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How to Buy Property with Little or No Money Down

Getting Started

Most real estate courses and seminars agree on what a person should do before jumping into the real estate market.

Make A Commitment

I can't emphasize this principle enough. It's the glue that holds the model together. Without a solid commitment, all the good information in the world won't get you property. In any worth-while endeavor there are always going to be obstacles. Commitment is the vehicle we use to overcome them. A determined person with immovable commitment is an awesome force. Sam Walton had several business set backs before Wal-Mart. It wasn't Sam Walton who built Wal-Mart. It was Sam Walton with immovable commitment that persevered in the end and the result was Wal-Mart.

Commitment, commitment, commitment. Say it over and over to yourself until it oozes from your pours. It will drive you to your goals.

Goals

I don't believe setting goals creates a magic, mysterious phenomenon. Rather setting goals gives focus and direction to energy. If people who fail to plan, plan to fail, then it is safe to assume that people who don't set goals arrive at a place not of their own choosing. Setting goals is the one thing we can do to chart a course of our own choosing rather than leaving our boat to the ever changing currents of life.

Commitment is the force and goals are the maps. Most successful people will tell you to 1) write your goals down and 2) have realistic short term and long term goals as well. And be flexible. Don't set yourself up for disappointment by not pacing your run. If you're in for the long haul, don't run like a sprinter. You'll wear out before too long.

That Credit Thing

Everybody's favorite subject, huh? Well let me first say that you do not need credit to buy real estate, but it makes it easier if you do. However, if you currently have bad credit or no credit at all, you can still buy a home or investment property. To facilitate building a good credit record, we've included with this package our credit repair info pack that explains in detail a step-by-step procedure that is a sure fired method that has worked for millions of others rebuilding their credit. If your credit report could use some improvement, I would encourage you to it check it out.

The important thing to remember if you're buying a home for little or no money down is that it has more to do with the deal and personal compatibility than it does with credit. We'll get into this in some detail later on.

What Kind of Property is Best for Investment

The property one chooses to buy should be determined by ones short and long term goals. Are you looking for income property, meaning property that will produce a residual income over an extended period of time, short term investment property, property that is turned over as quickly as possible with maximum profits, property that realizes its greatest gain down the line, a nice home to live in or any combination of all these options. These questions should first be answered before you set out on your property quest.

INCOME PROPERTY

There's good news and bad news here. the good news is there's good money to be made in rental property. The bad news is you have to deal with renters. I'm being fictitious.

Ninety percent of all problems that occur with bad renters can be eliminated with common sense and a good screening process that should be religiously adhered to. Do your work up front and save yourself a bucket of trouble later on. Lower your defenses and I guarantee there will be people who will take advantage of you.

All income property should be balanced out against the potential benefits, i.e. income and resale value against the challenges such as the cost of repairs and maintenance as well as the responsibilities of being a land lord.

Income properties come in all sorts of colors and flavors:

• Apartments
• Retail Stores
• Warehouses
• Mobil homes
• Office buildings
• Single-family homes

I could probably list 50 more but you get the point. Anything you own and somebody else rents from you for a profit would qualify.

For a new investor a single family residence represents the best investment opportunities. They are easier to buy and there's more of them. Besides, the most flexible sellers fall into this category. It's also considerably easier to evaluate the investment potential of a single family residence than commercial real estate, and they are much easier to rent and keep rented. Until a person solidifies his or her position in real estate investment, it just makes good sense to minimize the risk factor. This is most easily accomplished by investing in a single family residence.

Flexible Sellers

If you want or need to buy a property with little or no money down, there's little doubt that you have to find a flexible seller. This doesn't always have to be an individual though. HUD sells repossessed homes for as little as 3% down and in some cases less than that. Links to this information on HUD, VA and other government agency sales with their various restrictions conditions can be found at the end of this document.

To eliminate frustration and save a whole lot of time and effort, you need to be aware of a very important fact. At least 80% to 85% of sellers are firm on their asking prices and terms. These are NOT the people we want to deal with. It's the other 15% to 20% of the marketplace where the best deals are being made.

That is where you find the folks who really want to unload their property and are willing to negotiate on price or terms or both.

"Why would they do that?" you ask? The answers to that question is as varied as people themselves, but often it is a result of:

• Divorce
• Job transfer
• Emotional dissatisfaction with the property
• Need money fast
• Tenant problems

Need I go on? But don't get the wrong impression, flexible sellers are not always down and out. Many times they would be considered wealthy by most people's standards.

The National Association of Realtors lists "Wanted tax or investment advantages" and "Needed larger home" as the two leading reasons why people move. Another thing to keep in mind is that a seller's emotions, needs, wants and desires are constantly changing. This can make a non-flexible seller become flexible, a not so uncommon occurrence of people who have sat on their "for sale" property for some time.

As you look into buying property with little or no money down, you will learn that it is essentially a numbers game. Or as they used to tell me in sales training, "You throw enough mud at the wall and some of it is going to stick." If you talk to one person and they say "no" and you give up, you haven't tried enough. Talk to 20 prospective flexible sellers and you'll probably get several workable deals. It's very important to remember that your success is greatly effected by the number of offers you put out. There's no room for discouragement in this game. Emotions must take a back seat to logic and persistence.

Studies have shown that two out of three people are either going to buy, sell or lease real estate or know someone who is. It's a very active arena and the most persistent are the most successful.

One of the gurus of the industry puts it like this:

1. Call twenty-five sellers
2. Look at five properties
3. Make three offers
4. Buy one property

And he is speaking from the personal experience of many others besides himself.

Buying The Right Property

When focusing on buying property for little or no money down, it's easy to jump too quickly at any seller willing to deal. As a result mistakes are made, like overpaying, agreeing to too high of an interest rate or buying property that fails to increase in value.

For this reason it's important to evaluate the property on its own merits and from several different aspects.

Some questions to ask yourself when looking for prospective property are:

• Is it located in a growing city?
• How about the neighborhood?
• Are there a lot of vacancies near by?
• What are the price ranges of comparable properties in that area that are for sale?
• Are businesses coming to or leaving the area.

All these questions will have a bearing on the future value of any property and should be examined carefully before an intelligent decision can be made.

You will also need to know your risk:reward profile for each property, i.e. if all goes well, how much will I make and, if the worst comes to the worst (e.g. loan interest rates rise, property prices fall) how much of a profit cushion do I have and at what point do I need to bale out.

Many people make the mistake of trying to do these calculations on the back of an envelope.  Big mistake.  Unless you use a proper real estate profit calculator you are almost certainly going to miss out some important factors.   For example, you need to take into account buy and selling costs, hidden charges such as taxes and local authority fees, the costs of renovations, the effects of different interest rates, and the real cost of having your property empty for some of the time.   For this reason I strongly recommend you get a proper calculator to figure all this out.  You are about to invest thousands of dollars - it would be plain foolish to try to economise on $20 or $30!  Check out this one, as it is the best I have seen:  real-estate-profitcalculator.com

As stated earlier, the single family residence offers the best opportunities for the average person entering the real estate market.

Most experts will tell you to never buy a two bedroom or less home. There are far too many people that need three or even four bedrooms. These homes are easier to sell and rent. It's also beneficial to have a garage, fenced in yard and central air conditioning, all popular features that make reselling or renting less difficult.

Fixer Upper

Fixer upper homes, especially in good neighborhoods, increase the opportunity for profit. In addition you'll find many of your flexible sellers with these kinds of properties.

A fixer upper property will sometimes languish on the market for months or even years creating a motivated seller open to creative financing. However a fixer upper should be examined closely to ensure no major renovation is required. Major renovation can put future profits at risk for obvious reasons although this is not always the case.

Buying Through Real Estate Brokers

When a property you're interested in is listed with a real estate broker, you are forced to make an offer through them. This presents some challenges that take a little finessing when offering no money down deals.

A real estate broker's first allegiance is to the seller but their primary concern is their commission. This is not bad but it must be factored in by your offer. There are several ways to do this with out actually having to put money down. However many brokers don't hear much of what you're saying when they perceive that you're trying to make a no down payment offer. It's important to remember that real estate brokers are required by law to present any offers made to the sellers and you have a right to be there at the time the offer is presented if you choose. If necessary, this should be stated to the broker in a non-offensive manner.

Once the broker understands how he or she can profit from your offer, the resistance will usually subside.

Buying From A Real Estate Broker

There are more and more brokers not only selling properties for other people but also buying them themselves. Why? To make a profit. If you structure a deal from which they can profit, they are more likely to go with it.

I bought a home from a real estate broker and it went as smooth as silk. I was dealing with a professional whose main objective was making a profit. He didn't get everything he wanted but it was enough to satisfy him. Today, three years after the deal, he still is offering me property that he thinks I might be interested in. That's because our previous transaction was a win-win deal for both of us.

Buying From An Owner

Buying from an owner without the real estate broker as a middle man has obvious benefits but also some hidden problems. Most of these problems can be dealt with by contracting the services of other professionals or by careful procedures.

Not having a real estate commission to pay eliminates an obvious hurdle to no money down deals but at the expense of loosing the valuable services of a professional. Therefore, much care and planning should go into dotting all the i's and crossing all the t's.

When you find a flexible seller who is not using a broker make sure you don't move too fast. This is easy to do if your inexperienced. Examine the property's market value, analyze the potential cash flow for rental property and choose the creative financing techniques that will determine the price range.

Buying Property with Little or No Money Down

Creative financing has been and still is being used by sophisticated real estate investors for the many benefits that are a part of the warp and woof of it's very nature. The Donald Trumps of this world have always used techniques that are anything but conventional. Recently, however, the average investor has come to rely on creative real estate financing as a way to avoid the cost of borrowing money from institutional lenders and the strict qualifying requirements of conventional loans.

Some people assume that "no money down" means the seller doesn't receive any cash. This is not always the case however. Many deals can be structured in ways that allow the seller to walk away with cash but the cash does not have to come from your pocket.  I will try to cover briefly some of the ways you can do this, for more detailed information and complete instructions, click here.

Technique 1

Lets say a seller has a property with a fair market value of $50,000 and an existing assumable mortgage of $30,000 at 8% interest with payments of $245 per month. The seller's equity is $20,000 ($50,000 minus $30,000).

A conventional "no money down" way to purchase the property would call for the buyer to assume the first mortgage of $30,000. The buyer then would give the seller a second mortgage for the $20,000 balance at 10% interest with payment of $200 per month. The purchaser's total payment would be $445 per month ($245 + 200).

In order to avoid the cost and liability of assuming the existing mortgage, offer the seller a $50,000 wrap-around mortgage, payable at the rate of 10% interest with payments of $445 per month. On the surface, it appears to be the same proposition, but look at the difference.

A wrap-around mortgage is a new mortgage which literally "wraps" around the old mortgage. By using a wrap-around mortgage, the buyer makes payments on the old mortgage. Since the payments on the new mortgage are larger than on the old mortgage, the seller keeps the differences.

In this example, you will pay the seller approximately $5,000 per year interest ($30,000 x 8%) on the first mortgage. The seller will keep the difference, or $2,600 per year ($5,000 minus $2,400). The seller's equity is $20,000 so the seller is actually netting approximately 13% ($2,600 divided by $20,000) on the transaction, and the first mortgage is being paid off at a faster rate than the wrap-around mortgage. Therefore, when the first mortgage is paid off in fifteen years or so, the wrap-around mortgage will have an unpaid balance of about $35,000. The seller's equity has effectively grown from $20,000 to $35,000 which is good for both parties.

Technique 2

On this one you would create a promissory note and mortgage on the existing equity you have in an asset (home, boat, investment property, automobile, vacant land, etc) and use it as a down payment on another property. Equity is the value of the property minus any mortgages or liens.

Assume that you located a two family property that is on the market for $60,000 with an existing $25,000 mortgage. Therefore, the seller's equity is $35,000. You now create a promissory note and mortgage in the amount of $15,000 secured by equity in one of your assets. Use that as a down payment on the two family property and ask the seller to take a $45,000 wrap-around mortgage for the balance. When you buy the two family property, you will immediately have $15,000 equity in the property because of the $15,000 down payment.

The mortgage that you are creating on your asset should have a substitute of collateral clause, allowing you to later move that mortgage from your asset to another property where you have equivalent or greater equity. Thus, you might use equity in your own home to buy investment property "A"; your equity in "A" to buy "B"; your equity in "B" to buy "C"; and then, by the substitution of collateral clause, move the mortgage from your own personal residence to your most recent purchase, property "C". If the seller of the two family property, property "A", is concerned about not receiving any cash at the time of closing, the note and mortgage can be converted into cash by selling them to someone else.

Technique 3

The seller might be willing to sell "no money down" and take back a mortgage for the entire equity of a property. However, the seller might be afraid that you will walk away from the property before building up a substantial equity, forcing the resale of the property all over again. If this happens, the seller may be fearful of getting the property back in a condition worse than when it was sold to you.

You can overcome the seller's fears by offering additional collateral with a blanket mortgage. A blanket mortgage includes more than one property. You can include equity in your home, other property or even an automobile under the terms of a blanket mortgage.

NOTE: the blanket mortgage that the seller will be taking back may be for a term as long as five or ten years. Since you do not want to tie up your extra property for that period of time, make certain that the mortgage contains terms that will allow you to release your home or other property from the mortgage after you have made payments on time for a period of six, 12 or 18 months.

Technique 4

A good source for capitol to help a new investor begin can be found in the investor's own home or investment property. Many lending institutions make loans secured by the equity in your home or other properties, usually for about 75% of their value. If you look for special offers, you can get as much as 80% to 85%. The interest rate is usually tied to the prime rate: for example, prime rate plus 1% or 2%.

The payoff period, or time in which the investor is required to repay the loan, is five to fifteen years, depending upon the lending institution. Most institutions do not charge any points (the percentage of the loan that the borrower must pay to the bank) for making the loan. In addition, the origination costs of the loan are very small.

Technique 5

This technique works well when the seller owes nothing on the property or when the amount the seller owes is not greater than 40% of the value of the property; however, you must have a flexible seller who is willing to help finance the property.

For example, assume the seller of a $50,000 house has an existing loan of $12,000 is looking for a $15,000 down payment and is willing to carry the financing for the balance of $23,000 ($50,000 minus $12,000 minus $25,000). Simply obtain a new first mortgage for $27,000 which can pay off the existing $12,000 mortgage and give the seller $15,000. Next, give the seller a second mortgage in the amount of $23,000. The $27,000 first mortgage plus a $23,000 second mortgage gives the seller his or her total asking price: $50,000

A seller who may be initially reluctant to accept this offer may ultimately agree to accept an offer with more cash up front. For example, obtain a new loan in the amount of $5,000, giving the seller an $8,000 larger down payment than expected, or a total of $23,000 ($35,000 new mortgage proceeds minus $12,000 old mortgage pay-off).

Some sellers have even been known to join the buyer in signing a note and mortgage at the bank. If the buyer does not have sufficient credit to get a new mortgage, the seller in effect loans his or her credit to the buyer.

Technique 6

A higher interest rate may encourage the seller to accept terms that would otherwise be unacceptable. This technique could allow a seller to postpone a portion of capital gain that might otherwise have to be reported in an installment sale under the new tax law.

For example, a seller has a property for sale at an asking price of $100,000. The property has an existing assumable mortgage of $50,000 payable at the rate of $450 per month. The seller wants $10,000 cash at close and will extend you a loan of $40,000 in the form of a mortgage at 10% interest.

Offer the seller $95,000 with no money down. Agree to take over the loan of $50,000 and pay 15% interest on the remaining $45,000 for a period of five years. The result is a monthly interest payment of $563 ($45,000 x 15% divided by 12 months) to the seller. You initially pay only the interest with $45,000 due in five years.

If the total monthly payments for the first and second mortgage of $1,013 per month ($450 + $563) result in a negative cash flow, restructure the second mortgage so that only a portion of the 15% interest is paid monthly. The balance would be accumulated but not compounded and would be due along with the $45,00 at the end of five years.

Technique 7

From time to time you will come across a property listed by a broker that is being offered for a 10% down payment. Typically the seller is asking for the 10% to cover the broker's commission as well as closing costs.

Brokers’ commissions are generally 5% to 7% of the purchase price. If a broker both lists and sells the property, the broker receives the entire commission. If another broker is involved, then usually this commission is split 50/50.

Borrowing a portion of the commission or giving the broker a portion of the ownership in lieu of all or part of the commission is sometimes possible, especially when dealing with a listing broker. If the listing broker is also the selling broker, the commission will not be split and the broker will be in a better position to loan part of it to you.

If you find some initial reluctance from the broker, you might try to make the proposition more attractive by offering to give the broker a note for an amount larger than the commission. For example, if the broker's commission is $5,000, you might consider offering a $6,000 promissory note of 1% per month. In other words, every month you would make a payment of $60 to the broker. At the end of the year you would have reduced, or amortized, the note by 2% or $120. The note could become due and payable in five to seven years. Generating all or part of the down payment in this way is a inexpensive way to do it.

Before approaching an agent or broker about borrowing commission, it is important to understand how the commission is determined in a real estate office. When a seller lists a piece of property with a broker, the broker's compensation is spelled out in the contract. It is usually computed as a percentage of the total selling price. Similarly an agent or salesperson has an agreement with the broker that sets the amount of commission received by the sales person when a transaction is completed. The rate of a broker's and salesperson's commission is always negotiable.  Make sure you play around with these figures in your profit calculator so as to see how they might affect the feasibility of the deal.

Another way of doing business is the Re/Max method and is one of the best ways to exercise this creative financing technique. Re/Max is a nation-wide brokerage firm that rents office space to its agents. In addition to rent, they also must pay a fee for the benefits of advertising done by Re/Max. The agent receives 100% of the commission on property sold. These agents and brokers are usually more receptive to lending all or a part of their commission to you than the more traditional agents and brokers. Check with your brokers to find out about the commission arrangements for his or her salespeople.

Technique 8

Lets assume you locate a property that is on the market for $50,000 and it has an existing $40,000 assumable mortgage. The seller's equity is $10,000 which is the down payment required to buy the property. The property has been on the market for four or five months without selling and the owner is getting anxious. Offer the seller $6,000 cash contingent upon being able to locate a new second mortgage. If the seller accepts that, you will proceed to find a lender to loan you $6,000 in return for a mortgage.

Banks and savings and loans are reluctant to take second mortgage loans on investment property like this because the property already has a loan for 80% of its value. Therefore, you will probably have to go to a private lender. Check the classified ad section in your local newspaper. You will find that there are private lenders who advertise that they will buy mortgages for cash. Call one of these lenders and tell them that you have a property that is appraised for $50,000 (if it is), has an existing $40,000 first mortgage on it, and you are in need of $6,000 cash. Ask them how large a note and mortgage would have to be and what the interest rate and term would be for them to give you $6,000. Assume they respond by telling you they would need a $7,500 note and mortgage at 12% interest for a term of five years. You would then determine, by doing a financial analysis of the property, whether or not the net operating income would support the payments on this new second mortgage and assuming the existing mortgage. If it does, you would proceed with the translation and, in effect, buy the property "no money down."

Other No Money Down Techniques

Some sellers are in a position where they are not able to sell their properties unless they actually receive cash at the closing. If you are using one of the techniques that does not allow the seller to receive cash, you might not be able to buy the property unless you can show the seller how to convert the note you are offering to cash. Let us look at several ways that the seller might accomplish this.

Technique A

An active market of investors is eager to purchase notes at a discount. While this is probably the least desirable way to generate cash, selling a $10,000 note for $7,000 to $7,500 is not difficult, depending upon its interest rate and term. This process is known as discounting a note.

Technique B

The note could be taken to a bank, with whom the seller has a good banking relationship, and pledged as security for borrowing money. While the seller will probably be paying 3% to 4% more for the money than what is being received from you in interest. This way is still much less expensive to generate cash than selling the note at a discount.

Technique C

Let us say that you have purchased a property and have given a $10,000 promissory note to a seller secured by the real estate that you purchased. If the seller does not need the entire $10,000 or even as much as would be received if the note were sold at a discount of 30% to generate $1,400 in cash, another new note for $2,000 could be used by the seller as a down payment to buy real estate. The seller would still have the original note for $10,000. $6,000 of that note would be "free" and would generate income for the seller.

Technique D

Most people are aware that when they receive a note, they have an asset in the amount of the note. What most people do not realize is that they really have two assets: they have the note itself and also cash flow that is coming each month or each year from that note.

Assume that you gave the seller a $10,000 promissory note bearing interest at 9%, payable $900 per year. That $900 per year income that the seller is receiving could be sold at a discount, or for that matter, the seller could sell several years of income at a discount to generate cash. This technique would leave the primary asset, the $10,000 note itself, untouched.

For more information on buying with no money down, click here.

Agreements for Deed (Land Contracts of Contracts for Deed)

This form of seller financing is quite popular in some parts of the country, yet practically unheard of in others. It calls for the purchaser to pay for all or most of the property before he or she receives legal title. In its simplest form, an agreement for deed works like a mortgage, except that legal title does not pass until a predetermined and stipulated number of payments have been made.

Theoretically, it provides additional protection for the seller because in the event of default, where the purchaser does not make the payments as agreed, the agreement for deed usually stipulates that the money paid to the date of default is deemed to be rent for the period from the term of possession to the date of default. No foreclosure is necessary. Technically if default occurs, to clear the title especially if the agreement for deed or an affidavit and memorandum of agreement have been recorded in the public records, a quit claim deed should be given by the purchaser to the seller to release the purchaser's equitable interest in the property.

When an agreement for the deed is used, the contract will call for specific dollar payments, usually monthly, with the money applied first to interest on the purchase price, then to charges such as real estate taxes, insurance and special assessments, if any, then to the unpaid principal balance of the purchase price. The contract may call for these payments to be made for any agreed upon time, such as a year or even thirty days, before legal title will pass. If the contract states that the legal title will pass before the principal balance is paid in full, a "balloon" payment will usually become due, although the seller could take back a note and mortgage in lieu of the balloon payment.

Some people believe that an agreement for deed provides a legal way around due-on-sale clauses found in many mortgages. Not so. The due-on-sale clause is triggered by any transfer of legal or equitable title to real estate. While legal title is not transferred with an agreement for deed (until the stipulated number of payments have been made), equitable title has passed. From a practical standpoint though, the due-on-sale clause is not triggered because no deed has been conveyed and recorded and insurance continues in force in the name of the seller. It is unlikely (but not impossible) that the lender would learn of the transaction.

Lease Options

A lease option gives you an opportunity to enter into a contract with the seller/lessor where you pay rent, but a portion of your rent payment will be credited towards the purchase price. A down payment, if required, is not necessary until the lease option ends. By then you should have had enough time to obtain the money for a down payment or decide against purchasing the property. If you decide against exercising your option, it could be sold to another purchaser for cash.

In its simplest form, a option is nothing more than a legal right given by a seller to a buyer for purchasing property at a predetermined price. An option must be in writing and consideration must be present to make it legal. Consideration refers to something of value (usually money) that serves to induce one to enter into a contract. It is only binding on the seller.

Benefits to the Seller

• Price of property is at the top of market value range.
• Option money received is tax deferred.
• When the option is exercised, money from the buyers is taxed at ordinary income rates.
• The tenant has "pride of ownership" and an incentive to take better care of the property.
• If the rent is not paid on time, the option is forfeited (so the rent is always paid on time).
• The rent, including option payments, is usually set at or above the fair market rent.

Benefits for the Purchaser/Optionee

Usually the option consideration paid by the purchaser is relatively small compared to the value of the property. Therefore, very little risk is involved in controlling a large property. The purchaser is betting that the property will increase in value beyond the agreed-upon option price. If the buyer is wrong, they can walk away from the contract with no obligation.

An option gives the purchaser control and in the case of a lease option, possession as well. The purchaser gets the benefits of occupying the property and perhaps even improving it to create more value. The purchaser could even generate profit from the property by leasing it to someone else.

Option Consideration

While an option contract must have consideration, it need not be money. It can be a mortgage on a property you already own or an unsecured promissory note. It can even be equity that you have in some other property that may be a dead asset to you or an asset, you no longer want.

Lease Option to Purchase a Personal Residence

Assume that you are a renter or you are living in a home that you own and you would like to have a nicer home, a larger home or a better neighborhood. You come across a seller who is willing to sell or rent his or her property. The home has a fair market value of $60,000 which is also the amount that the seller is asking. On the other hand, the seller is willing to rent it on an annual lease for $500 per month.

When you talk to the seller about lease optioning the property, he or she agrees to apply $50 of the $500 monthly rent payment toward the $60,000 purchase price. You learn that the property has a mortgage in the present amount of $38,000 with an interest rate of 9% and payable at the rate of $338 per month. The seller is asking for a $15,000 cash down payment and would be willing to take back a $7,000 mortgage.

The first thing you should do is contact the bank that holds the mortgage to determine whether it is assumable. In this case, the bank informs you that it is not, but would be willing to rewrite the mortgage at a blended interest rate representing half the difference between the current rate of 9% and the market rate of interest which is 11%. The new blended rate would be 10%. Be sure to ask if this is a standard bank policy and will apply in the future. Assume you are told that the policy will remain the same but the then-current market rate of interest will apply. The blended rate could be higher or lower depending upon the level of the current market rate at that time. Ask the loan officer to summarize the bank's policy in writing. In addition, make sure that the loan officer to whom you are talking has the right to legally commit the bank.

Reapproach the seller with an offer to lease option the property, but with slightly different terms. Do not offer the $60,000 the seller is asking, but rather a premium of $65,000. In return, however, you would like to have the option period extended from one year to three years. Further, offer to make a monthly rent payment of $600 rather than $500, but in return ask that the seller give you a monthly credit of $300 toward the purchase price. Then proceed to explain all of the benefits to the seller for entering into an arrangement like this.

The seller is going to have a positive cash flow over the three year option period of $4,500 ($600 minus $475 equals $125 per month multiplied by 36 months). While you, the purchaser, are paying $600 per month, $300 of that is a credit toward the purchase price.

When the option period is over, you will have a total of $10,800 as a credit toward the $65,000 purchase price ($300 per month multiplied by twelve months multiplied by three years). By that time, assuming just 5% rate of inflation based on the property's current fair market value of $60,000, the property should be worth $70,000. You will only need $54,200 to buy the property ($65,000 minus $10,800).

The existing mortgage principal will be decreased to approximately $17,000 due to payments made over the three year period. It will provide a good portion of the money needed to buy the property. You also know that you will be able to get a blended interest rate from the lender and will have immediate equity in the property of $15,800 ($70,000 value minus $65,000 purchase price minus $10,800 option credit). You need to obtain only the $17,200 difference between what you owe and the first mortgage balance $65,000 minus option credit of $10,800 less first mortgage of $17,000. Because the value of the property at the end of the option period is $70,000 a bank will finance 80% of that value to provide all the necessary money (80% of $70,000 fair market value = $56,000!). Another alternative is to sell the property at the end of the option period for a profit.

As a result of this transaction, you will have lived in the property for a net cost of $300 per month. The yearly total of $3,600 represents just 5.5% of your option price; in effect, a "no money down" transaction with an interest rate of 5.5%

Take into account the fact that the property will probably increase from the $65,000 option price to $70,000. The $5,000 increase in value, divided by three years or $1,667 per year, really belongs to you. If you credit that increase against your net out-of-pocket cost of $3,600 per year in rent, your actual net cost was $1,933 per year or only 3% of the option price. This is a perfect example of how a lease option to acquire property in which you will live can be powerful for the purchaser and yet still be an attractive proposition for the seller.

Sublease Income Property For A Profit

Sometimes you will find a property which would not be suitable for your personal residence and yet would make a good rental property. What if you find a single-family home that is selling for more than its fair market value? The property is being offered at $65,000 and its value is about $60,000. If rented, its fair market rent would be approximately $575 per month.

You could offer the seller a three year lease option with payments of $550 to $600 per month. You could then sublease the property to a tenant for $575 per month and have, depending upon the terms of your lease option, a cash flow of approximately plus or minus $25 per month. If you have to supplement the rental income with cash out of your pocket, it will probably only be temporary. Over the next three years, you could reasonably expect rents to go up at least 5% per year. By the end of the first year, you will probably have a positive cash flow.

Once again, make sure that you use the profit calculator to make sure your sums are right.

The benefits to the seller in this kind of situation are as follows. Not only would the seller receive the asking price for the property, but all of the tax benefits of owning real estate would be retained because the property is being leased and is now considered investment property. Untaxed monthly income would also be received.

The benefits for the buyer are obvious. While you may have only a very small positive cash flow, you are receiving a $200 per month credit toward the purchase price. You are, in effect, banking money each month, and the tenant is paying for it.

This technique incidentally can work with any size property. You could even lease option an eight unit apartment building. While you may not have a strong positive cash flow during the period of the lease option, you could be fixing up the property and raising rents.

You might even find an owner who is currently paying a 10% management fee to an outside management company who would be willing to lease option the property to you for 10% to 15% less than the current rental income level. That way you would have a positive cash flow while you are lease optioning and then subleasing the property. This technique of using lease options and then subleasing is referred to as a sandwich lease option.

Protecting Yourself With Lease Options

If you enter into a lease option agreement without taking care to protect yourself, you might find that the specific terms of the lease option are so binding that it will be almost impossible to exercise. The following precautions are important:

• Record the Option
  Every time you enter into an option agreement with a seller, you should record the option in the public records of the county in which the property is located. This protects you , the purchaser, more than it does a seller. It provides notice to the world that you have an option to buy the property. If the seller should sell the property to anyone during the option period, the new purchaser will buy the property with the knowledge that you have an option to buy the same property.

  To record the option, it must be notarized and witnessed by two people. If the option agreement is signed before this notarization takes place, the seller might be reluctant to later sign a second time in front of a notary public. Make sure it is all done at the same time.

  If you consider the terms of the option confidential, then record and Affidavit and Memorandum of Agreement Affecting Real Estate. This will put the world on notice that there is a pending sale of at least an agreement that could affect the real estate in question, without disclosing the terms of the agreement. As in the case of the option, it should be witnessed and notarized.

• Right to Sublease
  Whether you plan to live in the property or not, you should always make certain that your lease option will give you the right to sublease the property to another tenant. That right is not inherent in a lease unless specifically spelled out.

• Right to Assign
  In some states, the right to assign a contract is protected by law. In other states, it is not. Assignment is the right to transfer the contract to someone else. To avoid any misunderstanding or litigation, you should make sure that the right to assign the contract is spelled out in your lease option contract. If you do not exercise the option yourself, you should have the right to sell it. Your "equity" in that property is valuable. After all, you have been paying rent each month, and a portion has been allocated to the option price.

  By providing you with the right to assign the contract, the seller also benefits. The seller does not have to find another buyer for the property.

• Right to Extend
  Some lease option contracts will have a section which spells out the terms under which the option may be extended, known as an extension clause. Other contracts specifically say that the extension of the lease option is prohibited. Some contracts may be silent on this point. Regardless of what your lease option says or does not say, make certain that you have the right to extend the option period for at least a period for one year.

  This right may be expensive. For example, you may have to pay an additional 5,000 in earnest money, and the option price may be increased by several percentage points. However, in the end, it will be less costly than if you were not able to exercise the option when you want to, thereby losing all of the credits that you have built up.

Negotiating

Negotiating the deal can have more to do with whether or not it's accepted than with the terms themselves. The terms of your offer can be good for the seller or they can stink, but the plate it's served up on can often be the difference of a yea or a nay.

Obviously a bad deal for the seller is a hard sell, but many times a seller will be willing to work with an offer they had no intentions of taking based on the fact that they like you and little more. This is very important to remember and it's one of the basic tenants of selling anything.

You may think you're trying to buy a piece of property but what you're really doing is selling yourself. The seller evaluates the deal based not only on the particulars of the offer but on whether or not you, the buyer, will be able to deliver the goods.

Never Criticize the Property

Never, never, never criticize the property to the owner. They will always take it personally. Count on it. If you're trying to negotiate the price down, get better terms, etc., then use something other than criticizing the property. If you love the property, they'll love you. If you criticize the property, when you leave they'll criticize you. Count on that too.

Things you can say:

• "I'm planning on investing money into remodeling and I have to be careful to stay within my budget."
• "This home is so beautiful I wan’t to put some money into it but I have to stay within my budget."
• "Do you think I'll have to fix that crack in the foundation?"
• "Do you think it's serious?"

What he thinks, is actually ilrelevant to your decision to buy the property but let HIM criticize his property.

Understanding and Identifying the Seller's Needs

Your needs are obvious to you -- better price, no money down, etc. But what about theirs? The asking price and their initial terms more often than not are not their real needs or wants. Those are usually just the things that would safely take care of their real needs or wants. You have to break through the veil and enter the place where the bottom line lies. This is never accomplished initially because they didn't plan on telling you. And they never will tell you until they first trust you. They will have to like and trust you before they tell you their secrets. It's all personal relationships. Work on building trust and a relationship and the deal will be worked out. Try to skip the relationship and you don't have enough money to buy what they're selling.

What Do They Like?

So how do you get them to like you? Appreciate the things they love. What are they? This is the easiest part. People love to talk about the things they love. Ask for a tour of the house or property, even if you have already been over it with a fine tooth comb. Go very slowly and notice everything. You'll soon see what they love, all around.

• "That's a lovely vase Mrs. Jones, is it an antique?"
• "I see you collect guns. My dad is an avid hunter. Do you hunt?"
• "Is that a tiffany?"

Don't be phony, but rather be very sincere. Get into their lives and they'll usually open up.

Take all the time necessary to build a relationship before you move to the nuts and bolts of the deal. Once you are at the negotiating table, take your time and don't rush it. People get nervous and tense if they are being rushed.

Stay away from an inflexible statement like, "This is all I'm offering." Rather use flexible words like, "I believe I can offer this. Do you think you can work with me?" Be prepared to have the seller tell you he or she needs all cash, because you're going to hear it often enough.

At this point asking the seller what the cash will be used for can open up that inner sanctum of real needs that we talked about earlier. If the seller responds by saying they need it to purchase another home, you now have an opportunity to explain some of the creative financing techniques that would allow him or her to buy the home with no cash.

If the seller responds by saying his or her reasons don't matter, you could then say you would like to give them their cash down payment, but ask if it could be spread out over a period of time, say two or three years.

Whether you are purchasing a million dollar apartment building or a single family home to live in or rent out, your negotiations are going to center around six things:

• Price
• Terms (interest rate, length or mortgage, etc.)
• Down payment
• Closing date
• Monthly payment
• Personal property (appliances to be left etc.)

The more you can learn about the seller's true needs as they relate to each of these areas, the more successful you'll be.

Don't ever argue with the seller. If he is obviously wrong, use the old third party analogy to correct him.

Do your research and crunch your numbers before you ever get to this negotiating stage and use third party analogies to relieve tension. The seller won't feel that you're trying to argue and antagonize him this way.

Be Prepared

Have a negotiating checklist.

Example:

• Seller to pay all closing cost instead of just part.
• Seller to warrant all appliances for a period of one year.
• Mortgage to be amortized over forty years instead of thirty.

Compromising is what negotiations are all about. If you come to the table with a non-abrasive open mind, the seller will most likely have an open mind, and that is fertile ground for a win/win situation.

Distressed Property Opportunities

One of the fastest ways to make large cash profits or equities in real estate is to buy properties substantially below their present or projected renovated market values. These bargain properties, some call distressed properties, offer the greatest opportunity for cash and equity profit.

Forced Sales

Forced sale properties would include FHA, VA and HUD foreclosure sales, tax sales, bankruptcy sales, government services administration spare property and drug arrest acquired property, developer close-out sales and auctions, property taken back by corporations in connection with employee transfers, civil judgement sales, IRS sales, probate sales and estate sales.

Many of the properties that are forced sales by the courts will often be run down and in need of repair, so look them over carefully.

Foreclosures Sales

Recent statistics show foreclosures are on the increase. As a matter of fact, the foreclosure rate is higher now than at any times since 1929. Unfortunately, this upward trend will probably continue because the stigma attached to bad credit and bankruptcy is not as great today as it once was.

Foreclosures occur for two reasons: either the owners do not want their properties or they cannot afford them. In some larger metropolitan areas, like New York and Los Angeles, declining neighborhoods have caused some owners to just walk away and abandon their properties. These properties are then repossessed through mortgage or tax foreclosures. The most common reason that properties are lost through foreclosure, though, is that the owner cannot afford the monthly payments because of divorce or loss of employment.

Adjustable rate mortgages (A.R.M.s), which were designed to help people buy homes by providing lower monthly payments, have created their own set of problems. When people borrow money with adjustable rate mortgages they have no idea what will happen to their future monthly payments. Since some of these mortgages were originated four to five years ago, there has been a consistent increase in the monthly payments. Home owners by the thousands have lost properties through foreclosure because of their inability to make these higher and higher payments.

Many people think that lenders like foreclosure because the lenders are going to get back a property that is potentially worth more than the amount owed. As a matter of fact, nothing could be further from the truth. Lenders will frequently go out of the way to avoid a foreclosure action.

The Foreclosure Process:
Delinquency

When a borrower fails to make a monthly payment on time, the lender sends a friendly reminder letter. If the payment is not received within a few days, another letter is sent warning of potential foreclosure. At some point in time, usually within thirty to sixty days, the lender turns the matter over to an attorney. The attorney contacts the borrower by mail and explains that if the mortgage is not brought current within a certain time, formal foreclosure proceedings will begin. This is known as the redemption period. The last date given for bringing the mortgage current is known as the cure date. During this period, most borrowers and lenders are extremely interested in talking to you as an investor about buying the property. The cost of bringing the mortgage current is at its lowest during this time because expensive forclosure proceedings and large atttorney fees have not been added into it. Usually only the interest, principle and penalties would be due at this point in time plus a small attorney fee.

Once the cure date is reached, the foreclosure period begins. In most states the attorney will file a notice of the action at the county courthouse in which the property is located. The attorney will also go to court and ask for a judgement directing the sale of the property. A copy of the summons and complaint will be served against the defendant (the borrower).

You, as an investor, can still buy the property at this point. However, the cost will have risen substantially primarily because of attorney fees. Also, you will have no assurance if you do buy the property that there are not other liens which must be satisfied. For example, other mortgages or even judgements from local professional people or credit card companies may be outstanding.

The Foreclosure Process:
The Public Sale

After a period of time prescribed by state law and a notice to the public has been printed in the newspaper, the sale of the property is held at a public action in a public place, usually the county courthouse. If you have never been to one of these auctions, you should attend one just to become familiar with how they work.

The lender, by law, has an automatic bid for the total amount owed. The lender may not bid higher than that figure. If there are no other bidders, then the lender will receive the property for the entire amount owed (amount of loan plus interest plus expenses). Once the lender has taken title, these properties are referred to as R.E.O.s, or real estate owned by the lender. They also represent a good investment opportunity.

If the R.E.O property is ultimately sold by a lender for less than the total amount owed, the lender will probably go to court and seek a deficiency judgement against the borrower. If there are excess funds from the public sale, however, these would rightfully go to the borrower.

Locating Foreclosure Opportunities

Foreclosure opportunities exist in three separate time frames: the period up to the foreclosure sale, the foreclosure sale itself, and finally, once the property has reached the status of R.E.O You have several ways to locate foreclosure opportunities during these three stages.

In some jurisdictions, the lender will post a notice on the property that it will be sold at a public auction. In some cases, too, the run-down condition of a property may indicate a foreclosure is in process. In either case, your course of action would be to approach the owner/borrower, not the lender.

Purchasing A Property In The Initial Stage Of Foreclosure

WARNING!  This is only a brief introduction.  Buying foreclosures can be tricky and risky unless you know what you are doing.  I STRONGLY recommend that you learn more before you dive in!  Here is a highly recommended resource that will take you step by step through a proven system:  click here for more details.

To purchase property during the initial stage before foreclosure proceedings, you need the unqualified permission from the bank and the owner of the property. If either refuses, buying the property and bringing the mortgage current will be impossible.

Assuming the seller is willing to allow you to bring the mortgage current and buy the property under terms that are favorable to you, you should then visit the bank and determine whether you will be permitted to assume the mortgage if you bring the payments current. If the mortgage has a due-on-ale acceleration clause, but you are given permission to assume it, find out what the new interest rate will be. Be sure to get the answers in writing from an officer who is able to bind the bank corporation.

Assuming that you have assured yourself of the satisfactory physical condition of the property, now get a preliminary title report from a tittle insurance company. For a cost of approximately $50 to $100, the title company will give you a report on the title and will determine if there are other liens against the property, such as a judgement lien from a local finance company.

When you are satisfied about all aspects of the transaction, have the title insurance company prepare a deed which will be signed by all owners of the property. Their signatures should be witnessed and notarized by a notary public. You should quickly record the deed in the public records. Then be sure and obtain fire and casualty insurance for the property.

Purchasing A Property At Public Auction

(Again,  learn more before you dive in!)

You may find that either the bank is unwilling to allow you to assume the mortgage or that you do not want to buy the property before the auction because of the large number of liens that exist. If you are satisfied, however, that you would like to own the property, you need to make plans to bid at the public sale.

There are several ways that can be used to determine when the public sale is going to be held.

• Contact the Sheriff's Department and ask the secretary to the Sheriff to look at the court calendar.
• Contact the lender's attorney and ask when the property will be sold at auction.
• Go to your local legal newspaper and check the ads to see when the property will be sold.
• Visit your courthouse to review a posted schedule of foreclosure sales.

Once you learn the sale date, contact the lender's attorney to find out if the lender will accept any other terms than all cash. If the lender will not (and most will not), you will need to make arrangements to get the cash yourself.

Many properties have been sold on the courthouse steps for 50 or 60 cents on the dollar. If the property in which you are interested represents this kind of a bargain opportunity, generating the cash needed should not be difficult. You could go to private lenders or partners who might advance the money needed, or if you have sufficient credit yourself, go to a local bank and get a 90-day loan. Once you buy the property and make any need repairs, you will be able to put a new mortgage on the property and take out whatever cash you had invested, or maybe even more than you invested.

Purchasing property at a public auction can be a very risky business. You have to know what you are doing. You not only need to be absolutely certain, through an engineering report (by a firm recommended by a broker or banker), that the property you are buying is in reasonably good condition or at least be familiar with its faults. Further, you need to have a good understanding of market value, and all the other factors involved in an accurate risk:reward assessment so that you are sure that you are getting a bargain.   Know your figures and know your maximum bid.  Once again, the Real Estate Profit Calculator is an essential tool.

Making Money On R.E.O.s

When there are no other bidders at the public sale, the bank, by law, becomes the owner of the property. These properties taken back by banks are not assets, they are liabilities. Banks are naturally eager to sell these properties to generate cash or a mortgage loan, both of which would be assets.

Every banks has a list of R.E.O.s which it is generally willing to show to you, especially if the bank thinks you are a sincere and qualified investor.

Assume that you select one or two properties from the list that you think would make good investments. If the asking price is not shown on the list, then find out the price and terms from the banker. Remember, the banker's first price and first offer of terms is not the final one. Most bankers are willing to negotiate, especially with R.E.O.s. Some bankers are even willing to sell the properties on a lease option.

GOVERNMENT AGENCIES OFFERING FORECLOSURE PROPERTIES

Few people are aware of the large amount of property that is seized by federal government agencies and then later sold at bargain prices. Although it is beyond the scope of this document to list properties for sale by individuals across this country, we have provided the following LINKS from all the government agencies we're aware of that have property for sale in practically every decent sized city in America.

This LINKS are updated regularly and can be referred to as often as necessary.

www.gsa.gov/pbs/pr/prhome.htm

www.fdic.gov/assets/flauct.html

www.financenet.gov/exsales/www.usdoj.gov/nsl.html

www.treas.gov/auctions/customs/realprop.html

www.va.gov/vas/loan/homes.htm

www.financenet.gov