My favorite “Nothing Down Real Estate” Investing Methods #1

Method # I Taking Paper Out (Seller's equity is converted to paper)

A real estate investor back East was able to acquire a $47,000 4plex from a banker who not only arranged for a new low-interest first mortgage, but also carried back virtually all the remaining equity in the form of second at below-market rates.

Another real estate investor, picked up a single family home for $67,000 by putting on a new first and having the anxious seller carry back all the rest of his equity ($37,000) for five years, no payments, no interest.

Both of these investors were using the technique known as - "Taking Paper Out".

Here is how it works.

When we are talking about buying or selling a piece of real estate, we are really talking about the problem of defining and dealing with the seller's equity.

Equity as a concept is straight forward enough.

Everyone knows that it represents that portion of the value of a real estate property that is not encumbered, that belongs lock, stock, and barrel to the owner.

Equity is a fluid concept.

It can be specified only in relation to that mysterious and shifting quantity called the "Fair Market Value."

The owner has dreams about an equity to be such and such - usually an optimistically high number. The truth of the matter is market forces determine his equity by determining how much his real estate property is really worth at any specific moment in time.

The members of the "Market Value Club" - gang up on the poor old seller and say collectively, "You have a nice little place, but we've taken a vote around town, and the best we could come up with is this price I have given you in the contract to buy which is such and such."

At that moment in time, the seller's equity is defined, and the problem now becomes how to transfer to him value equal to the equity involved.

The majority of sellers, of course, will want to hold out for a selling price at the high end of the scale. They want their equity to be lot higher because they think or heard it should be higher.

No one can blame them for that but among the army of sellers in the marketplace at any given time, there are always a few - perhaps 5 percent or less - who say to themselves . . .

"We like our equity and want to keep it and derive some benefit from it, but we are very anxious to sell, so we might give up some of that equity in order to get rid of the real estate property quickly."

These "Don't-Want" sellers might be thinking - I really don't feel like discounting my equity for a quick sale, but I would be willing to wait until later for a part or all of my equity to be converted to cash."

That is the issue when it comes to "Taking Paper Out" deal. After the seller and the real estate investor have determined what equity is involved, the next step is to decide how soon the equity is to be converted.

It all boils down to a matter of patience.

The seller with infinite patience (and infinite desperation) will say, "Here's my equity, take it all and just get me out of this place."

In a case like that the selling price is equal to the liens. Such cases are rare.

The next best situation is the case in which the seller says, "Here's my equity, pay me for it when you can. Let's work out the schedule."

That is the technique referred to as - Taking Paper Out". All of the seller's equity is converted to paper before it is converted to cash.

When the buyer takes over the real estate property, he gives the seller paper for his equity and obligates himself to redeem the paper according to mutually agreeable terms.

Not all sellers will agree to an "Taking Paper Out" but creative real estate investors should always ask. You never know exactly what the seller is thinking or how anxious he really is to sell.

Perhaps only one seller in twenty will be willing to enter into a nothing down deal and of these, perhaps only one in ten will agree to an "Taking Paper Out"

That means that Method # I will show up in only one out of every 100 creative deals. But which one the first or the last one, it is never known until you get in there and ask the questions and derive the reasons for the sale and the sellers point of desperation. Yet . . .

It does happen from time to time - much to the surprise and delight of many creative real estate investors.

Try it and see for yourself. I did and it worked for me in San Francisco and Hawaii and those are top end properties which were able to put into a break even and positive cash flow conditions due to the correct structuring of the sales agreement to meet my needs as well and the sellers.

Results. Win - Win Deal.

Always the best way to go.

There will be another Method called the " Blanket Mortgage". . . coming soon to this blog.

Keep an eye open, you never know, it might be exactly what you have been looking for in your investment strategies.

RT-RGA