There are endless variations of how seller financing might be set up.
Here is one more, which could prove useful under certain circumstances.
A seller of a free and clear real estate property who needed cash down only to build trust in his real estate investor might be induced to forego rental income for a few months while the real estate investor accumulated enough to put together the required down.
It is not a common opportunity.
But it has happened in the past and will happen again in the future - perhaps to you.
This technique, together with the other seven described and illustrated in this section, should stimulate creative real estate investorss to take advantage of seller flexibilities in financing.
Seller financing after all, is one of the major sources for down payment capital.
Saturday, January 2, 2010
Sunday, November 22, 2009
Crafting a Purchase Offer
When crafting a purchase offer, it is first important to understand the several truths of the real estate sale.
It is important that all buyers remember that Homes will generally sell at market value.
Market value is determined by what a buyer is willing to pay.
Market value is not a fixed, rigid price, but instead is a range of value.
This is because no two buyers are alike. While one must have a pool, another will consider a pool a liability.
Bottomline, you the buyer are the market.
As in many areas which are continuing to experience declining home prices, we see the "low-ball" offer becoming the leading offer (new pink) for Spring buyers.
The term low-ball (price), generally defined as the deliberate underestimation of cost or value. In real estate, the low-ball offer means an offer significantly below a seller's asking price.
In the current real estate environment, there are two distinct categories of buyers.
One includes the traditional buyer looking for a good home at a good "value" today, because today is when they are shopping.
The second is a buyer with less concerned with timing or even suitability of the property and much more concerned with value, not only in the context of value today but in terms of anticipated value tomorrow or next year.
Regardless of the category in which you fall, keep in mind that both buyers are in the market at any given time.
Unless your goal is to accumulate a scrapbook of rejected offers you will one day share with your grandchildren, it is critical to remember that you are offering to purchase a home.
A home, unlike a share of stock, a gallon of milk, or a commercial office building, is inherently emotional.
So, it is helpful to keep in mind a few dos and don'ts when creating your offer:
1. Don't offend. Unless you are offering on a property which has been held purely for investment, the seller is emotionally invested in his property.
Do not try to trash-talking the seller's shelter is not a winning strategy.
Statements like "This offer reflects the fact that the premises will require professional cleaning with a blow torch prior to possession" may just get you and your offer kicked to the curb.
2. Do get personal. Write a cover letter summarizing why you believe this is the right home for you.
On many occasions, I have seen sellers accept a lower offer because they felt a connection with the buyer.
The seller has a dog? It never hurts to mention that your own pet, who has been on Prozac since moving to your current top floor studio apartment, is (or soon will be) "digging" the large rear yard.
The seller raised his children in the home? Why not mention something about anything personal within your circumstances that may sway an acceptance, it my not help but it couldn’t hurt.
3. Don't defend your offer the wrong way. As in, by saying it is all you can afford or that you are basing it on what you believe values will be during the next lunar cycle.
This approach will likely leave the seller with the notion that there is a buyer out there, one who isn't you, who can afford his home and at the price it is worth now.
4. Do know the seller's circumstances.
Does the seller want to move or does he need to move?
Does he need to be out of Dodge by sundown, or is he just toying with the idea of relocating to the mountains if he can get "his" price ?
Circumstances will dictate whether there is a bargain on the horizon, and knowing this in advance can save everyone the aggravation of a long trip to nowhere.
5. Don't preach. Your agent has given you information on comparable property sales.
Beating the seller over the head with your 16-column spreadsheet will not endear you to him.
He has set a price, presumably after having taken this same data under consideration.
You may believe his price to be high, but it is his price. Insulting his intelligence will not further your cause.
6. Do be prepared to negotiate. No buyer wants to think they paid too much, and no seller wants to think he sold out.
Expect to go a round or two. "Take it or leave it" offers are rarely met with excitement from the seller, regardless of the price and even in this market.
In negotiations, everyone wants to feel like they were in control and that they prevailed.
7. Don't be unreasonable.
There is value, and then there is crazy-talk. If a home is offered for X, and you are willing to pay 10% less than X, do not offer X minus $1 million and then ask the seller to throw in his bedroom furniture and a pony.
You will not be taken seriously.
Today's real estate market is teeming with opportunities for the buyer. Great values, values relative to prices a year or two or more ago, are plentiful.
But, insanely great "deals" are still needles in the haystack, because market value will always be determined by what a buyer is willing to pay.
This buyer might be you, but if you are unrealistic or even simply careless with crafting your offer, it will probably be someone else. rtwb
Saturday, November 14, 2009
Defer the Down Payment - No Mortgage Payment
There are endless variations of how seller financing could be arranged.
Here is one example, which could prove useful under certain circumstances.
A seller of a free and clear real estate property who needed cash down only to build trust in his real estate investor might be induced to forego rental income for a few months while the real estate investor accumulated enough to put together the required down.
It is not a common opportunity. But it has happened in the past and will happen again in the future - perhaps to you.
This technique, together with the other seven described and illustrated in this section, should stimulate creative real estate investorss to take advantage of seller flexibilities in financing.
Seller financing after all, is one of the major sources for down payment capital.
Everyone should try to obtain seller financing prior to obtaining normal bank financing.
It never hurts to ask, maybe you will get lucky.
Remember, it may take awhile for someone to agree but if they do agree with your offer, then you will have a deal come true.
Good luck with your offers.
Here is one example, which could prove useful under certain circumstances.
A seller of a free and clear real estate property who needed cash down only to build trust in his real estate investor might be induced to forego rental income for a few months while the real estate investor accumulated enough to put together the required down.
It is not a common opportunity. But it has happened in the past and will happen again in the future - perhaps to you.
This technique, together with the other seven described and illustrated in this section, should stimulate creative real estate investorss to take advantage of seller flexibilities in financing.
Seller financing after all, is one of the major sources for down payment capital.
Everyone should try to obtain seller financing prior to obtaining normal bank financing.
It never hurts to ask, maybe you will get lucky.
Remember, it may take awhile for someone to agree but if they do agree with your offer, then you will have a deal come true.
Good luck with your offers.
Friday, October 23, 2009
Habits that make Millionaires
I have added this little tidbit of information as a modivation for you to focus your intentions.
Keep in mind that you must have a target and the tools (knowledge) to get you there.
According to a study of college students more than 50 percent of these young leaders expect to be millionaires within their lifetime.
What's more, 5 percent of them expect to hit the million-dollar mark while in their 20s.
Earned Money vs. Easy Money
Easy money usually comes from inheritance or luck, such as winning the lottery.
The track record of people who get their money through the lottery or other windfalls is usually very different from those who created their wealth themselves or who planned for an expected inheritance.
Lottery winners are often a sorry lot; more than 90 percent use up their winnings within 10 years -- some go through their money in weeks or months.
But there are some consistent patterns among those people who earn or plan to inherit their money, and these five strategies may be worth emulating.
1. Avoid the Earn-to-Spend Mentality
Point out that to increase wealth, it's essential to emulate millionaires who view money as something to save and invest, rather than income to spend.
Many wealthy people live quite simply, he points out, choosing less pretentious homes than they could theoretically afford and opting for financial independence over material showmanship.
2. Focus
Resisting the impulse to be scattered in your efforts and interests: "Winners focus; losers spray." And goals that are clearly written down are easier to keep in focus.
3. Do Whatever Is Necessary to Meet Your Goal
People who earn their millions are able not only to focus but persevere in the pursuit of their goals.
One single mom entrepreneur, started her first business, a health and safety consultancy, when she had a young son.
While en route to her goal of becoming a millionaire by age 35, she and her son ate lots of pizza, did homework late at night and often slept at the office.
She is now a chief executive for a global business consulting firm.
4. Take Calculated Risks
You have to take strategic risks to earn and grow money. A little rebelliousness seems to help too.
One interesting study found a majority of male millionaire entrepreneurs had been in trouble with school authorities or the police during their adolescence.
5. Be Generous
Why doesn't it surprise us that millionaires are often very generous?
Sometimes it's for the tax breaks, obviously, but often it's not. One Swiss millionaire, for instance, gave $5,000 in cash to a waiter at a Jerusalem café who foiled a Palestinian suicide bombing.
Among the most generous of millionaires are those from North America, who are, two to five times more likely to give to causes they value than their European counterparts.
These five habits are a pretty good prescription for living happily even if you're not a millionaire.
It's not so unusual to be a millionaire. As of 2004, there were 8.2 million households with a net worth of more than $1 million.
Are the folks in those households happy ? Yes.
The happiest among them, he says, seem to be "highly educated, well-paid women who have jobs."
How much money does it takes to be happy ?
"About $1 million, give or take a little."
Get Happy Now : Seek Knowledge - Stay Focussed on Target
Keep in mind that you must have a target and the tools (knowledge) to get you there.
According to a study of college students more than 50 percent of these young leaders expect to be millionaires within their lifetime.
What's more, 5 percent of them expect to hit the million-dollar mark while in their 20s.
Earned Money vs. Easy Money
Easy money usually comes from inheritance or luck, such as winning the lottery.
The track record of people who get their money through the lottery or other windfalls is usually very different from those who created their wealth themselves or who planned for an expected inheritance.
Lottery winners are often a sorry lot; more than 90 percent use up their winnings within 10 years -- some go through their money in weeks or months.
But there are some consistent patterns among those people who earn or plan to inherit their money, and these five strategies may be worth emulating.
1. Avoid the Earn-to-Spend Mentality
Point out that to increase wealth, it's essential to emulate millionaires who view money as something to save and invest, rather than income to spend.
Many wealthy people live quite simply, he points out, choosing less pretentious homes than they could theoretically afford and opting for financial independence over material showmanship.
2. Focus
Resisting the impulse to be scattered in your efforts and interests: "Winners focus; losers spray." And goals that are clearly written down are easier to keep in focus.
3. Do Whatever Is Necessary to Meet Your Goal
People who earn their millions are able not only to focus but persevere in the pursuit of their goals.
One single mom entrepreneur, started her first business, a health and safety consultancy, when she had a young son.
While en route to her goal of becoming a millionaire by age 35, she and her son ate lots of pizza, did homework late at night and often slept at the office.
She is now a chief executive for a global business consulting firm.
4. Take Calculated Risks
You have to take strategic risks to earn and grow money. A little rebelliousness seems to help too.
One interesting study found a majority of male millionaire entrepreneurs had been in trouble with school authorities or the police during their adolescence.
5. Be Generous
Why doesn't it surprise us that millionaires are often very generous?
Sometimes it's for the tax breaks, obviously, but often it's not. One Swiss millionaire, for instance, gave $5,000 in cash to a waiter at a Jerusalem café who foiled a Palestinian suicide bombing.
Among the most generous of millionaires are those from North America, who are, two to five times more likely to give to causes they value than their European counterparts.
These five habits are a pretty good prescription for living happily even if you're not a millionaire.
It's not so unusual to be a millionaire. As of 2004, there were 8.2 million households with a net worth of more than $1 million.
Are the folks in those households happy ? Yes.
The happiest among them, he says, seem to be "highly educated, well-paid women who have jobs."
How much money does it takes to be happy ?
"About $1 million, give or take a little."
Get Happy Now : Seek Knowledge - Stay Focussed on Target
Friday, September 11, 2009
Real Estate Strategy: "The Balloon Down Payment"
An investor in Milwaukee recently bought a small rental home for $45,000 by putting on a new first of $25,000 and having the seller "carry back" the rest (no payments, no interest) after a small down. The seller would do so only after the real estate investor agreed to pay out the indebtedness after five years.
The real estate investor of a $235,000 6-plex in Lake Worth, Florida, assumed the existing first and induced the seller to carry back the remainder of his equity after the $50,000 down payment (obtained from a partner) in the form of a second at 12%. The seller agreed, but only on the basis of a ten-year payout of the balance of the second. Both of these investors were using the technique referred to as a "balloon mortgage".
It is not uncommon for seller-financing arrangements to include provisions for a balloon payment in the future.
In fact, balloons are an important inducement to get the seller to play the part of the lender in the first place. Knowing that the major part of his equity is coming in the near future, the seller is willing to carry the financing at rates below the conventional market.
Occasionally a seller is willing to amortize the entire amount of the carry back over a long period of time - fifteen or twenty years or longer. Most of the time, however, the seller wants to be paid off sooner, in fact, as soon as possible.
That is the danger the real estate investor must beware of - short-fuse balloon notes can rob the real estate investor of health, sleep, and sometimes the real estate property itself.
In theory, the time of the balloon payment should be far enough away to take advantage of interim appreciation. real estate property values and rents must grow enough to permit a refinance solution to the balloon payment.
What if local real estate property values - particularly during a period of sustained high interest rates and sluggish real estate sales - do not grow as anticipated?
The real estate investor may be forced to sell the real estate property, or another piece of real estate in his control to pay off the balloon.
He may have to bring in an equity-participation cash- partner to bail him out, thus giving away important benefits.
The worst case, he might have to give the real estate property back to the seller and lose all his investment.
Despite the risks, the balloon payment technique can be a valuable way to get into a real estate property for little or nothing down up front.
Real estate investors should resist pressures to accept anything less than five years for payout seven years or more would be preferable.
The real estate investor of a $235,000 6-plex in Lake Worth, Florida, assumed the existing first and induced the seller to carry back the remainder of his equity after the $50,000 down payment (obtained from a partner) in the form of a second at 12%. The seller agreed, but only on the basis of a ten-year payout of the balance of the second. Both of these investors were using the technique referred to as a "balloon mortgage".
It is not uncommon for seller-financing arrangements to include provisions for a balloon payment in the future.
In fact, balloons are an important inducement to get the seller to play the part of the lender in the first place. Knowing that the major part of his equity is coming in the near future, the seller is willing to carry the financing at rates below the conventional market.
Occasionally a seller is willing to amortize the entire amount of the carry back over a long period of time - fifteen or twenty years or longer. Most of the time, however, the seller wants to be paid off sooner, in fact, as soon as possible.
That is the danger the real estate investor must beware of - short-fuse balloon notes can rob the real estate investor of health, sleep, and sometimes the real estate property itself.
In theory, the time of the balloon payment should be far enough away to take advantage of interim appreciation. real estate property values and rents must grow enough to permit a refinance solution to the balloon payment.
What if local real estate property values - particularly during a period of sustained high interest rates and sluggish real estate sales - do not grow as anticipated?
The real estate investor may be forced to sell the real estate property, or another piece of real estate in his control to pay off the balloon.
He may have to bring in an equity-participation cash- partner to bail him out, thus giving away important benefits.
The worst case, he might have to give the real estate property back to the seller and lose all his investment.
Despite the risks, the balloon payment technique can be a valuable way to get into a real estate property for little or nothing down up front.
Real estate investors should resist pressures to accept anything less than five years for payout seven years or more would be preferable.
Friday, August 21, 2009
Real Estate Contract: "Raise the Price, Lower the Terms"
Seller financing has already become a convention for real estate transactions in the decade of the 80's on.
Currently nearly two-thirds of all home sales involve contract sales or assumptions with owner carry-back second mortgages.
Tight money conditions always foster seller financing of this type.
Yet even though the concept of "seller as lender" is no longer foreign to the American way of real real estate property transfer, there are variations to the game that give creative real estate investors the advantage over the competition.
One such variation is the important technique called "Raise the Price and Lower the Terms."
Simply put, this calls for the real estate investor to offer the seller more than he is asking for the real estate property in exchange for flexibility with the terms.
For example, one investor we know of recently took an interest in a Jacksonville, Florida, estate house with adjoining triplex.
He offered to raise the sales price by $8,000 if the seller would lower the down payment requirement and accept payments over 10 years.
By using this technique, he out aced the competition and won over the seller despite the hue and cry of all the relatives in the background.
Currently nearly two-thirds of all home sales involve contract sales or assumptions with owner carry-back second mortgages.
Tight money conditions always foster seller financing of this type.
Yet even though the concept of "seller as lender" is no longer foreign to the American way of real real estate property transfer, there are variations to the game that give creative real estate investors the advantage over the competition.
One such variation is the important technique called "Raise the Price and Lower the Terms."
Simply put, this calls for the real estate investor to offer the seller more than he is asking for the real estate property in exchange for flexibility with the terms.
For example, one investor we know of recently took an interest in a Jacksonville, Florida, estate house with adjoining triplex.
He offered to raise the sales price by $8,000 if the seller would lower the down payment requirement and accept payments over 10 years.
By using this technique, he out aced the competition and won over the seller despite the hue and cry of all the relatives in the background.
Sunday, August 2, 2009
Contract - Wrap Around Mortgage Stratagy
An California investor recently bought a duplex for $68,000 by putting down $1,000 and having the seller accept a contract for the remaining $67,000, 10.75% interest for 30 years, and payout after 12.5 years.
The contract wrapped around a small underlying first mortgage.
Similarly an investor in Oakland, California acquired an $80,000 free and clear single-family house by putting a small sum down and having the seller carry back the rest in the form of a contract.
These are variations of the technique referred under various names such as "contract, wrap-around, or owner carry back".
This technique is one of the most frequently used creative finance tools.
It is the foundation of seller financing. Rather than refinancing the real estate property or formally assuming the existing mortgage.
The real estate investor uses a contract as the purchase instrument.
He does not get title to the real estate property until he has performed according to the provisions of the agreement. He says to the seller, "I'll pay your equity off in installments over time.
As soon as I have paid everything off, you will give me the deed for the real estate property, and it will be mine.
In the meantime, I will act as the owner by taking over the management and getting all the tax benefits and the appreciated equity above what the real estate property is worth at the time of purchase.
Of course, all the expenses in the meantime are mine as well."
If the real estate property is free and clear at the time of purchase, the seller pockets all the installment payments on the contract if there are existing encumbrances on the real estate property.
Then the contract is referred to as a wrap-around contract or wrap-around mortgage.
It "wraps around" the existing first and subsequent mortgages or trust deed.
When the seller receives the installment payments, he has to first make payments on the existing notes before he can pocket the rest.
The advantage to him is that the interest rate on the total wrap-around contract will be higher than on the underlying loans.
He will be making an interest spread on the underlying part of the note - not a bad deal for a seller-turned-lender.
In addition, he will be able to spread his capital gains profit out over time rather than receiving all of it during one year.
The tax advantages are considerable.
With the recent liberalization of installment sale provisions by the IRS, sellers have great leeway in how contracts are set up for maximum tax benefits.
A competent tax accountant can spell out the detail.
The advantage to the real estate investor is that he does not need to come up with a large cash down payment Frequently a moderate amount down will close the deal.
In addition, the interest rates acceptable to sellers are usually far below conventional market rates for new financing.
A contract sale is bandied by an escrow company, which holds the pre-executed deed from the seller in favor of the real estate investor until the latter satisfies the terms of the contract.
The escrow or title company will also hold a quit claim deed made out by the real estate investor in favor of the seller, which is to be released to the seller in case of default.
It is in the best interests of the real estate investor if the escrow company is also empowered to receive his installment payments and take care of making the payments on the underlying loans before disbursing the balance to the seller.
That way the real estate investor can be assured that his money winds up in the right places.
An alternative form of the "contract wrap" technique is the situation where a real estate investor takes title subject to the existing financing (agrees to take over the seller's obligations) or goes through the formal procedure of assuming the existing financing (qualification, credit checks, transfer of title).
The real estate investor then signs a contract with the seller for the equity above the existing loans and makes payments according to a mutually agreeable schedule.
The seller's equity is covered by a note secured by the real estate property itself.
The usual term for this arrangement is "owner carry back".
The term refers to the fact that the seller carries back paper to cover the unpaid equity on his real estate property.
Of course, the terms on the paper are negotiable and vary from case to case.
RT-RGA
The contract wrapped around a small underlying first mortgage.
Similarly an investor in Oakland, California acquired an $80,000 free and clear single-family house by putting a small sum down and having the seller carry back the rest in the form of a contract.
These are variations of the technique referred under various names such as "contract, wrap-around, or owner carry back".
This technique is one of the most frequently used creative finance tools.
It is the foundation of seller financing. Rather than refinancing the real estate property or formally assuming the existing mortgage.
The real estate investor uses a contract as the purchase instrument.
He does not get title to the real estate property until he has performed according to the provisions of the agreement. He says to the seller, "I'll pay your equity off in installments over time.
As soon as I have paid everything off, you will give me the deed for the real estate property, and it will be mine.
In the meantime, I will act as the owner by taking over the management and getting all the tax benefits and the appreciated equity above what the real estate property is worth at the time of purchase.
Of course, all the expenses in the meantime are mine as well."
If the real estate property is free and clear at the time of purchase, the seller pockets all the installment payments on the contract if there are existing encumbrances on the real estate property.
Then the contract is referred to as a wrap-around contract or wrap-around mortgage.
It "wraps around" the existing first and subsequent mortgages or trust deed.
When the seller receives the installment payments, he has to first make payments on the existing notes before he can pocket the rest.
The advantage to him is that the interest rate on the total wrap-around contract will be higher than on the underlying loans.
He will be making an interest spread on the underlying part of the note - not a bad deal for a seller-turned-lender.
In addition, he will be able to spread his capital gains profit out over time rather than receiving all of it during one year.
The tax advantages are considerable.
With the recent liberalization of installment sale provisions by the IRS, sellers have great leeway in how contracts are set up for maximum tax benefits.
A competent tax accountant can spell out the detail.
The advantage to the real estate investor is that he does not need to come up with a large cash down payment Frequently a moderate amount down will close the deal.
In addition, the interest rates acceptable to sellers are usually far below conventional market rates for new financing.
A contract sale is bandied by an escrow company, which holds the pre-executed deed from the seller in favor of the real estate investor until the latter satisfies the terms of the contract.
The escrow or title company will also hold a quit claim deed made out by the real estate investor in favor of the seller, which is to be released to the seller in case of default.
It is in the best interests of the real estate investor if the escrow company is also empowered to receive his installment payments and take care of making the payments on the underlying loans before disbursing the balance to the seller.
That way the real estate investor can be assured that his money winds up in the right places.
An alternative form of the "contract wrap" technique is the situation where a real estate investor takes title subject to the existing financing (agrees to take over the seller's obligations) or goes through the formal procedure of assuming the existing financing (qualification, credit checks, transfer of title).
The real estate investor then signs a contract with the seller for the equity above the existing loans and makes payments according to a mutually agreeable schedule.
The seller's equity is covered by a note secured by the real estate property itself.
The usual term for this arrangement is "owner carry back".
The term refers to the fact that the seller carries back paper to cover the unpaid equity on his real estate property.
Of course, the terms on the paper are negotiable and vary from case to case.
RT-RGA
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