Single Family Homes - The No Risk Investment! - Part 17 11-14
Hard Money Lenders
Traditionally hard moneylenders make real estate loans available at high
cost and above average investing rates, for short periods of time. Typically they
will loan 50% to 70% of the value of a property for less than a year. They charge
very large upfront fees and they want to turn their money over frequently to collect
those fees. The up front fee for a loan of just a handful of months might run
$5,000 or more… depending on the size of the loan.
Most often this money is used for rehab properties. The investor is able to
buy a property with a “after rehab value” of $100,000 for $50,000. He finds a hard
money source that will lend the $50,000 for five months. That gives the investor
the cash to buy the property and the time necessary to do the rehab work and sell
the property to a retail buyer who will cash out the investor with a new loan.
Some hard moneylenders will loan money for the short period of time
needed to buy and sell homes in preforeclosure, or homes that have been taken
back by banks and other lenders.
As you gain experience you will want to watch for those who will make
these expensive, short-term loans. There will be times when you find deals so
good that you can afford to pay the high loan costs and still make money. Some
times you can have these hard money loans as soon as the next day. They can be
invaluable when you have no other alternative.
You can sometimes find hard moneylenders through mortgage brokers.
Experienced real estate brokers often have contacts with these lenders. Watch for
ads in the business section of your newspaper. You often see hard moneylender’s
ads in the “Income Property” section of the Sunday newspaper classified ads. Ask
other investors at a meeting of your local real estate club.
Private Lenders
When you have developed some expertise and a track record in finding and
controlling profitable deals you can begin building a stable of “private lenders”.
This will become your very best source of funds.
You find private lenders by offering a higher rate of return than can be had
from conventional sources, such as CDs, bank deposits, bonds, etc.
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If CDs are paying 5% and you can offer 9%, you have a very powerful
investment to offer anyone with money to invest.
Private lenders can be found at almost every social level of your community.
Your challenge is to diplomatically make them aware of the high rate of return you
can offer. Here’s the way you ask every person you encounter in your daily life:
“I know you wouldn’t be interested, but do you know of anyone who would
like to earn 7% to 18% on short term investments secured by real estate?”
The magic of that sentence is that your target does not feel he is being
squeezed to make an investment. If it sounds like something he is interested in he
will ask you for more information. If it’s not for him he still may spread the word
among his friends and coworkers. Either way you come out a winner.
Here’s a newspaper ad that has been effective in flushing out private
investors when run in the business section of newspapers:
7% - 18% INTEREST!
Secured Real Estate
Notes
(Deeds of Trust)
on
SINGLE FAMLY HOMES
30-70% Loan-To-Value
$10,000 to $1 million
First & Second Positions
000-111-2222
THE HOME BUYER LLC
There are many ways you can structure your deals with private investors.
One is to form a Limited Liability Company with the two of you as members. The
two of you agree that the LLC will buy the property you have found with your
investor putting up the needed cash. You than formulate a company resolution that
the property will be purchased with the investor taking title. The property is to be
sold to a lease option buyer with the term of the option set at two years. When the
option is excised the net profit will be split 50/50 between the two members of the
LLC.
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Or you find a property. Present it to your investor and ask him to lend you
the money to buy the property. He will receive a mortgage on the property to
secure his investment. The mortgage loan will pay 91/2% (or whatever rate
necessary) interest only for a two-year period. The two-year period is for safety,
for your goal is to sell the property to a retail buyer as soon as possible. The buyer
will cash you out, so that you can pay off the loan and get to your profit.
The key is to find property you can buy at 30% or more below full value.
That’s why you want to sell as quickly as possible, so you can get to your profit.
Look, you can’t risk using private lenders until you really understand how to
buy below market value and sell for a profit. If you make mistakes with the money
of others you will surely learn more about lawyers than you’ve ever wanted to
know.
As soon as you gain some experience and can show people you are capable
of doing profitable deals it’s important to start looking for private money. You can
build extremely valuable relationships that will be like gold to both of you.
You want people you can count on and, after a few successful deals with
them, to be able to call them up and get money the next day. When you reach that
point you should be earning over 200-thousand dollars per year. AND your
investors will love you because you will be providing them with a return on their
money they can get nowhere else!
Once you start making money for others, money will begin finding you!
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TWELVE
ADVANCED TACTICS
What you have learned in these pages is everything you will need to steadily
and surely move toward financial independence investing in single family homes.
In this chapter you will be introduced to some advanced tactics. As you gain
actual investing experience you may find opportunities to use some of these
techniques. Please remember that the more complex a deal the more education you
need to avoid undue risk.
DUE ON SALE
We mentioned the due on sale clause in an earlier chapter, but let’s review it
here.
An assumable mortgage is one that can be taken over by the buyer of a home
with the consent of the lender. In most cases the buyer would have to qualify just
as if they were getting a new loan. There could be fees and points payable. There
is seldom an advantage to assuming an existing loan.
A mortgage with a due on sale clause (or acceleration clause) is one where
the remaining balance of the loan must be paid off if title and occupancy of the
property is transferred. Since Dec. 1989 FHA loans are not freely assumable and
VA loans have been due on sale since Feb. 1988.
In point of fact it is very rare that a lender enforces their right to call for the
pay-off of a loan. If the loan payments are current they apparently do not want to
go to the expense of taking legal action to force the pay-off and then reinvest the
money. This might change if interest rates increase to rates much higher than those
of existing loans. Then it would be in the best interest of lenders to demand pay
off and lend the money at higher rates.
The law that allows lenders to enforce a due on sale clause has some
exemptions. One of them reads “a transfer into an inter-vivo trust in which the
borrower is and remains a beneficiary and which does not relate to a transfer of
rights of occupancy in the property:”
Some aggressive investors use this loophole to avoid paying off an existing
mortgage when they buy a property. This is a way you can buy property for no
money down. You find a distressed owner who is willing to carry back his equity
in a second loan. You buy the property leaving the first mortgage in place and
make payments on both the first and second loans.
Investors often do this using a “land trust”. A land trust sneaks through the
loophole because it is a revocable, living trust (inter-vivo trust).
There are two steps to creating a land trust:
A. The land trust agreement is created by the grantor (the person who
creates the trust – the property seller).
B. Then the property is deeded from the grantor of the trust to a
trustee (often the trustee is the grantor/seller). The property is then owned
by the trust. A beneficiary is named in the trust.
The trust has three parties. The first is the grantor (he creates the trust). The
second is the trustee. The trustee administers the trust. And the third is the
beneficiary. He is the one who would benefit from the trust as described in the
trust agreement. All three of those could be the same person.
Here is how you would use the land trust to control a property that had a
mortgage with a due on sale clause.
1. The home Seller would create a land trust (under the Investor’s
supervision) with the Investor as trustee. In the trust agreement Seller would
be named as beneficiary of the trust.
2. Seller would transfer title by recorded deed to the trustee (That is the
loophole. It might not be a violation of the due on sale clause, because the
property ownership will be held in the land trust).
3. Seller then assigns his interest as beneficiary under the trust to the
investor/buyer. The assignment is not recorded. Seller moves out and
investor takes over the property.
4. Investor is now the beneficiary of the trust and his appointed trustee
makes payments on the mortgage.
Everything is legal with this plan until the investor takes over the
property. In effect that is occupancy and that is a specific violation of the
law enforcing due on sale.
Of course, none of the parties to the deal are going to notify the
lender, so how would he know there was a violation? One of the following
ways?
a.) A new deed is recorded - but lenders don’t usually monitor these public
records. Even so the property would be deeded into the trust and that alone
would not trigger the due on sale clause.
b.) Checks used for monthly payments would have a different name from the
original borrower. Clerks process these checks by the thousands. These
payments are often handled by a third party company that “services” the
loan. There is no reason for the new name on the check to attract anyone’s
attention as long as the payments are on time.
c.) The Investor would direct the insurance company to make him
beneficiary of the policy that covers the property. That can be the alarm
bell. In most cases an insurance change is how lenders discover a title
transfer. They are listed coinsured on the policy and receive notice of any
changes.
Because title was transferred into a land trust the new insured will be the
trustee of the land trust. Lenders are accustomed to property begin placed into
trust for estate planning purposes and usually take no special notice of such
actions.
As we mentioned above - the only time lenders might begin watching for
opportunities to enforce due on sale clauses is if there was a great disparity in
interest rates. If the home the investor was buying had an existing loan with a 6%
interest rate and new loans were going for 10% or higher the lender might want a
pay-off so he could reinvest the money at the higher rate.
Learning material is available on how real estate investors should use land
trusts. Do some study before you attempt to use land trusts.
Contract for Deed
An installment land contract, also called a contract for deed, is a device used
by some to buy and sell property. It is simply an agreement that says I own this
property and I will sell it to you. You will move in and treat the property just like
you own it. You will make the agreed upon payments to me in a timely manner.
When you have completely paid off the amount you owe to me I will sign the deed
over to you. Until that time the property has my name on the deed and if you don’t
pay I can foreclose.
Here’s an example of how you might use a land contract. You find a
motivated seller who is willing to sell his property to you for little or nothing
down, but we feels he would lose control if he deed the property to you.
This is a perfect situation for a land contract. You explain that you are
willing to buy the property under a land contract. Tell the seller that he holds the
deed until you have completed paying off the existing financing through monthly
payments…or a lump sum pay off at some point in the future.
You could then turn around and sell the property under a two-year lease
option at a profitable price and terms. At the end of the term the option buyer gets
a new loan, pays you off, you pay off the original owner and pocket the profit.
Land Contracts, land trusts and other creative instruments should not be used
until you understand them completely. Learning material is available.
In our own investing program we actively look for late model homes with
little or no equity. We find that owners are sometimes willing to deed these
properties to us subject to the existing loan with little or no money changing hands.
When we find a willing owner we prepare a deed and have him sign it on the
spot. Within the next few business hours we check title to be sure there are no
liens or loans against the property that the owner failed to reveal. If we find
something we don’t like we tear up the deed and inform the owner the deal is off.
If every thing is OK we record the deed and the property is ours.
We find we are acquiring these properties at about 8% to 12% below full
market value. We then quickly sell the property on a one-year to two-year lease-
option to someone with credit problems that prevent them from buying a home in a
conventional manner. We sell to this buyer for 10% to 15% over full market value.
Monthly payments are a little above the amount we must pay on the existing
mortgage, so we have a positive monthly cash flow. When the buyer exercises his
purchase option in a year or two we collect a profit of from $15,000 to $25,000.
Buyers with the impaired credit are pleased that we are making it possible
for them to get into a home of their own, even though we explain they are buying a
little above full value. In our area home prices are going up an average of about
6% per year. That means by the time they exercise the option the home will have
gained some value and they will have recaptured some of what they “over paid”.
A benefit of buying/selling homes built in the last one to three years is that
there will seldom be any maintenance or repair problems, and if there are they
should be covered by the builder’s warranty.
Lease options and sandwich lease options are powerful tools for real estate
investors. It will pay you to add some learning material in this area to your success
library.
There are dozens of ways to buy real estate without much cash. The secret
is that you have to compensate for your lack of cash with hard work, perseverance
and knowledge.
Suppose you find a seller with a home that has a market value of $100,000.
He owes just $40,000 on the existing mortgage and has $60,000 in equity.
You don’t have $60,000, so you have to try something creative.
You offer the owner $38,000 cash and your promissory note for $20,000
with interest only payments for 5-years. Where do you get the $37,000?
You have the homeowner refinance the property. He can get a new loan for
80% of the home’s $100,000 appraised value. That’s $80,000. He must pay off
the old mortgage loan of $40,000 and loan costs will be another $2,000. That
leaves $38,000 that goes into the seller’s pocket. He then deeds the property to
you subject to the new financing. You write him a note for an interest only, 5-year
$20,000 loan that is secured by a 2nd mortgage/trust deed on the property.
You’ve bought a $100,000 home with no money out of your pocket, the
seller leaves with $38,000 and you can rent or lease option it for profit. Yes, you
must find a seller who is motivated for this kind of deal. But look, Seller gets
$38,000 and a stream of monthly income for 5-years. At the end of the term he
gets another $20,000 cash…in a lump sum. He got a fast, no hassle sale and paid
no real estate commission, which saved him about $6,000.
On a deal like this you should be able to get the seller to reduce his asking
price by at least the amount of the real estate commission he won’t have to pay.
That’s another 6% profit you will collect on the back end of the deal.
You did not use any of your own cash with this deal. When we use our own
cash (or that of our investors) we insist on buying at least 30% below market value.
Cash is king and you must only use it for high profit deals. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
