Private Financing For Your Real Estate Investments

Flipping houses for fun and profit?
THE BAD NEWS (For Some): The inventory of houses that are available for purchase is at an all time high. These houses range from older homes that may need remodeling to new or almost new homes. This situation has been created by: 1) The previous several years of selling and financing homes for buyers who could not afford them, resulting in record foreclosures at an all time high. And in addition, 2) The present unemployment situation has forced many people to give up their homes to move to lesser expensive lodging, and in extreme cases, resulting in homelessness.

THE GOOD NEWS(For Others): Anytime there is a situation as described above, it is bad news for many people. Conversely, at the same time, it is good news for others because of the opportunities created by the particular situation – In this case, INVESTING IN HOUSING.

Because of the glut inventory of product (houses) available, prices are down from the previous market period; the old “Supply and Demand” syndrome. Therefore, it is a great opportunity for investors, entrepreneurs, etc. to make profits by taking advantage of these favorable circumstances.

So, let’s assume you are or would like to be one of those who takes advantage of the situation. You have some experience in residential housing or you have a mentor to help you make good decisions whenever you may be buying, selling, and/or rehabbing houses.

There are basically two types of investors who would be interested in the housing market:
1. Those who buy for resale later at a profit (hopefully) or,
2. Those who buy to hold for rental income.
Of course an investor could, and many do, fill both roles.

Now, let’s assume you have the knowledge, experience or mentorship to become involved in the housing market that we are discussing. One more thing we need is the funds necessary to buy, fix-up if necessary, and sell the houses. Also, if you intend to hold houses for rental income, you will need long term financing. So, if you have funds of your own, good credit with banks and other commercial lenders, you are all set – AS LONG AS THEY ARE LENDING. BUT,

What if you don’t have your own funds, and you don’t have good credit, or for whatever reason you are unable to obtain institutional funding? What to do then? AND,
Even if you do have good credit with the banks, that could change tomorrow with the whim of the banks and/or government.

Therefore, let’s consider your options: What if you could create a scenario where in you could conduct unlimited business in this and other markets, and not have to contend with banks and other institutional lenders? What if you could depend on always having financing available, short term and long term, even if your credit was not that great?

Well, you know what? You can do that! How can you do that? With Private Financing. This Private Financing will be from Private Investors and individuals who are looking for better and safer investments than they now have access to.

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.

Opportunities To Buy Good Paper Are Here Now

Tough economic times in the 1980′s produced a lot of paper. The paper I’m talking about is Private Mortgages, Trust Deeds, Land Contracts, etc. This type of paper is created when one entity (person or company) sells Real Estate to another entity and carries back a mortgage from the buyer payable to the seller, also known as “Seller Financed Paper”.

During tough economic times you will see much more of this type of paper created. The 1980′s was such a time. Many of the holders of this paper (the sellers) didn’t really want the paper; however, it was the only way they could sell their property. In addition, in tough times is when people’s credit gets hurt and they can’t get regular bank or Mortgage Company financing, thus another reason for Seller Financing. Therefore, an abundance of paper was created during this time.

The 1990′s saw Institutional Investors discovering this multitude of paper and becoming involved in very aggressive buying of this type of paper. Private investors were buying it as well; however, the institutions (with more money and willingness to buy at lower yields) made it more difficult for the private investors who found fewer amounts of paper that they could buy.

For example, during the 90′s and early 2000′s, my company bought and sold over 200 million dollars in paper. Then in the late 90′s and early 2000′s Congress pressured the banks and Mortgage companies into making home loans almost to anyone who could fog a mirror. The result = The Sub-Prime mess funded by Fannie-Mae and Freddie-Mac. This affected Seller Financing greatly. No longer were buyers hard to find who could qualify for a bank loan, so sellers didn’t have to finance the property for the buyers. So what happened? You all know; Foreclosures by the millions and the creation of another severe economic downturn. THANKS, CONGRESS.

So, the cycle has come full circle. There is an abundance of paper being created. Just check the “Homes For Sale” in your local newspaper, and see how many ads offer Seller Financing. Now we have, and are going to have, more and more Seller Financed paper available for investors to buy.

The prudent paper investor, who does due diligence, can buy paper to produce 10% – 14% Yields. Compare this to 2% of whatever the banks are paying.

So, I would advise that if you are an investor or have investor clients, consider getting in the paper buying business. Sure beats the crap-shoot in Wall Street.

If you are interested, review some of my earlier Posts about doing diligence and how to find good paper @ 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.

Substitution Of Collateral

An extremely valuable and strategic tool to use when acquiring Real Estate is the “Substitution Of Collateral”. As you know, if you have been reading my articles, I am a strong proponent of acquiring (and sometimes selling) properties wherein I can obtain Seller Financing. This tool could also be effective if you, as a buyer, are obtaining Private (other than seller) financing. It probably would be difficult, but not impossible, to obtain this substitution from an Institutional Lender. OK, so what am I talking about with this “Substitution Of Collateral”? Let me give you an example or two. I believe learning sticks better if you can tie it to an example of how something works.

Charlie Barrow is a budding Real Estate entrepreneur who has a mentor. Charlie has a good paying day job; however, he is looking to acquire, hold and manage Rental houses to supplement his income when he retires. Charlie finds a single-family house For Sale wherein the seller, R. Bishop, has already stated that he would consider financing the house for a buyer.

The house needs some repair and Charlie is confident that he can handle that for about $3,000. The estimated value of the home, after repairs are made, is $125,000. The house will rent for $1,100 per month.

So after conferring with his mentor, Charlie makes Mr. Bishop an offer to buy his home. After negotiating, Charlie and Mr. Bishop agree to the following terms:
Sales Price $90,000.00
Down Payment $5,000.00
Seller Financed Loan $85,000.00

Monthly Payment (P&I) $565.51
Estimated Taxes & Insurance $167.00
Total Monthly Payment $732.51

Following his mentor’s advice, Charlie also negotiates the “Right of Substitution” of the collateral for the Loan. The seller agrees that in the future Charlie may move the Loan from the house to another property. The other property would need to have an appraised value of at least as much as the value of the house. The seller further stipulates that the appraised value of the new collateral must be at least $15,000 more than the sales price of the house he is selling.

OK, so they close the deal. Charlie makes the repairs and the house now has an appraised value of $125,000. Charlie has received approval from his bank for a future loan of 80% of the appraised value, payable over 30 years at 6% interest. His monthly payments, PITI, would be $766.55 giving him a positive cash flow of $333.45 per month.

Charlie, feeling very confident now, is looking for another house. He soon finds one somewhat similar to the one he just bought from Mr. Bishop. This house is owned by a Mr. & Mrs. Clarke who are asking $100,000 for the home. The house has been on the market for over 6 months. The Clarkes have indicated they might finance; however, they need at least $40,000 as they are moving to be near their children and need as much cash as they can get.

Sensing an opportunity here, Charlie asks Mr. & Mrs. Clarke what the price would be if he paid ALL CASH. After some negotiating, Charlie offers the Clarkes $85,000 cash for their home. They accept the offer from Charlie for that amount.

Charlie now goes to Mr. Bishop and tells him that he wants to move his loan from the house he bought from Mr. Bishop to the house he is buying from Mr. & Mrs. Clarke. They agree and hire an appraiser for the home. The appraisal comes in at $105,000.

Now Charlie goes to his bank and obtains the $100,000 loan on the house he bought from Mr. Bishop. The loan will close simultaneously with the purchase of the Clarke house and the movement of Mr. Bishop’s loan to the Clarke house.

So, after the smoke clears, let’s see what happened:
1. Charlie obtains a loan from the bank for $100,000.
2. Mr. & Mrs. Clarke receive $85,000 cash for their home.
3. Mr. Bishop’s loan is now secured by the house acquired from the Clarkes.
4. Charlie now has approximately $700 per month cash flow from both houses.
5. Charlie also has $15,000 cash left over from the bank loan. This will repay the repairs on Mr. Bishop’s house and leave more for repairs on the Clarke house.

Now Charlie can repeat this process over and over again. Isn’t this Real Estate business a fun thing?

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.

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.

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.