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What should you be doing as a Real Estate Investor?

What is creative financing?

Commonly used phrase which involves non-traditional types of funding that are not commonly used. Most of these techniques involve the seller not having to use much or any of their own money.

Lease Options
Subject2 deals
Hard Money loans
Seller financing
Private loans
Wrap-around Mortgages

Definition of Wrap-around mortgage

A seller financed deal where the sellers existing loan stays in place and a 2nd loan agreement is created between the seller and the new buyer.

Example
Owner of a property has a $100k existing mortgage at 5%. Current payment is $537. You make offer to buy the property for $105k at 7% interest and create a loan with the seller resulting in a pmt from you of $699. Seller will continue paying on the 100k mortgage or $537 a month and collect your $699 and pocket the $162 difference.

Benefits of a Wrap-around mortgage

Benefits to Buyer

• Smaller down payment (or maybe no down payment)
• Easier qualification
• Lower closing costs
• Don’t have to work through lender – no arduous underwriting process
• Don’t have to have good credit
• Don’t have to be employed

Benefits to Seller

• Quicker sale
• Increase the pool of potential buyers
• Create stream of cash flow
• Collect high rate of interest
• Defer taxes on the sale

Wraps to Create Streams of Cash Flow

• As investors we are always looking for huge discounts 30-50% off
• Using wraps you don’t have to find deals at these huge discounts
• Investors can create streams of cash flow by collecting cash on higher rates of interest than they are paying the bank on the underlying loan.

Mkt value $100k
Buy (assume mortgage) for $95k at 6% - Pmt = $570
Sell for $105k at 10% - $921
Positive CF = $351

How do they work?

Many sellers will have never heard of a wrap-around mortgage. Don’t expect people to be offering their homes on a wrap; you will need to put the numbers together and incorporate this type of financing into your offer. You will play the part of consultant as you educate them on the strategy as well as show them how it is beneficial to them to do this type of a deal.

This is how you create creatively financed deals. I hear many people say they “can’t find good deals”. Well, we don’t always find good deals, we have to create them.

What to watch out for

What if the seller doesn’t make the payment on the underlying mortgage? You need to make sure they ARE paying. You can do this buy using a third party to make those payments, you can make the payment directly to the bank for them and send the additional amount to the seller, or get access to their bank via internet or phone so you can verify payment.

What is creative financing?

Commonly used phrase which involves non-traditional types of funding that are not commonly used. Most of these techniques involve the seller not having to use much or any of their own money.

• Lease Options
• Subject2 deals
• Hard Money loans
• Seller financing
• Private loans
• Wrap-around Mortgages

Definition of Subject To

A real estate transaction where title to the property gets transferred to the new buyer and the new buyer takes over the payments on the existing loan. The seller’s existing loan is not satisfied or paid off; the house is bought “subject to” the existing mortgage.

Example
Owner of a property has a $100k existing mortgage at 5%. Current payment is $537. The buyer makes an offer to buy the property and simply takes over the $537 payment. Title transfers and the buyer is now the new owner of the property.

Benefits of doing a Sub2 deal

Benefits to Buyer

-Smaller down payment (or maybe no down payment)
-No loan qualification
-Lower closing costs
-Don’t have to work through lender – no arduous underwriting process
-Don’t have to have good credit
-Don’t have to be employed
-Can do as many of these deals as you want because they will never show up on your credit

Benefits to Seller

-Quicker sale
-Increase the pool of potential buyers
-Relieved of mortgage payment
-New buyer will build their credit score with consistent on-time payments

How do they work?

Many sellers will have never heard of a Sub2 deal. Don’t expect people to be offering their homes Subject to. You will need to put the numbers together and incorporate this type of deal into your offer. You will play the part of consultant as you educate them on the strategy as well as show them how it is beneficial to them to do this type of a deal.

This is how you create creatively financed deals. I hear many people say they “can’t find good deals”. Well, we don’t always find good deals, we have to create them.

What to watch out for as an investor

• Make sure the title is clear that you are taking over – Do title search
• Make sure the numbers work on the deal – Work financial analysis before buying
• Have a clear exit strategy – buy and hold, buy and sell, wholesale, etc.

Concerns to the Seller

What if the investor doesn’t make the mortgage payment?

Answer-

• You are an investor and are doing this deal to make money. If you make the payment you make money on the deal. It would be a waste of time to do a sub2 deal and then not make the payment. What’s the point?
• The loan is still in the seller’s name and they can monitor on time payments on the internet or by calling their bank
• Tell them if you are late ONCE you will immediately deed the property back to them
• What other options does the seller have? Probably none. Many Sub2 deals will be with houses going into foreclosure.

What if the bank doesn’t want to do this kind of a deal?

Answer-

• In most cases the bank will not even know you are doing the deal. They don’t monitor the country recorder’s office to see if title is being transferred on their properties.
• Even if the bank does know, typically they won’t care as long as the payment is being made
• Banks will get notified if insurance is changed but, again, they probably won’t care.

The Dreaded Due-on-sale Clause

• When title transfers the bank has a right to call the note due. They have the RIGHT not the obligation. The question is will they?
• If they do call the note and you can’t refinance and don’t have the money to pay the bank, their only option is to foreclose. In this market do you think banks will foreclosure on homes that have a fully performing underlying loan? Probably not.

Working effectively with Partners

• This might initially scare you
• Keep an open mind
• It is not working with some stranger; you will become friends with them and it won’t be so scary

Why work with partners?
• Source of money
• Source of knowledge and expertise
• Diversify risk
• Source of deal flow
• Source of credit

How to work with partners?
• Can own property jointly in your names
• Set up entity – management agreement sets forth rules

Structuring deals
• Simple cash loan
• Equity split
• Hybrid deal

Simple Cash Loan
• Partner lends money and is paid a percentage interest rate
• Try and defer interest payments

Equity
• Partners split equity and ownership of the deal
• Don’t give away the farm

Hybrid
• Cash loan for interest
• Equity split

When to use what strategy?

Cash only

Pros:
• Getting cash the least expensive to you
• Don’t have to share the equity

Cons:
• Cash payment required to investor
• May not have the cash
• Not sharing risk
• Deal goes bad, you still owe the money

Equity

Pros:
• No cash expense
• Share risk
• Deal goes bad you don’t owe anything

Cons
• Giving up valuable piece of deal

Hybrid

Use this strategy when getting resistance from potential investor or you feel more comfortable with this structure. They may be concerned about giving you cash and not getting immediate return so you can offer some cash payment combined with a small piece of equity. Conversely, they may not want immediate cash; they may want a piece of the deal, so you can give them a smaller piece of the deal and some cash payment.

You decide what is going to work best for you and propose deal and negotiate from there.