Archives For creative financing

When traditional lending avenues fail, seller financing can help seal the deal. But watch out for pitfalls.

If you’re working with sellers who have seen offers collapse because buyers can’t get a mortgage loan, you might want to suggest they consider offering some variation of seller financing. If structured carefully, seller financing not only makes deals possible but also can typically help transactions close quickly, as less due diligence is required. After all, who knows the property better than the sellers?

There are other perks, too: Sellers can often negotiate an interest rate that’s more favorable than would be available for other sorts of investments. And they might also get a higher selling price as compensation for assisting the buyers. Finally, there can be some tax benefits; if the seller structures the loan as an installment sale, for example, there can be tax advantages based on how recognition of the capital gain is timed.

But against these benefits is the big downside of seller financing: the potential for buyer default. This risk is compounded if the deal is structured as a wrap-around deed of trust, as many are. With a wrap-around deed of trust, the seller issues a promissory note and deed of trust for the dollar gap between the amount of the first mortgage and the buyer’s down payment. When structured this way, the seller’s performance on the underlying first mortgage is linked to the buyer’s performance. If the buyer defaults, the seller will likely default, too.

Here are some ways to help sellers minimize such pitfalls, no matter how the transaction is structured.

  • Request a credit report and credit references. Sellers can get a credit report from any credit reporting agency, but they’ll want to get a signed consent letter from the buyer first. For credit references, one place to go is the buyer’s landlord, if they’re renting. Sellers should also ask for in­dependently audited financial statements.
  • Consider loan assumption. In many cases, the seller’s existing mortgage loan has a due-on-sale clause that requires the principal to be paid upon sale of the property. Having to settle their own financing makes it hard for many sellers to offer financing, especially if they’re buying a house themselves and need their sale proceeds to make their own down payment. In these cases, it might be better to simply have the buyer assume the seller’s existing loan. The buyer still must submit to the lender’s underwriting analysis and get the lender to approve a modification, but the process should be less time-consuming than if they were applying for new financing.
  • Provide expanded remedies. For many sellers, the only remedy for buyer default included in their loan documents is foreclosure. But it’s best to include lower-level remedies so foreclosure doesn’t have to be the only option. Suggest that sellers set rules for imposing late charges or default interest. Or suggest that sellers hire a property manager to keep track of incoming payments and to spearhead collection efforts, because these activities can be time-consuming.
  • Understand the risks to buyers, too. Although it might seem like most risks are on the sellers’ side since they’re putting their resources on the line, there are risks to buyers as well—and if you’re working with buyers, you’ll want to be aware of them. First, buyers could pay the loan in full but still not receive title if there are encumbrances that were never divulged by the seller. Second, if the transaction is structured as a wrap-around deed of trust and the sellers are supposed to be making payments on senior debt, the buyers could be at risk if the sellers fail to make their loan payments, even if the buyers are scrupulous in holding up their end of the deal. Third, buyers might not have the protection of a home inspection, mortgage insurance, or an appraisal to ensure they’re not paying too much.

These are challenging times in credit markets, so there’s a role for seller financing. But be aware of risks so you can help protect your clients.

If your buyers are being ignored by the bank, consider a loan from the seller.

In today’s stymied real estate market, lenders are more cautious about making loans and sellers are more inclined to agree to carry financing to sell their properties more quickly. Here’s a look at how installment sales could work for your clients.

Installment sales are structured so that the seller receives payments for parts of the purchase price over a period of time following the closing.

If a buyer makes a substantial down payment and is sufficiently creditworthy, and if the seller either owns a property outright or has the resources to pay off any remaining mortgage, installment sales can be beneficial to both parties.

An installment sale also enables a seller to defer income taxes when at least one installment payment is received after the tax year in which the transaction closed. The seller recognizes the gain over the taxable years in which the payments are actually received.

Deferring taxes can be a real benefit to home owners whose capital gain exceeds the $250,000 individual exemption on the sale of a principal residence or who haven’t held the home for the two-year period required. Installment sales also benefit investment sellers who don’t want to use a Section 1031 exchange to defer taxes.

Each installment payment consists of three elements:

  • A partial return of the seller’s adjusted basis in the property sold, which isn’t taxable to the seller.
  • A portion of the taxpayer’s realized gain on the sale, which is taxable as a capital gain.
  • Accrued interest, which is taxable as ordinary interest income. An installment note must include an adequate stated rate of interest to be paid by the buyer. An adequate rate of interest is equal to or greater than the rate published by the IRS.

Each year, a seller receiving payments from an installment sale must determine how much of the year’s payments are taxable as capital gains and how much are a nontaxable recovery of the seller’s cost basis.

The taxpayer’s adjusted basis starts with the original purchase price, including initial closing costs. It then increases by any capital improvements and the selling expenses incurred in the sale. It’s reduced by any depreciation taken during the time of the seller’s ownership. The taxpayer multiplies the non-interest portion of the total payments received in that year by the gross profit ratio for the sale.\

The gross profit ratio is the taxpayer’s total anticipated gross profit divided by the total contract price. The anticipated gross profit is the contract price less the taxpayer’s adjusted basis. The contract price is equal to the selling price, reduced by the amount of any qualifying indebtedness that is assumed by the buyer.

Qualifying indebtedness is limited to the seller’s adjusted basis in the property. If the seller has refinanced the property and taken cash in an amount that creates indebtedness greater than the seller’s adjusted basis, the qualified indebtedness for purposes of calculating the contract price is limited to the adjusted basis.

Consider the example of a sale of raw land (below). In Year 1, Seller sold Black Acres to Buyer for $1.2 million. Buyer paid $200,000 in cash at closing and agreed to assume the current $200,000 mortgage. Seller agreed to finance $800,000 of the purchase price over a five-year installment note, with the first installment being due in Year 2.

The gross profit of $400,000 is divided by the seller-financing contract price of $1 million to determine a gross profit ratio of 40 percent. In applying this gross profit percentage to the $200,000 received in Year 1, the seller will recognize $80,000 of gain in the year of the sale. If the principal portion of the payments received by seller in Year 2 is equal to $160,000, the seller will recognize gain equal to 40 percent of $160,000, or $64,000 in Year 2. (Note that gain on real property that depreciates, such as an office building, would be calculated differently because gain from depreciation is taxed at 25 percent.)

Installment sellers should consult an attorney to better understand the risks of default by the buyer and inquire about ways to reduce the risk.

Calculating Gain

Selling price: $1,200,000

Less assumed mortgage: ($200,000)

Contract price: $1,000,000

Adjusted basis: ($720,000)

Selling expenses: ($80,000)

Gross profit (selling price minus adjusted basis minus selling expenses): $400,000

From By Mike Cetera •

Laughing woman talking on cellphone | Tom Merton/Caiaimage/Getty Images

You have missed payments on past loans. You have a large, unpaid medical debt. You once went bankrupt.

Whatever the reason, your credit score has taken a nose dive. But that doesn’t necessarily mean you can’t get a credit card. You just might not be able to get the card you want.

“First, credit seekers with a bad credit score will find it easier to get a secured card over an unsecured card even though it will require a deposit. Second, it is a much safer bet because payments and interest will be lower,” says Katie Ross, education and development manager at American Consumer Credit Counseling in Auburndale, Massachusetts. “If you can build a history of consistently making payments on time, then your score will improve.”

CARD SEARCH: Find the best offers for borrowers with bad credit at

Secured credit card

A secured credit card requires a cash collateral deposit that becomes the credit line for the account. If, for example, you deposited $500 into the account, you would be able to charge up to $500 on the card.

3 steps before applying for a credit card

There are some steps you’ll need to take first before applying for a credit card — secured or unsecured:

  1. Check your credit report. You want to know what the lender will see when it pulls your credit file. Get your credit report and score today, free and with no obligation, at myBankrate.
  2. Check your credit score.
  3. Ask the credit bureaus to fix any mistakes you find in the report, like a credit line that isn’t yours.

What’s a credit score?

A credit score is a 3-digit number — roughly between 300 and 850 — that summarizes a consumer’s creditworthiness.

The higher the score, the more able and willing a consumer is to repay a loan, lenders believe. The best interest rates go to borrowers with credit scores of 740 and higher. Generally, a “low” credit score is in the “fair” to “poor” ranges below.

Credit score ranges
Range Score
740 and higher Excellent
661 to 739 Good
601 to 660 Fair
501 to 600 Poor
500 or lower Bad

FREE TOOL: Get your credit score today from myBankrate.

Your credit score will help determine what type of credit card you should apply for. Any score below 600 lenders consider a high risk, meaning they are unsure you’ll repay the loan. If your score is in the 500s, getting an unsecured credit card may prove difficult.

“Once people cross the 600 threshold into higher numbers it increases the possibility that they would qualify for unsecured products,” says Bruce McClary, vice president of public relations and external affairs at the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.

Your credit history counts

Your credit score alone won’t determine whether an issuer will approve your application. A creditor’s decision will be guided by what’s in your credit report. That may be why nearly one-quarter of all borrowers with a good credit score had their card application denied in 2014, according to the Consumer Financial Protection Bureau.

Mass market approval rates by Consumer Credit Score (MMI)

The odds are far worse for people with poor credit. Issuers approved just 27% of subprime (that’s a credit score below 600) applications, the CFPB found.

RATE SEARCH: Shop today for the best credit cards from our partners.

The National Foundation for Credit Counseling found 10 reasons that a credit card application might be rejected:

  1. Not enough existing credit
  2. Poor repayment history
  3. Existing lines maxed out
  4. Overall debt too high
  5. Too many credit applications
  1. Serious negative credit marks
  2. Insufficient income
  3. Unstable job history
  4. Too young to apply
  5. Errors on the application

“If you get rejected when you’re applying for a credit card, that may be a clear sign that you need to stop borrowing for a while,” McClary says.

In that case, he suggests reaching out to a nonprofit credit counseling agency to look for solutions to your financial problems.

But if you’re already addressing the reasons your credit is poor, you may consider applying for a secured card — even if you are eligible for an unsecured card — if the interest rate and fees are better, says Kathryn Bossler, a financial counselor with GreenPath Financial Wellness based in Farmington Hills, Michigan.

“Just because you can qualify for an unsecured credit card doesn’t mean it necessarily will be one you want.”

Questions to ask when applying for a secured card

There are a few key questions you’ll want to ask of any issuer before you apply. You’ll want to know:

  • What is the interest rate charged on the account? “If the borrower does not pay off the balance in full every month, the lender is able to charge interest on the difference,” Ross says.
  • What additional fees are associated with the account? “Most credit secured cards charge both an annual fee and a large penalty fee should the borrower go over their limit or miss a payment,” Ross says.
  • How long do I have to keep the secured card before I can get an unsecured one? “If you take out a secured credit card and have managed this successfully after about a year to a year and a half, the bank which issued the secured credit card will send you an unsecured card in most cases,” Ross says.
  • Does the issuer have affordable unsecured cards that I can eventually graduate to?
  • Does the issuer report my payment activities to the credit bureau? They’re not required to, but if they don’t the secured card will not help you improve your credit score. “If they don’t report your payment activity, you’re not doing yourself any favors by getting that card,” McClary says. “It’s just going to be a secret between you and the card issuer.”

Bossler suggests you start first with your bank or credit union. Because you already have a relationship with that institution, it may be more willing to extend credit to you.

Seller Financing

In some situations, sellers are lining Lending Standards, Seller Financing. CFPB
Finalizes Loan 2013, The Consumer Financial Protection Bureau – 2012-03-15

Seller Financing May Be Worth Exploring | Realtor Magazine

In today’s stymied real estate market, lenders are more cautious about making loans and sellers are more inclined to agree to carry financing to sell their properties more quickly. Here’s a look at how installment sales could work for your clients. – 2008-12-01

Get Seller Financing to Work for You | Realtor Magazine

Seller financing has been a hot issue in recent real estate news due to the changes in regulations, specifically in the Dodd-Frank Act. Here’s what you need to know to incorporate this method into your business strategy and be the best advocate for your clients. – 2015-04-06

Seller Financing: Background

Seller financing is subject to new rules following the passage of financial reform legislation. Know these changes in order to serve sellers better. – 2012-01-17

My Account

Seller financing plays an important role in financing the sale of real estate, especially when credit is tight. This paper summarizes the impact of two federal laws that affect seller financing. Seller financing plays an important role in financing the sale of real estate, especially when credit is tight. This paper summarizes the impact of two federal laws that affect seller financing. – 2012-01-12

Sales Clinic: Expand Your Market with Seller Financing | Realtor Magazine

Are there any creative ways to sell a home that will maximize the salesperson’s value? —Timothy Baker, RE/MAX Affiliates, Naperville, Illinois If you want to be a top salesperson, you always have to be on the lookout for new and creative ideas to set yourself apart from the pack.…/feature/article/1999/12/sales-clinic-expand-your-market-seller-financing – 1999-12-01

Ways to Protect Yourself Under Seller Financing | Realtor Magazine

TIP: Instead of taking back an installment loan, per se, have the buyer purchase an annuity or some zero-coupon bonds in your name. These can often be bought at deep discounts to eventual payout, lowering the sale price, but guaranteeing you a higher future return.…/sell-your-business/article/ways-protect-yourself-under-seller-financing

NAR Submits Comments on CFPB’s Proposed Seller Financing Rules

On Oct. 15, 2012, NAR President submitted comments to the CFPB on its loan originator proposed rule. On Oct. 15, 2012, NAR President submitted comments to the CFPB on its loan originator proposed rule. – 2012-10-19

Sellers Can Fill a Void | Realtor Magazine

If you’re working with sellers who have seen offers collapse because buyers can’t get a mortgage loan, you might want to suggest they consider offering some variation of seller financing. – 2011-07-01

Seller Financing: The SAFE Act

In 2008, President Bush signed the Secure and Fair Enforcement of Mortgage Licensing Act or SAFE Act, which requires licensing and registration of loan originators. – 2012-03-15
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Looking for something else? Search the archive for many resources created before 2009.


Field Guide to Lease-Option Purchases

(Updated April 2016)

Lease-option agreements* are common when acquiring personal property—such as dishwashers, washing machines, automobiles, and TVs—but are not as common for the acquisition of real property. Lease-option agreements are generally utilized in residential real estate acquisition when a home buyer would like to purchase a home, but needs to repair her credit rating in order to secure a promissory note and mortgage. The lease-option agreement allows a buyer to lease a property for a set period of time—typically between 1-3 years—with the option to buy the property at a contractual future date. “The negotiated option is typically a percentage of the price for example, one to five percent, and is credited, along with the rents and a rent premium, to the purchase price if the lessee buys the property. If the option to buy is not exercised, the buyer will lose the option fee and rent premium.” (Real Estate Law (link is external), p. 227). Read the articles below to learn more about this alternative real estate financing option. (H. Hester, Information and Digitization Specialist)

*Also known as lease-to-own, rent-to-own, lease/purchase, lease with an option to purchase, or real options.

E – EBSCO articles available for NAR members only. Password can be found on the EBSCO Access Information page.

Lease to Own: The Basics

Is rent-to-own the future of housing? (link is external), (HousingWire, Jan. 14, 2016).

Investors Bank on Rent-to-Own Comeback (REALTOR® Magazine, July 29, 2015).

How do Lease Purchase Agreements Work? (link is external) (SFGate, n.d.).

How Do I Get a List of Rent to Own Homes? (link is external) (®, July 25, 2012).

How Do I Find A Rent To Own Home In Bristol, Pennsylvania? (link is external) (®, May 10, 2012).

How Do I Find A Realtor To Explain The Rent To Own Option? (link is external) (®, Apr. 6, 2012).

Lease-to-Own Contracts (link is external), (UCLA School of Law, 2012).

Lease options are back: proceed carefully (link is external), (Realty Times, Oct. 25, 2011).

Sale-Leaseback Transactions: Price Premiums and Market Efficiency (link is external), (Journal of Real Estate Research, Apr.-June 2010). E

Informal Homeownership in the United States and the Law (link is external), see page 132. (University of Texas School of Law, 2010).

How lease-options benefit sellers, buyers … and their REALTORS®? (link is external), (CRE Online, n.d.).

Thought about lease-to-own transactions?, (REALTOR® Magazine – Speaking of Real Estate blog, Aug. 6, 2009).

Renting to Own (link is external), (®, n.d.)

Case Studies & Examples

A Valuation Framework for Rent-to-Own Housing Contracts (link is external), (The Appraisal Journal, Summer 2014). E

Lease-to-own deals offer options in sluggish Tampa Bay housing market (link is external), (St. Petersburg Times, Oct. 23, 2011).

Can I get a lease option with bad credit? (link is external), (®, May 5, 2011).

A Growing Housing Imbalance (link is external), (Mortgage Banking, Oct. 2011). E

Raising Capital Through Sale-Leasebacks (link is external), (Public Management, June 2010). E

Tax Implications

Individual Taxation Developments (link is external), (The Tax Adviser, Mar. 2012). E

Comparing Accounting and Taxation for Leases: Certified Public Accountant (link is external), (The CPA Journal, Apr. 2009). E

Tax Considerations for Buying and Selling Property with a Burdensome Lease (link is external), (Journal of Accountancy, 2009). E

Government Publications & Programs

State Agency Lease/Purchase Program (link is external), (Washington State Treasurer’s Office, n.d.).

Recent State Agency Lease/Purchase Interest Rates – Real Estate Only (link is external) (Washington State Treasurer’s Office, n.d.).

Definition from Washington State:

Lease/Purchase Obligations (Real Estate) — Lease/purchase obligations are contracts entered into by the state which provide for the use and purchase of real or personal property, and provide for payment by the state over a term of more than one year. For reference, see RCW chapter 39.94 “Financing Contracts.” Lease/purchase obligations are one type of lease-development alternative.” (Financial Budget Instructions Glossary of Terms (link is external), Washington State Office of Financial Management, n.d.).

Non-Mortgage Alternatives to RE Financing (link is external) from Reference Book – A Real Estate Guide (link is external), (California Department of Real Estate, 2010).

LFC Hearing Brief (link is external), (New Mexico Legislative Finance Committee, Dec. 2007).

Instructions for the Lease/Purchase Analysis Modeling Tool (link is external), (Idaho State Leasing Dept. of Administration, n.d.).

eBooks & Other Resources

The following eBooks and digital audiobooks are available to NAR members:

Smart Guide to Real Estate: Step by Step Rent to Own, (Kindle and ePub)

Investing in Rent-to-Own Property, 2010 (ePub)

Investing in Real Estate With Lease Options and “Subject to” Deals, 2005 (ePub)

Books, Videos, Research Reports & More

The resources below are available for loan through Information Services. Up to three books, tapes, CDs and/or DVDs can be borrowed for 30 days from the Library for a nominal fee of $10. Call Information Services at 800-874-6500 for assistance.

Who Says You Can’t Buy a Home! (link is external) HG 2040.5 R25w (2006).

Field Guides & More

These field guides and other resources in the Virtual Library may also be of interest:

Sale-Leasebacks & Synthetic Leases

Seller Financing

Information Services Blog

Have an Idea for a New Field Guide?

Send us your suggestions (link sends e-mail).

The inclusion of links on this field guide does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this field guide complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.

5 Ways to Collect Cash When Buying No Money Down
by Richard Roop

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 real estate 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 to sell. Then I have money to further my real estate education, pay operating costs, invest in systems to grow my business… and write myself a paycheck!

Get your money out quickly
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 get my money back out quickly once the house is occupied by a buyer or tenant/buyer.

There are many different approaches to real estate investing, and I certainly don’t have the only 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 negotiate 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. I get motivated sellers to call ME

I don’t call sellers. I prefer to use real estate marketing systems that are easy to implement and easy to repeat.

For each of the seven 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.

To buy directly from sellers, I use a number of low-cost real estate marketing tools to get them to call me and to get them to ASK ME to buy their houses. (See How to Get Motivated Sellers to Call You.)

Working 20 hours per week with a small staff, I buy and occupy three or four houses per month. If I cannot make at least $20,000 net profit, it’s just not a deal.

If the sellers have a lot 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 a new loan.

That’s from one to 36 months down the road–most common is two to three years. But some of the 57 properties I own today were bought over five 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.

Your marketing edge–offer attractive terms 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 when dealing with contractors.

I avoid dealing with renters and all the landlording challenges that come with it. 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 andmaintenance.

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.

No limit to the number of house you can buy 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 five ways to put cash in your pocket when you BUY a house…

1. Overborrow with no bank qualifying when paying 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. In a nutshell, I pay 9% to 13% interest. And then I pay zero 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% to 70% of the property’s value with no qualifying.

In fact, if I cannot borrow enough to buy and fix the house without qualifying, then it may not be a great buy… and there are better deals to out there.

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 would be no confusion on a transaction, I called Beth (my closing agent at the title company) to 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. Overborrow with no bank qualifying when buying with owner financing
When I started my real estate investing 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 motivated sellers with a lot 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 two 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 two 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 investing 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. Overborrow with no bank qualifying, buy with owner financing, and substitute other equity as collateral

On a recent postcard campaign (see The Ultimate Direct Mail for Buying Houses) I bought five houses in six weeks. On the fifth 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.


I offered his price for $153,000 with $63,000 down. I gave him five second mortgages each with no payments and a five year balloon. I agreed to the 6% interest but it would accumulate for five 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 five 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 wouldyou 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 home buyers 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 bankqualifying” or “rent-to-own.” We get at least 3% to 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 first 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 when you buy 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 on 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 mysell price. These days it’s $30,000 or 10%.

I told them they owed too much. 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 ina 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: 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, it’s called retailing.
I hate retailing.
I prefer to offer 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 as much as 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 it works!

His house had gone to foreclosure. In our 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.
Otherwise, he was about to get nothing.

I placed a sign in the yard, ran a classified ad, and added the house tour web site.
I said “owner can finance” since I’d take my profit in a note.
Bottom line: a 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.

About the author…

Richard Roop is a full-time investor who has been called The MarketingConsultant for Real Estate Entrepreneurs. He is the President of BottomLine 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 estateentrepreneurs. His articles have appeared in various entrepreneurial, realestate, and marketing newsletters across the nation, and he is the author of How To Sell Your Home in 9 Days.

How to Collect 5-Figure Paychecks Buying and Selling Houses


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