5 Ways to Collect Cash When Buying No Money Down
|By definition, a real estate investor puts up some money and "invests" it into real estate deals. As a real estate "entrepreneur," I prefer to avoid tying up any of MY money in my investments. In fact, I prefer to collect some of my profits on the same day I buy a house. That way I don't have to be in a hurry a sell. Then I have money to further my real estate education, pay my operating costs, invest in systems to grow my business… and write myself a paycheck! Now, I'm willing to wait for my profit on the back end. And I'll even consider "investing" small amounts into a house like a small down payment plus money for holding and touching up the property. Ideally though, I'll want to quickly get my money back out when the house once it's occupied by a buyer or tenant buyer. There are many different approaches to real estate investing. And I certainly don't have the perfect plan. Your approach will depend on your own personal desires and skill set. But to put my "collect cash when buying" strategies into context, I'll briefly describe my real estate business…|
I buy mostly single family homes. I rarely buy houses listed with real estate agents unless it's an all cash deal. I prefer to be negotiating directly with the owner. I don't use my good credit or banks to finance my purchases. Typically I acquire homes taking them "subject to" the existing mortgage using a land trust or agreement for deed. That means I get no bank qualifying owner financing. For cash deals, I use hard money lenders or private lenders. To buy directly from sellers, I use a number of low-cost marketing methods to get them to call me (see "How to Get Motivated Sellers Calling You"), getting them to ASK ME to buy their house. I prefer using marketing systems which are easy to implement and easy to repeat. I don't call sellers. For each of the 7 to 15 calls I receive, I'll find one seller who is flexible and motivated enough to allow me to buy creatively, or at a price and terms that works for both of us. You won't get that type of closing ratio calling ads in the paper.
Working 20 hours a week with a small staff, I buy and occupy 3 or 4 houses a month. If I cannot make at least $20,000 net profit, it's just not a deal. If the seller has lots of equity, they typically take it back in a note due upon the "refinance" of the home. The refinancing occurs when my buyer or tenant buyer gets their new loan. That's between one and 36 months down the road. Most common is 2 to 3 years. But some of the 57 properties I own today were bought over 5 years ago and have appreciated nicely. After I buy a house I put it on the market with a flexible seller financing. That includes doing "wraparound" owner financing or selling on a "rent-to-own." I don't list my homes with agents or rely on my buyer getting a bank loan to close. By offering terms, I make the home more desirable and more valuable. I get it occupied fast and under contract for top dollar, even in a slow market. I can also sell a house "as is" if it needs some work offering my "trade sweat for equity" program. Many buyers like that opportunity... and I can eliminate some of the frustration or costs that are common with dealing with contractors.
I avoid dealing with renters and all the landlording challenges that come with that. Instead, the homes I still own are occupied by tenant buyers who have paid me a non-refundable "purchase deposit" to buy at a later date. They can earn a modest credit toward buying the home for each "on time" rental payment plus they agree to take care of all repairs and maintenance. Since they are planning to buy, they typically are interested in taking care of the property… even doing major improvements which are also non-refundable in the event they do not close. Think about it. If you don't tie up your own money for very long when you buy, or you actually collect some cash when you buy, what's the limit to the number of houses you can buy each month? And if you avoid landlording headaches by selling with owner financing or "rent until close" terms, what's the hurry to cash out? Most of the homes I buy require little or no money down. I still find investors to this day who say that that is not possible. That amazes me. On my best deals, I actually get cash when buying.
So here are my top 5 ways to put cash in your pocket when you buy a house...
1. Over Borrow with No Bank Qualifying when Paying All Cash
Most of the houses I buy are "subject to" the existing mortgage. That's because most sellers owe more than I'd be willing to pay cash. So I tell them, "You owe more on the house than I can pay cash as an investor. I get a high return on my cash. It wouldn't make much sense to pull my cash out of other investments to buy your house at the price you say you need. The only way I could come close to your price would be to take over the existing loan and relieve you of the debt. Would you even consider that... if I can get you an acceptable price?" Other times they have enough equity. What if the seller insists on all cash? Most of the houses I buy all cash need a lot of repairs, or are owed by a bank, or both. That's for my market. Prices here range from $50,000 to $300,000 with an average $165,000. When you buy in the very low price ranges, then you may be doing more cash deals. For me, only one out of 10 houses I buy require a lot of cash.
I get my cash from hard money lenders and private lenders. You can listen instantly online to a free audio presentation I did on how to raise cash for your deal. In a nutshell, I pay 9 to 13% interest. And then I pay 0 to 10 points. I have credit lines that would cost me less, but they have limits. I like having unlimited funds to buy houses and keeping my credit or credit lines open for emergencies. I consider the cost of these funds when I construct my offers so I'll make a huge profit regardless of the interest or points I pay. My "collateral" lenders don't look at my credit report, only the value of the property being used as security. I can borrow 65%-70% of the property's value with no qualifying. In fact, if I cannot borrow enough to buy and fix the house without qualifying, the it may not be a great buy… and there are better deals to out there.
So, a seller of a $100,000 house needs cash, I may offer $61,237 cash, an amount plucked out of the air (near 60% and looks like I really crunched the numbers). I then borrow $70,000 and pay 5 points, costing me $3,500 and netting $66,500 in cash to close. I walk away from the closing table with over $5,000 in my pocket on the day I buy the house. Recently, just so there'd be no confusion on a transaction, I called Beth (my closing agent at the title company) and let her know I'd be getting money at closing as the buyer. She responded, "Richard, that's no surprise. It would be more unusual if you brought me a check to closing." Can you find a ton of deals like this all the time which you can buy so cheap? No. But they are out there and you'll find them now and then if you're "in the game."
2. Over Borrow with No Bank Qualifying when Buying with Owner Financing
When I started my real estate business in 1996, I couldn't find enough cash deals to keep me busy. I still can't… cash deals that is. That's why I developed a number of ways to buy all types of houses, using creative financing. And this is my favorite. When I find a motivated seller with lots of equity, there's a good chance I'll use this strategy to get them a higher price than an "all cash" offer.
I had a seller who agreed to sell a free and clear property for $107,000 if I gave him $30,000 down. He'd carry $77,000 at 7% interest, or about $700 a month for 15 years. It needed $20,000 in repairs and would resell for $169,500 with owner financing after it's fixed up.
I borrowed the $30,000 down plus $20,000 in repairs plus an extra $20,000 for a total of $70,000 from a private lender. My lender got a first lien and the seller got a second lien. The seller also agreed to subordinate (stay in second position) to any new first loan on the property in the future. The terms of the first were 13% and 5 points with a 3 year balloon. Payments worked out to about $760 a month. The total monthly with the first and second mortgages totaled $1,460. Market rent was $1,395. I'd have a small negative cash flow but I'd walk away from the closing with $36,500 in cash which included my rehab money of $20,000 (less a couple thousand for closing costs.) I put the house on the market for "$169,500 fixed up, make offer as is. Owner can finance." After 2 weeks I did not have a buyer so I began fixing up and spent $5,000 before finding my buyer. They agreed to buy for $160,000 on an "agreement for deed" if they could do the rest of the work as their down payment before moving in. They agreed to pay $1,300 a month and refinance within 2 years. To me it was like getting $15,000 down because that's what I would've paid to finish the house. Some "real estate investment educators" say don't over borrow. But I only owe $147,000 and I am collecting on a $160,000 note. I still have $13,000 coming to me.
3.) Over Borrow with No Bank Qualifying, Buy with owner Financing and Substitute other Equity as Collateral
On a recent postcard campaign (see "The Ultimate Direct Mail System for Buying Houses") I bought five houses in six weeks. On the 5th house, the seller only owed $18,000 on a nice $170,000 house. He did not need all his cash but he insisted on getting $63,000 at closing. The $18,000 he owed would be paid off out of that. He also insisted on 6% interest on the money he carried back in a note. And he insisted on a price no less than $153,000. He's getting 90% of retail value. That's quite a fair price, isn't it? Here's what I could've done. Borrow $70,000 at 11% and 8 points, 15 year amortization with 3 year balloon. Loan would cover cash to seller, lender points and closing costs. My payments would be about $800 a month, leaving enough extra positive cash flow from rental income to give the seller a monthly payment on his equity. At a price of $153,000, he would have a second mortgage for $90,000. I'd owe $160,000 on a house to be sold for $179,500 with terms.
But here's what I did instead. I borrowed $123,000 from my private lender. Payments are about market rent, or $1,400. I gave seller his $63,000 cash, but I walked away at closing with $60,000 less closing costs. The seller agreed to have his $90,000 secured with five different second mortgages on five different houses… the five houses I just bought from the postcard campaign... including his. If I only used his house in the deal, I'd owe $213,000 and be upside down. So I offered his price for $153,000 with $63,000 down. I gave him 5 second mortgages each with no payments and a five year balloon. I agreed to the 6% interest but it would accumulate for 5 years with no payments. His $90,000 would grow to $121,000 by the time I paid him off. In essence, I was able to tap into the profits I just created in these 5 houses... equity at the high-end of each house's "loan-to-value"… plus I got it at 6% interest, no bank qualifying, minimal closing costs, no discounting of my equity and no payments and I had him grant me the right to substitute equal or better collateral in case I resold any of those homes over the next five years! What would you do with an extra $60,000 in cash?
4. Close Only when you Find your Buyer
If you've noticed in slow down in your housing market, or found it's taking longer to get your houses occupied, then be more cautious and buy better. In fact, you can buy with no risk when you find the right type of house and motivated seller...
"I appreciate the fact that you'll sell me your house for what's owed plus $1,000 in moving money, but with the way things have been going, I cannot commit to taking over your loan until I line up my occupant. Your house has too much owed against it. Now, I do have a program to help homebuyers get into a house when they need some time before getting a bank loan. And 60% of the general public is in that position. This gives me a strong marketing advantage when I buy houses. I can offer to finance my buyer myself or rent the home until they close later. Therefore, I'll agree to buy your house if you can give me some time to find a buyer. Once I do, I'll give you your $1,000 and start making the loan payments, getting that debt off your back."
When they agree, I advertise the house with "Owner financing" or "No bank qualifying" or "Rent-to-own." We get at least 3-5% down from a tenant buyer as a non-refundable purchase deposit. This works the same as option consideration on a lease option. If I'm selling for $179,500 then I'll get at least $5,000 plus the 1st month's rent. Then I can complete my deal with the seller, and enjoy the difference ($4,000) immediately. Be careful to use this only if the seller doesn't care what you sell it for, or when they have already vacated the home. Sometimes I'll have the seller show the house for me! You can also use this strategy if the seller's payments are in default, and use the buyer's money to cure the default.
5. Require the Seller to Pay you when Buying the House
An important lesson here. For years I did not do this. I think it's critical to always tell the seller what you are willing to do, even if (in your mind) it's unlikely they would ever accept your offer. You'll never know all their underlying motivation, so don't make decisions for them. When you're not excited about the deal, consider what price or terms would get you excited.
I had a couple call of my marketing. They owed $147,000 and wanted to sell for what they owed. I did comps and determined it was worth $147,000 and I could sell for $157,000 with easy terms. At the time I needed a minimum $20,000 spread between my buy price and my sell price. These days it's $30,000 or 10%. I told them they owed too much, and thanks for calling, but there was nothing I could do. They called me back one year later after listing it for $159,500. It didn't sell because it was overpriced to be sold retail but priced to cover commissions and closing costs. When they called the second time it was still the same situation. But this time I said "The only way I can buy your house is to take over your loan and have you come up with $10,000 in cash at closing. Are you in a position to do that?"
Apparently they were going to raise the cash anyway to get the house sold through another agent at a lower price. The house was now vacant and they were getting desperate. They got a signature loan not secured by the house and brought $10,000 to closing one week later. Three weeks later I found a buyer with $13,000 to put down. When occupied, I had already collected $23,000 of my $20,000 spread! I knew I'd have to bring some money to closing once my new buyer refinanced down the road. But that was OK. I could have paid down the mortgage by $3,000 but decided to keep the cash.
6. (Bonus Strategy!) Simultaneously Buy and Sell for Cash
Need cash to get started in real estate investing... or pay some bills? Find a deal and sell it the same day you buy it. No cash needed, no holding costs and no landlording. This is called flipping and yes, it's legal. There are several ways to do this. I use this strategy only when a seller must have all cash, but more cash than I can raise using a hard money or private lender. When you sell a house for cash or new loan for full value, this is called retailing. I hate retailing. I prefer to be offering a great price or great terms. I need a marketing advantage to resell. Otherwise I'm not interested in the deal. I can still offer terms to a buyer who is getting a new loan by taking up to all my profit in a second mortgage. I'd be willing to do this rather than lose the deal.
Recently a seller called me. Sometimes I get so many leads I don't have time to call back everyone, as in this case. He called several times which forced me to respond. This is a lazy way of prescreening leads... but to works! His house had gone to foreclosure. In my state, he had a couple months to redeem the house by coming up with the foreclosure sale price in cash. I agreed to buy his interest (get the deed) and then look for a new buyer. I made no guarantees. He had nothing to lose. If successful, I'd get the first $10,000 in profit and then we'd split any profit over that. He agreed. He was about to get nothing.
I placed a sign in the yard, ran a classified ad and added the house to our website. I said "owner can finance" since I'd take my profit in a note. Bottom line: neighbor bought the house with a new loan, did not ask me to carry a note so we got cashed out. I made $18,000 and the seller got $8,000. My only risk was the cost of marketing and a little time. I also created the equity by getting the second lien holder to take a huge discount. The bank was happy to get $4,000 for their $40,000 mortgage because they were about to be wiped out after the redemption period. I forgot to ask the first mortgage holder to discount!
Remember, there's no limit to the number of houses you can "invest in" when you buy and get cash at the same time.
|Full-time investor Richard Roop has been called The Marketing Consultant for Real Estate Entrepreneurs. He is the President of Bottom Line Results, Inc., a real estate acquisition company located in Woodland Park, Colorado since 1996. As a successful marketing consultant since 1984, Richard specializes in providing innovative business and marketing advice to real estate entrepreneurs. He is the author of the "How to Sell Your Home in 9 Days" book. Richard Roop's articles have appeared in various entrepreneurial, real estate and marketing newsletters across the nation. |
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