the market a long time with no buyers.
Property may be un-financible by a lending institution such as a bank. Why? – It could be:
Land – hard to get banks to loan on land
Mobile Homes on land
Property in improper zoning area.
Poor condition of property etc., etc.
The seller may not want to receive all cash for tax reasons etc. etc.
Secondly, the buyers may have any number of reasons why they would prefer Seller Financing, such as:
Buyers may have some glitches on their credit and can’t get bank financing.
Buyers may be self-employed and have trouble getting financing.
Buyers may desire for many other reasons not to use bank financing.
I would say, all in all, the advantages here may appear to be in favor of the buyer; however, as we progress in our discussion, I think you will see many advantages and benefits for the seller as well.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice.
If such advice is required or desired, the services of competent professional persons should be sought.
Using A Mortgage Broker To Buy Loans
There are many investors who make loans to private individuals or companies. These loans, more often than not, are at a significantly greater interest rate than a bank would charge. Sometimes these loans are referred to as “Hard Money” loans. Although the interest is usually higher, so is the risk. Most people who are seeking these type loans either can’t qualify to borrow from an Institutional Lender, or in many cases, the property being used as collateral would not be accepted by a “regular” lender.
Case in point, and in my experience; Many of these loans are made to borrowers who are “rehabbing” a house or other property, commercial building, mobile home, etc. If the investors are prudent, they can receive much better yields on their money compared to buying CD’s, Bonds, and other so-called “Safe” investments.
In my opinion the greatest risk for the investor is finding a reliable borrower who will pay back the loan. The woods are full of frauds out there who can talk pretty slick, even sell vinyl siding to people with brick homes. For example, we loaned funds to an individual to buy and rehab a very nice old house in an historical district of San Antonio. The borrower then went to other people and solicited two more loans from private parties, secured by the same property. Apparently these other parties did not check the Title situation on the property.
The borrower defaulted on our loan so we foreclosed. The other two lenders got wiped out. We heard later that this “Slick” operator did this on several other properties. I have written in my Blog before about doing your due dilligence if you are going to make these type loans.
Now, I have another thought for you. You might want to consider using a Mortgage Broker to assist you in not only finding better quality borrowers but also helping you do the due diligence. There are Mortgage Brokers who specialize in brokering these kind of loans. Also, very often they already know of existing loans that you can buy at discount to give you a greater yield. In this capacity my company has brokered or sold thousands of loans to investors.
Now, if you want to use a broker to lessen your risk, you should check-out the broker before you use him/her. You could check the Better Business Bureau and so forth; however, I would check with Title companies or Attorneys who have closed loans in the past for investors. They will know who is active and who brokers many loans. They can recommend someone to you that they have had good experience with. We have received many referrals from attorneys, bankers and Title people. One point to remember; using a broker should NOT cost you any fees. Usually the broker is paid by the borrowers, just like with traditional Lenders.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Case in point, and in my experience; Many of these loans are made to borrowers who are “rehabbing” a house or other property, commercial building, mobile home, etc. If the investors are prudent, they can receive much better yields on their money compared to buying CD’s, Bonds, and other so-called “Safe” investments.
In my opinion the greatest risk for the investor is finding a reliable borrower who will pay back the loan. The woods are full of frauds out there who can talk pretty slick, even sell vinyl siding to people with brick homes. For example, we loaned funds to an individual to buy and rehab a very nice old house in an historical district of San Antonio. The borrower then went to other people and solicited two more loans from private parties, secured by the same property. Apparently these other parties did not check the Title situation on the property.
The borrower defaulted on our loan so we foreclosed. The other two lenders got wiped out. We heard later that this “Slick” operator did this on several other properties. I have written in my Blog before about doing your due dilligence if you are going to make these type loans.
Now, I have another thought for you. You might want to consider using a Mortgage Broker to assist you in not only finding better quality borrowers but also helping you do the due diligence. There are Mortgage Brokers who specialize in brokering these kind of loans. Also, very often they already know of existing loans that you can buy at discount to give you a greater yield. In this capacity my company has brokered or sold thousands of loans to investors.
Now, if you want to use a broker to lessen your risk, you should check-out the broker before you use him/her. You could check the Better Business Bureau and so forth; however, I would check with Title companies or Attorneys who have closed loans in the past for investors. They will know who is active and who brokers many loans. They can recommend someone to you that they have had good experience with. We have received many referrals from attorneys, bankers and Title people. One point to remember; using a broker should NOT cost you any fees. Usually the broker is paid by the borrowers, just like with traditional Lenders.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Monday, July 19, 2010
Rolling Option - Part II
In the last post we talked about a Land Developer tying up and controlling a 640 acre parcel of land that he wanted to develop over time. However, he could only afford to develop 40 acres initially and the seller would not finance the land. So, they worked a deal beneficial to both wherein the developer would take down the first 40 acres and have an Option to purchase the remaining land in 40 acre parcels or larger, over time.Let’s look at another example of how this concept could be used on a smaller scale.
Let’s say that Mr. Charles, an experienced Home Builder, wants to build some Spec houses and needs lots on which to build them. He has funds to build the first house, but can’t buy several lots at the same time. Mr. Charles, through a realtor, locates a Mr. Apple who owns 20 lots in a Residential Subdivision. As in our other example, Mr. Apple wants to cash out of the lots, but is in no great hurry to do so. He also doesn’t want to finance the lots to a builder who is building Spec houses. The builder could go broke and leave the lots tied up in legal actions.
The Realtor, who had been to an Option Seminar, proposed the following solution:
1. Mr. Charles will purchase an Option To Buy the 20 lots. The Option terms allows him to take down lots one or
more at a time by paying cash for the ones taken down.
2. Mr. Charles will pay cash for the first lot. This allows him to do all the things necessary (permits, site work, etc.)
and build his first house. With the return of his funds plus profits from the sale of the first house, he can buy
the next one or more lots.
3. This allows Mr. Charles to “Roll” through all 20 lots over a period of time which he can afford to do.
4. Mr. Apple gets cashed out of his lots and does not have to worry about the builder being successful.
5. In the event the builder does not complete the purchase, the remaining lots should be more valuable.
6. Mr. Apple will only have to pay income taxes on the funds as he receives them and not on the entire
proceeds from all 20 lots at one time.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Let’s say that Mr. Charles, an experienced Home Builder, wants to build some Spec houses and needs lots on which to build them. He has funds to build the first house, but can’t buy several lots at the same time. Mr. Charles, through a realtor, locates a Mr. Apple who owns 20 lots in a Residential Subdivision. As in our other example, Mr. Apple wants to cash out of the lots, but is in no great hurry to do so. He also doesn’t want to finance the lots to a builder who is building Spec houses. The builder could go broke and leave the lots tied up in legal actions.
The Realtor, who had been to an Option Seminar, proposed the following solution:
1. Mr. Charles will purchase an Option To Buy the 20 lots. The Option terms allows him to take down lots one or
more at a time by paying cash for the ones taken down.
2. Mr. Charles will pay cash for the first lot. This allows him to do all the things necessary (permits, site work, etc.)
and build his first house. With the return of his funds plus profits from the sale of the first house, he can buy
the next one or more lots.
3. This allows Mr. Charles to “Roll” through all 20 lots over a period of time which he can afford to do.
4. Mr. Apple gets cashed out of his lots and does not have to worry about the builder being successful.
5. In the event the builder does not complete the purchase, the remaining lots should be more valuable.
6. Mr. Apple will only have to pay income taxes on the funds as he receives them and not on the entire
proceeds from all 20 lots at one time.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, July 16, 2010
Realtors - Sowing The Seeds
We will pick-up the story where the Johnsons closed on the home found for them by realtor Jane. Jane knew that her company, the “We Treat ‘Em Right” Realty’s policy was to send a free door knocker and a company Thank You letter signed by a company officer to new purchasers of homes. But, Jane recently attended a seminar that focused on developing a “Client” base rather than a history of one-time customers. The seminar was called “Building Your Farm”.
Jane made sure that she had the following information from the Johnsons prior to the closing:
*Birth dates of Mr. & Mrs. Johnson and their two children, plus their children’s ages.
*Wedding Anniversary date for the Johnsons
*Date of move-in at new home. If this is unknown at closing, Jane will stay in frequent contact to be sure she has the move-in date.
A few days after the closing, Jane sent a PERSONAL card, handwritten to the Johnsons thanking them for hiring her to assist in the purchase of their new home.
On move-in day, in the midst of boxes, furniture, and sweat, Jane shows up at the new home with a hot meal and cold drinks for the Johnsons in front of their new home among the chaos.
During the following years Jane diligently did the following:
*Sent a personal, handwritten card on each of the Johnson’s birthdays, including the children.
*Sent Mr. & Mrs. Johnson a personal, handwritten card on their Wedding Anniversary and maybe a small gift.
*Sent the Johnsons a personal, handwritten card on the Anniversary of their move-in date in their home. Included with the card Jane sent the picture she took of the Johnsons on move-in day.
*Periodically sent a copy of any news or articles she thought the Johnsons might be interested in concerning the local real estate, neighborhood news, etc.
Two years later Mr. Johnson gets transferred and must sell their home. Which realtor are they going to hire to help them sell their home? In the meantime, Jane has shown the same caring and staying in touch with the Smiths, who are now also sending Jane referrals.
How much longer do you think Jane will be pulling floor duty and looking for new prospects? In fact, Jane now has to have a team of assistants to help her keep up with the referral business. She knows the true meaning of “Building Your Farm”.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Jane made sure that she had the following information from the Johnsons prior to the closing:
*Birth dates of Mr. & Mrs. Johnson and their two children, plus their children’s ages.
*Wedding Anniversary date for the Johnsons
*Date of move-in at new home. If this is unknown at closing, Jane will stay in frequent contact to be sure she has the move-in date.
A few days after the closing, Jane sent a PERSONAL card, handwritten to the Johnsons thanking them for hiring her to assist in the purchase of their new home.
On move-in day, in the midst of boxes, furniture, and sweat, Jane shows up at the new home with a hot meal and cold drinks for the Johnsons in front of their new home among the chaos.
During the following years Jane diligently did the following:
*Sent a personal, handwritten card on each of the Johnson’s birthdays, including the children.
*Sent Mr. & Mrs. Johnson a personal, handwritten card on their Wedding Anniversary and maybe a small gift.
*Sent the Johnsons a personal, handwritten card on the Anniversary of their move-in date in their home. Included with the card Jane sent the picture she took of the Johnsons on move-in day.
*Periodically sent a copy of any news or articles she thought the Johnsons might be interested in concerning the local real estate, neighborhood news, etc.
Two years later Mr. Johnson gets transferred and must sell their home. Which realtor are they going to hire to help them sell their home? In the meantime, Jane has shown the same caring and staying in touch with the Smiths, who are now also sending Jane referrals.
How much longer do you think Jane will be pulling floor duty and looking for new prospects? In fact, Jane now has to have a team of assistants to help her keep up with the referral business. She knows the true meaning of “Building Your Farm”.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Realtors - Building Your Farm
Typical Situation: Mr. & Mrs. Johnson are moving into your area. You are a fairly new realtor trying to establish yourself into the market. On this day, you are pulling floor duty at the “We Treat ‘Em Right” Realty. Mr. & Mrs. Johnson come into your company’s offices and you greet them. They inform you that they desire to buy a home in a neighborhood somewhere nearby. You ask the normal questions as to what size home they are seeking; price range; financial situation, etc.After determining the particulars as to what type home, you search your local Multiple Listing Service (MLS) to see what is available. If you have no local MLS, you search the Classifieds and/or drive nearby neighborhoods for a prospective home for the Johnsons. Then you set-up showings and tour available homes with the Johnsons. Fortunately, they select a home the first day. You write up the offer, which is accepted, and the sale closes in 30 days. You thank the Johnsons, your company sends them a door knocker gift and you go back to floor duty, hoping another prospective customer will walk in.
This Is Not The End Of The Story: Two years later friends of the Johnsons move to town. They ask the Johnsons if they know a good realtor; however, the Johnsons can’t remember your name. Two years after that Mr. Johnson gets transferred to another city and the Johnsons list their home for sale with another realtor. In the meantime you are still pulling floor duty and advertising for prospects. In the next issue we will discuss how this story could have and should have had a different and better ending.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
This Is Not The End Of The Story: Two years later friends of the Johnsons move to town. They ask the Johnsons if they know a good realtor; however, the Johnsons can’t remember your name. Two years after that Mr. Johnson gets transferred to another city and the Johnsons list their home for sale with another realtor. In the meantime you are still pulling floor duty and advertising for prospects. In the next issue we will discuss how this story could have and should have had a different and better ending.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Buy A House In Transit
A great way to acquire houses at a very reasonable price is to become acquainted with a house mover. There are many reasons that houses need to be moved, such as:
1) A Freeway being built needing land which currently has houses on it.
2) Developers and Builders clearing off older houses to develop a project, new subdivision, or whatever.
3) Property has been re-zoned Commercial and needs houses to be removed,
4) Etc., Etc., Etc.
A good idea is to contact people who move these houses and bid to buy them. If you can get to them before the house is moved, you can have it delivered to your location.
Further, house movers usually have a Sales Lot where they have houses they have moved which they wish to re-sell. I have bought houses and moved them to a vacant lot. I did a little rehab work and then VOILA! I either sold them or rented them out.
My son, who is a builder, bought a very nice, very solid, older house and moved it to land that he owns. He built a beautiful “New” home, actually incorporating the older home within the new one. You can’t tell now where the older house is (unless you knew beforehand).
There are a lot of vacant lots available in many areas to move houses to. You can move a house on the lot, fix-up, and have it ready for a new owner or tenant a lot faster and less expensive than if you build the house.
So – here is the idea. Look around and locate a professional house mover. Get acquainted and let him/her know that you are interested in buying homes that he/she (notice how I’m trying to be “Politically” correct here), might move. Ask them to let you know when one is coming up so that you can inspect it and maybe bid on it to buy.
Also, look around for vacant lots that are available. Be sure you look for lots which have all UTILITIES available.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
1) A Freeway being built needing land which currently has houses on it.
2) Developers and Builders clearing off older houses to develop a project, new subdivision, or whatever.
3) Property has been re-zoned Commercial and needs houses to be removed,
4) Etc., Etc., Etc.
A good idea is to contact people who move these houses and bid to buy them. If you can get to them before the house is moved, you can have it delivered to your location.
Further, house movers usually have a Sales Lot where they have houses they have moved which they wish to re-sell. I have bought houses and moved them to a vacant lot. I did a little rehab work and then VOILA! I either sold them or rented them out.
My son, who is a builder, bought a very nice, very solid, older house and moved it to land that he owns. He built a beautiful “New” home, actually incorporating the older home within the new one. You can’t tell now where the older house is (unless you knew beforehand).
There are a lot of vacant lots available in many areas to move houses to. You can move a house on the lot, fix-up, and have it ready for a new owner or tenant a lot faster and less expensive than if you build the house.
So – here is the idea. Look around and locate a professional house mover. Get acquainted and let him/her know that you are interested in buying homes that he/she (notice how I’m trying to be “Politically” correct here), might move. Ask them to let you know when one is coming up so that you can inspect it and maybe bid on it to buy.
Also, look around for vacant lots that are available. Be sure you look for lots which have all UTILITIES available.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Creation Of Wealth - With No Cash
You are a Real Estate Broker/Agent. You have a client named Mr. Carlson to whom you helped obtain a Mini-Storage Facility approximately 3 years ago. The property was in poor condition when Mr. Carlson bought it; however, he has completely renovated it and has increased rents and value considerably. Mr. Carlson wants to acquire more tax shelter; however, even though his cash flow is excellent, he has used most of his cash reserves upgrading the Mini-Storage Units. Also, because he now has great cash flow and property in excellent condition, he wants to hold on to the Storage Units for maybe 3 or more years before considering an exchange into larger property.
Mr. Carlson has now come to you with this situation. He wants your advice and help to accomplish his goal. After a thorough meeting with Mr. Carlson, you begin searching for a property that will provide him with the benefits he needs. You comb through MLS, search the newspaper classifieds, and contact other agents you know who specialize in Commercial and Income properties. You locate through one of the agents you know, a 24 Unit Apartment Complex which has a 30% vacancy problem and needs physical upgrade to the property. The owner, Mr. Mendoza, has had the property on the market for sometime with no acceptable offers. Although he wants out of this property, he is not willing to take what he considers a deep discount.
So you show the apartments to Mr. Carlson. He likes the units and feels that he can do an upgrade and get the units fully occupied again. Still the problem is that he has little cash to buy with, and the units are in such poor condition that it would be very difficult to obtain a loan to purchase them with.
ANALYZING THE SITUATION –
1. Mr. Carlson’s Mini-Storage Units:
Owner’s Value – $260,000
Loans - $0
Equity - $260,000
2. Mr. Mendoza’s Apartment Complex:
Owner’s Value - $400,000
Assumable Loan – $180,000
Equity - $320,000
Possible Solution: Mr. Carlson offers to purchase Mr. Mendoza’s Apartments with a Blanket Note of $320,000 secured by both properties. Terms of the Note would state that after 3 years the Storage Units would be released as security for the Note providing Mr. Carlson has upgraded the Apartments.
BENEFITS TO THE PARTIES –
1. Mr. Mendoza receives full price and has excellent security for his Note.
2. Mr. Carlson receives the Tax Shelter he is looking for and can exchange the Storage Units after 3 years.
3. Each Broker/Agent has earned a commission.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Mr. Carlson has now come to you with this situation. He wants your advice and help to accomplish his goal. After a thorough meeting with Mr. Carlson, you begin searching for a property that will provide him with the benefits he needs. You comb through MLS, search the newspaper classifieds, and contact other agents you know who specialize in Commercial and Income properties. You locate through one of the agents you know, a 24 Unit Apartment Complex which has a 30% vacancy problem and needs physical upgrade to the property. The owner, Mr. Mendoza, has had the property on the market for sometime with no acceptable offers. Although he wants out of this property, he is not willing to take what he considers a deep discount.
So you show the apartments to Mr. Carlson. He likes the units and feels that he can do an upgrade and get the units fully occupied again. Still the problem is that he has little cash to buy with, and the units are in such poor condition that it would be very difficult to obtain a loan to purchase them with.
ANALYZING THE SITUATION –
1. Mr. Carlson’s Mini-Storage Units:
Owner’s Value – $260,000
Loans - $0
Equity - $260,000
2. Mr. Mendoza’s Apartment Complex:
Owner’s Value - $400,000
Assumable Loan – $180,000
Equity - $320,000
Possible Solution: Mr. Carlson offers to purchase Mr. Mendoza’s Apartments with a Blanket Note of $320,000 secured by both properties. Terms of the Note would state that after 3 years the Storage Units would be released as security for the Note providing Mr. Carlson has upgraded the Apartments.
BENEFITS TO THE PARTIES –
1. Mr. Mendoza receives full price and has excellent security for his Note.
2. Mr. Carlson receives the Tax Shelter he is looking for and can exchange the Storage Units after 3 years.
3. Each Broker/Agent has earned a commission.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, July 15, 2010
Rolling Option
Situation: A Land Developer, Mr. Tierra, has located a large parcel of land that he would like to develop into smaller tracts (5 acre tracts) for which there is a great demand.The land totaling 640 acres is owned by Mr. Grande who has had the land on the market for some time with no success in finding a qualified buyer. Mr. Grande does not want to finance the land for a buyer. It is difficult to find a lender who will lend on raw land. Mr. Grande’s firm price on the land is $1,000 per acre.
Mr. Tierra can raise the cash to buy 40 acres of the land and put in the improvements (Roads, Water, Septic Tanks, Electricity, etc.)
Possible Solution:
1. Mr. Tierra will buy 40 acres for $1,100 per acre, cash payment.
2. Mr. Tierra negotiates and buys an Option from Mr. Grande to purchase the remaining 600 acres in
40 acre or larger parcels over the next 5 years at a price of $1,100 per acre.
3. Mr. Tierra pays $4,000 for the Option which will be credited toward the purchase of the last 40 acre parcel.
Let’s look at some of the benefits for both parties.
Mr. Tierra:
1. Is able to start the development of the first 40 acre parcel which he can afford to do, wherein, if he had to purchase the entire 640 acres he could not do it.
2. By developing the first 40 acres, Mr. Tierra will increase the value of the remaining land because he has now built the popularity of 5 acre parcels being available.
3. Developing and selling the first 40 acres in 5 acre tracts will provide additional funds to buy and develop the next parcel of 40 acres or more.
Mr. Grande:
1. Receives a cash price of $1,100 per acre. He could eventually receive an additional 64,000 cash for the land.
2. Receives $4,000 as Option Consideration which he will not have to pay tax on until the final parcel is purchased or the Option is not exercised.
3. Each sale will be on individual parcels and not the entire 640 acres; therefore, Mr. Grande does not have an installment sale and will only have to pay taxes on each parcel as it is sold.
4. The development of the first parcel by Mr. Tierra will increase the value of the remaining land. If Mr. Tierra does not exercise any portion of the Option, the remaining land will be more valuable. Plus, Mr. Grande gets to keep the $4,000 Option Consideration.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Mr. Tierra can raise the cash to buy 40 acres of the land and put in the improvements (Roads, Water, Septic Tanks, Electricity, etc.)
Possible Solution:
1. Mr. Tierra will buy 40 acres for $1,100 per acre, cash payment.
2. Mr. Tierra negotiates and buys an Option from Mr. Grande to purchase the remaining 600 acres in
40 acre or larger parcels over the next 5 years at a price of $1,100 per acre.
3. Mr. Tierra pays $4,000 for the Option which will be credited toward the purchase of the last 40 acre parcel.
Let’s look at some of the benefits for both parties.
Mr. Tierra:
1. Is able to start the development of the first 40 acre parcel which he can afford to do, wherein, if he had to purchase the entire 640 acres he could not do it.
2. By developing the first 40 acres, Mr. Tierra will increase the value of the remaining land because he has now built the popularity of 5 acre parcels being available.
3. Developing and selling the first 40 acres in 5 acre tracts will provide additional funds to buy and develop the next parcel of 40 acres or more.
Mr. Grande:
1. Receives a cash price of $1,100 per acre. He could eventually receive an additional 64,000 cash for the land.
2. Receives $4,000 as Option Consideration which he will not have to pay tax on until the final parcel is purchased or the Option is not exercised.
3. Each sale will be on individual parcels and not the entire 640 acres; therefore, Mr. Grande does not have an installment sale and will only have to pay taxes on each parcel as it is sold.
4. The development of the first parcel by Mr. Tierra will increase the value of the remaining land. If Mr. Tierra does not exercise any portion of the Option, the remaining land will be more valuable. Plus, Mr. Grande gets to keep the $4,000 Option Consideration.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, July 13, 2010
Creation of Wealth - Convert Land Into $$, And You Get To Keep Your Land!
You are a Real Estate Agent and you have a client, Mr. Able, who owns 320 acres of land which he leases out to a rancher who raised cattle and uses the land for grazing. 40 acres of the land is used to raise alfalfa. Mr. Able could sell the land; however, he feels confident the land will greatly increase in value within the next 5 years because of it’s proximity to a major Freeway Interchange. Mr. Able would like to obtain improved property with which he could obtain some tax shelter and the opportunity for additional income. Mr. Able has told you that he would be willing to take property that required some “fixing-up”.
After some research you locate a 32 Unit Apartment Complex which does need some “fixing up”. It currently is only about 50% occupied. The property is in an upper blue collar area near an elementary school. The problem is that the owner who is a widow, Mrs. Calhoon, has little knowledge or desire to solve her problem. She has hired different managers; none of whom have been able to turn things around.
After inspecting the property Mr. Able is confident that he can do the fixing-up and turn the property around. However, he is going to need the cash he has available to buy the materials and labor to do the fixing.
In counseling with Mrs. Calhoon we discover that she needs Long Term income more than she needs a lot of cash. She has some cash from her husband’s Life Insurance. He has managed the Apartments prior to his demise. So let’s analyze the situation:
1. Mr. Able’s Land
Owner’s Value $480,000
Loans $0
Equity $480,000
2. Mrs. Calhoon’s Land
Owner’s Value $384,000
Loans $0
Equity $384,000
Note: Market Comparisons indicate that the value of the Apartments, after rehab and leased up, should be approximately $586,000.
After some negotiating the following transaction was agreed upon -
Mr. Able will purchase the Apartments by creating a First Mortgage to Mrs. Calhoon for $200,000 secured by his land. He will also give her a First Mortgage on the Apartments for $184,000. This will provide a substantial monthly income to Mrs. Calhoon and will get her out of the problem with the Apartments.
Mr. Able now has the tax shelter he is looking for and once the Apartments are upgraded and leased out they will provide more than enough income to pay Mrs. Calhoon’s notes.
You as the Real Estate Agent should receive a nice fee from Mr. Able, your client.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
After some research you locate a 32 Unit Apartment Complex which does need some “fixing up”. It currently is only about 50% occupied. The property is in an upper blue collar area near an elementary school. The problem is that the owner who is a widow, Mrs. Calhoon, has little knowledge or desire to solve her problem. She has hired different managers; none of whom have been able to turn things around.
After inspecting the property Mr. Able is confident that he can do the fixing-up and turn the property around. However, he is going to need the cash he has available to buy the materials and labor to do the fixing.
In counseling with Mrs. Calhoon we discover that she needs Long Term income more than she needs a lot of cash. She has some cash from her husband’s Life Insurance. He has managed the Apartments prior to his demise. So let’s analyze the situation:
1. Mr. Able’s Land
Owner’s Value $480,000
Loans $0
Equity $480,000
2. Mrs. Calhoon’s Land
Owner’s Value $384,000
Loans $0
Equity $384,000
Note: Market Comparisons indicate that the value of the Apartments, after rehab and leased up, should be approximately $586,000.
After some negotiating the following transaction was agreed upon -
Mr. Able will purchase the Apartments by creating a First Mortgage to Mrs. Calhoon for $200,000 secured by his land. He will also give her a First Mortgage on the Apartments for $184,000. This will provide a substantial monthly income to Mrs. Calhoon and will get her out of the problem with the Apartments.
Mr. Able now has the tax shelter he is looking for and once the Apartments are upgraded and leased out they will provide more than enough income to pay Mrs. Calhoon’s notes.
You as the Real Estate Agent should receive a nice fee from Mr. Able, your client.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Substitution of Collateral - "Walking The Loan"
One of the least known and one of the most powerful tools for the Real Estate Investor is the use of Substitution Of Collateral. Let’s look at an example using this technique.Mr. Riley owns 100 acres of prime timberland in East Texas. The fair market value of this land is $500,000. The land is free & clear of encumbrances. Mr. Riley would like to purchase an Apartment Complex in Tyler, Texas – owned by Mrs. Graves. The price of the apartments is $400,000. Mr. Riley buys the apartments with $100,000 down and Mrs. Graves finances the balance for Mr. Riley who executes a $300,000 note secured by a Deed of Trust.
Mr. Riley is an experienced investor who has bought, sold, and/or exchanged several properties in the past. When he negotiates the purchase of the apartments he receives the future right to substitute collateral for the $300,000 he owes Mrs. Graves on the apartments. The contract and Deed of Trust stipulate that the substitute property must be of equal or greater value of the property being substituted for. The wording could also be something like, “The property being offered as Substitute Collateral must have an appraised value of $125% of the amount of the money owed”, or whatever number is agreeable by the parties.
To continue our example: Let’s say that 3 years go by. Mr. Riley has upgraded the apartments, increased rents, etc. and the Fair Market Value of the apartments is now $550,000 and the remaining balance on the loan to Mrs. Graves is $291,840. Mr. Riley has an opportunity to exchange the apartments for a Commercial Strip Center which has a great future growth in value potential. However, the owner of the Strip Center will not accept the apartments with the loan on them. He wants them free & clear.
So, Mr. Riley exercising his right of Substitution of Collateral, moves the loan on the apartments, owed to Mrs. Graves, “Walks The Loan”, to the 100 acres of timberland. The apartments are now free and clear and Mr. Riley can complete his exchange for the Strip Center.
I highly recommend to anyone that anytime they are negotiating a purchase wherein the seller, or anyone else, is providing the financing, always ask for the right to substitute collateral in the future. Even if they, at present, don’t foresee a use for it, it is a good right to have.
Also, it does not have to be Real Estate. The collateral could be Private Property, Stocks, Bonds, Jewelry, Boats, Planes, Automobiles, etc.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Mr. Riley is an experienced investor who has bought, sold, and/or exchanged several properties in the past. When he negotiates the purchase of the apartments he receives the future right to substitute collateral for the $300,000 he owes Mrs. Graves on the apartments. The contract and Deed of Trust stipulate that the substitute property must be of equal or greater value of the property being substituted for. The wording could also be something like, “The property being offered as Substitute Collateral must have an appraised value of $125% of the amount of the money owed”, or whatever number is agreeable by the parties.
To continue our example: Let’s say that 3 years go by. Mr. Riley has upgraded the apartments, increased rents, etc. and the Fair Market Value of the apartments is now $550,000 and the remaining balance on the loan to Mrs. Graves is $291,840. Mr. Riley has an opportunity to exchange the apartments for a Commercial Strip Center which has a great future growth in value potential. However, the owner of the Strip Center will not accept the apartments with the loan on them. He wants them free & clear.
So, Mr. Riley exercising his right of Substitution of Collateral, moves the loan on the apartments, owed to Mrs. Graves, “Walks The Loan”, to the 100 acres of timberland. The apartments are now free and clear and Mr. Riley can complete his exchange for the Strip Center.
I highly recommend to anyone that anytime they are negotiating a purchase wherein the seller, or anyone else, is providing the financing, always ask for the right to substitute collateral in the future. Even if they, at present, don’t foresee a use for it, it is a good right to have.
Also, it does not have to be Real Estate. The collateral could be Private Property, Stocks, Bonds, Jewelry, Boats, Planes, Automobiles, etc.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, July 9, 2010
Investing In Real Estate Is A Two-Way Street
Every Real Estate Investor must recognize that investing is a Two-Way street. Contrary to what we used to believe, Real Estate values can go DOWN as well as up. The last 30 years have given us vivid examples of this roller-coaster ride.Nonetheless, Real Estate is and always will be the best investment vehicle; “Under All Is The Land”. However, the investor who fails to recognize that ANYinvestment can turn into a Two-Way street, can be in for major problems. Checked out General Motors or British Petroleum stock prices lately? Or maybe Real Estate prices in Las Vegas?
By the way, speaking of Las Vegas, I watched a movie last night about “Bugsey” Siegel who built the first hotel/casino in Las Vegas; The Flamingo. Bugsey was killed by his fellow Mafia (The Mob) compatriots because the cost of the hotel/casino ended up being several million more than Bugsey had told them it would be. Also, they did not think that this venture in the middle of the desert would be profitable. To date (or as of the date of the movie) Bugsey’s 6 million dollar venture has turned into 100 billion. How’s that for appreciation?
Anyway – Some ways to protect against the Two-Way street is as follows:
1. Try to invest in areas with varied businesses and economies.
2. Be aware that even though high-leveraged investments have more potential, they also have more risks.
3. Diversify your assets – so that you don’t have to start over from scratch. (I say this with considerable
experience). Try to have some properties Free & Clear, or at least with high equity percentages.
4. Use non-recourse financing whenever possible. I highly recommend getting Seller Financing whenever
you can. As icing on the cake, ask for the right to substitute collateral for the loan in the future.
5. If losses occur, don’t sweat it too much. If you did it once, you can do it again. You still have your
creative and experienced mind. I remember a statement I heard many years ago, don’t know who said it first;
“If you took all the money/assets of the people of the U.S. and split it up evenly among all of the people (with or without money/assets), those same people who have assets now and who gave theirs up, will have it back within a few years.”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
By the way, speaking of Las Vegas, I watched a movie last night about “Bugsey” Siegel who built the first hotel/casino in Las Vegas; The Flamingo. Bugsey was killed by his fellow Mafia (The Mob) compatriots because the cost of the hotel/casino ended up being several million more than Bugsey had told them it would be. Also, they did not think that this venture in the middle of the desert would be profitable. To date (or as of the date of the movie) Bugsey’s 6 million dollar venture has turned into 100 billion. How’s that for appreciation?
Anyway – Some ways to protect against the Two-Way street is as follows:
1. Try to invest in areas with varied businesses and economies.
2. Be aware that even though high-leveraged investments have more potential, they also have more risks.
3. Diversify your assets – so that you don’t have to start over from scratch. (I say this with considerable
experience). Try to have some properties Free & Clear, or at least with high equity percentages.
4. Use non-recourse financing whenever possible. I highly recommend getting Seller Financing whenever
you can. As icing on the cake, ask for the right to substitute collateral for the loan in the future.
5. If losses occur, don’t sweat it too much. If you did it once, you can do it again. You still have your
creative and experienced mind. I remember a statement I heard many years ago, don’t know who said it first;
“If you took all the money/assets of the people of the U.S. and split it up evenly among all of the people (with or without money/assets), those same people who have assets now and who gave theirs up, will have it back within a few years.”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, July 8, 2010
The REO Formula - Real Estate Owned
For clarification let’s describe what Real Estate Owned or “REO” is. Real Estate that is foreclosed on by an Institutional Lender (primarily banks, mortgage companies, insurance companies, etc.) and is now owned by that Lender is REO property. Most lenders have within their company an REO department usually managed by an REO officer, employee of the bank, or other lender. Lenders definitely do not want to own property they have had to foreclose on. They are under pressure from Federal and/or other banking regulators to dispose of these properties. This also lessens their ability to make new loans.
Today, the Short Sale is a very popular method of buying these foreclosed (or about to be foreclosed on) properties from the banks. There is another method or technique that has been used by Real Estate Investors for many years that has become known as the “REO Formula”.
Let’s look at an example for the use of the REO Formula.
Let’s say you are a Real Estate Agent with a very active & wealthy investor client who owns several properties and is always looking for a way to acquire more properties and/or raise cash. It seems like many investors are always in need of cash to make another “deal”.
Let’s say that your client owns several parcels of good development land. He would like to acquire more income producing properties. You find out from one of your REO officer contacts about a small apartment complex that the bank would take $250,000 for. You know that the fair market value of the units should be around $350,000.
After conferring with your client, you come up with the following proposal to the bank:
1) Your client will exchange development land valued at $250,000 to the bank for the apartments provided the bank will loan your client $175,000 (70% LTV) cash back on the apartments.
2) Your client then will buy back the land from the bank with $87,500 cash down and the bank loaning the balance of $162,500 (65% LTV).
Let’s look at the benefits to both parties:
A. YOUR CLIENT
1. Has completed a tax deferred exchange of his development land for the apartments.
2. Has $87,500 cash which is also tax deferred.
3. Has exchanged dormant land for income producing property.
B. THE BANK
1. Has exchanged an unwanted REO property (a bad loan) for two good loans from a capable borrower.
Another way this could be structured could be to have the bank make the loan on your client’s land. Then your client could buy the apartments with cash down and a loan from the bank. However, using this method would not have the same tax benefits.
Please be aware that I am not giving tax advice here. Before structuring any transaction that might have tax ramifications, you or any person should consult a CPA or tax professional.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Today, the Short Sale is a very popular method of buying these foreclosed (or about to be foreclosed on) properties from the banks. There is another method or technique that has been used by Real Estate Investors for many years that has become known as the “REO Formula”.
Let’s look at an example for the use of the REO Formula.
Let’s say you are a Real Estate Agent with a very active & wealthy investor client who owns several properties and is always looking for a way to acquire more properties and/or raise cash. It seems like many investors are always in need of cash to make another “deal”.
Let’s say that your client owns several parcels of good development land. He would like to acquire more income producing properties. You find out from one of your REO officer contacts about a small apartment complex that the bank would take $250,000 for. You know that the fair market value of the units should be around $350,000.
After conferring with your client, you come up with the following proposal to the bank:
1) Your client will exchange development land valued at $250,000 to the bank for the apartments provided the bank will loan your client $175,000 (70% LTV) cash back on the apartments.
2) Your client then will buy back the land from the bank with $87,500 cash down and the bank loaning the balance of $162,500 (65% LTV).
Let’s look at the benefits to both parties:
A. YOUR CLIENT
1. Has completed a tax deferred exchange of his development land for the apartments.
2. Has $87,500 cash which is also tax deferred.
3. Has exchanged dormant land for income producing property.
B. THE BANK
1. Has exchanged an unwanted REO property (a bad loan) for two good loans from a capable borrower.
Another way this could be structured could be to have the bank make the loan on your client’s land. Then your client could buy the apartments with cash down and a loan from the bank. However, using this method would not have the same tax benefits.
Please be aware that I am not giving tax advice here. Before structuring any transaction that might have tax ramifications, you or any person should consult a CPA or tax professional.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Foreclosures & Opportunities On The Rise
We had a lot of foreclosures in 2008. We had more in 2009. We had and/or are having even more in 2010. This trend will continue and increase as long as our unbrilliant Congress and the Administration continue to push Lenders to make loans to people who can’t make the payments.Fannie-Mae and Freddy-Mac were disastrous.
Now they are repeating the debacle with FHA. When some Senators were pushing that the FHA program should require buyers to put at least 5% down, Chris Dodd (one of the authors of the Fanny-Mae & Freddy-Mac crash, along with Barney Frank) said, (you won’t believe this) “If you require 5% down, then the only people who can buy homes will be those who can afford them.”
In any case, enough humor. All these foreclosures and impending foreclosures will provide incredible opportunities for Real Estate Investors; even investors or newbie investors who don’t have a lot of cash to invest, or maybe even NO cash to invest. Please review my recent Posts about Lease with Option with Shared Equity! The program shows you how to acquire nice homes in nice neighborhoods which have little or no equity and earning immediate cash and cash flow. The key ingredient to this program is the Shared Equity – which is future equity for the seller who has NO equity now.
Most sellers have a pride problem with the feeling that they are “Giving Away” their property. This can be overcome by giving the seller something in the future when there is equity to be shared.
I refer you back to several continued Posts that we call “The Eddie Nivens Story”. This story will show you how the Lease/Option With Equity Sharing Works. You can find them in my “Investors Corner” on my blog at www.RealEstateJack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Now they are repeating the debacle with FHA. When some Senators were pushing that the FHA program should require buyers to put at least 5% down, Chris Dodd (one of the authors of the Fanny-Mae & Freddy-Mac crash, along with Barney Frank) said, (you won’t believe this) “If you require 5% down, then the only people who can buy homes will be those who can afford them.”
In any case, enough humor. All these foreclosures and impending foreclosures will provide incredible opportunities for Real Estate Investors; even investors or newbie investors who don’t have a lot of cash to invest, or maybe even NO cash to invest. Please review my recent Posts about Lease with Option with Shared Equity! The program shows you how to acquire nice homes in nice neighborhoods which have little or no equity and earning immediate cash and cash flow. The key ingredient to this program is the Shared Equity – which is future equity for the seller who has NO equity now.
Most sellers have a pride problem with the feeling that they are “Giving Away” their property. This can be overcome by giving the seller something in the future when there is equity to be shared.
I refer you back to several continued Posts that we call “The Eddie Nivens Story”. This story will show you how the Lease/Option With Equity Sharing Works. You can find them in my “Investors Corner” on my blog at www.RealEstateJack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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