Learn Creative Financing to Win! The Home Selling Season is Now!

[Brian Gibbons]

So many people are trying to make money in real estate.

This is the selling season and currently it is the end of March/ beginning of April 2016.

The home sales last year and 2015 were not that great, and 2014 wasn't much better.

The big problem right now are we're in a difficult lending market, for residential property.

Borrowers for home loans are having difficulty. The recession of 2010 to 2012 has created difficulty for FICO scores. 

The real estate agents looking for properly qualified bank buyers to make commissions are having great difficulty finding enough buyers.

Alot has been said about the millennial's not wanting to own property. They want their freedom that renting provides. Well I don't think that's the whole picture... Millennials are avoiding homeownership for the most part is because of credit and down payment and FICO score (student loans a big problem)

The title of this post is

"the home selling season is now , learn creative financing."

Here's my definition of learning creative financing...

"help the home seller solve a problem, and make some money doing it."

Let's start with a $200,000 house, which is what the bank will appraise the house for.

And let's say the house would rent for $1200 a month.

Let's say PITI is $1100 a month.

And let's start with a problem, 

pretty house good location no equity. 

What can you do as a real estate investor and make some money?

Well here are 3 REI tools that you can look at to help the seller:

sub to,
lease with option or lease purchase, or
wraparound mortgage purchase.

Let's take subject to as the first conversation:

sub to means you're taking the property subject to the existing financing.
The loan remains in the seller's name for period of time.

Let's talk about a wraparound mortgage: you buy the property leaving the loan in place and create a brand-new mortgage that wraps around the existing mortgage.

Now let's talk about a lease with option and a lease purchase: this is where you rent for a while and buy the property down the road.

There's a big difference between a lease with option and a lease purchase. Lease with option gives the buyer the right to buy the property, a chance to buy the property, a choice to buy the property, but Buyer does not have to buy the property.

Lease purchase is a lease and purchase agreement with nonrefundable earnest money. In a lease purchase arrangement the buyer has to buy it or they're out the earnest money.

Now, there are pluses and minuses of all three of them.

If you're the seller, in a sub2, you giving up the deed in a subject to arrangement, and you as the buyer are promising to pay the underlying financing and the maintenance. You own it, but you have no legal obligation to pay the mortgage. The mortgage is not in your name, it is in the previous seller's name. The sellers depending on you to make that payment. Your moral obligation to make that payment.

In the wraparound mortgage purchase, you've an obligation to make that payment to the seller even if the renter or person in the property fails to make the payment to you. You have made a promise to the seller to make payment on time and the seller can foreclose if you do not pay him.

There is a DOS or due on sale clause in a sub2 and a wrap purchase. Realize if the loan gets called due and fully payable, you need the ability to buy it for cash or the ability to finance it.

In a lease with option, the seller or landlord is expecting a check from you so he can pay his mortgage. The relationship is landlord-tenant between you and the seller, so whatever landlord-tenant law is in your state you should abide by.

One of the things that a lot of gurus say is that you can charge tenants maintenance bills, which is illegal and against the law, so you shouldn't do that as a lease option investor.

In a lease purchase, you as a buyer, you lose your earnest money if you cannot finish the transaction and get permanent financing for the purchase after the lease terminates.

It's so important for you as a real estate investor investing with tools like subject to, wraparound mortgages, and lease options-lease purchase contracts that you have good credit and you have access to private lender money so that you can weather storms in case the tenant buyer doesn't pay you, or you have damage, or you have marketing expenses.

Now let's talk about profits with terms deals like Sub2, Wrap Purchases and Lease Options - Lease Purchases.

Let's say we have an expired listing, someone spent three months with an agent in the house did not sell.
Let's say it is worth 200,000 as in the previous example,

instead of listing the house at 200,000 and paying the cost to sell which is about 10% (once you factor in 6% commissions, 2% closing costs, 2% incidental costs), you as the seller will net about $180,000.

But if you owed $195,000, you would have to come to the closing table with $15,000.

And you still need moving money to move.

So it most sellers do is try to get more money than the bank will appraise it for, say 220,000, and the house just sits there. No offers.

Most home sellers will rent the property out if it doesn't sell.

So how can you make some money with a house that has very little equity???

Well the exit strategy is a "lease to own", and you need to get a hold of a contracts that will allow you to enter into a lease with option with the seller, and then assign your interests to the buyer.

How much money can you make? 

I think a fair assignment fee is 3%.
On 200,000 that $6000.

Why I like lease options it's much faster than wholesaling (30 - 45 days) and

you do not need credit or down payments, BUT

you do need marketing money for sellers and buyers and 

training on how to talk to the seller, and

you do need initial legal paperwork to be looked over by a local attorney.

Do need to be real estate sales licensed to do these?

I know in certain states it's helpful to be licensed to do these, states that have pretty strict real estate agency laws like California, New York, Virginia, Maryland, District of Columbia, Florida, and Ohio, to name a few.

If you have a real estate sales license, you're allowed to show a house to prospective tenant buyer, and talk to sellers about creative financing as a solution to their problems.

Making $6K a month part time could be a great extra income while keeping your primary job!

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Here's another common problem about helping sellers solve a problem:

grandma's house.

Think of a house that grandma's been in for 30 to 40 years. Many older people live simply and don't upgrade their kitchens and bathrooms, even though they really needed to resell their house.

Let's use the same example 200,000, market rent is $1200, and repairs for new kitchen is $10,000. New appliances and new flooring, with some minor upgrades in the bathrooms

Now if you understand the wholesaling formula:

70% of the after repaired value which is 200,000, totaling 140,000

Less the repairs of $10,000

Less a wholesaling fee of $5000

This offer will come in at $125,000 for the home seller.

Seriously? For $10,000 rehab?

A total profit of $125,000 for the home seller?

How to market the "House Needs Updating" solution

either

- go to real estate agents morning meetings and talk about houses that need updating, or

- talk to probate attorneys about houses that need updating in the sellers or the heirs not having enough money to properly fix the house so that it can get a good sales price.

So how do we make money for the house that needs updating, free and clear of loans, and the seller is broke???

What I show the seller to different solutions, 

first is the wholesalers solution which is as above $125,000.

My solution is a joint venture with the seller, where the seller can make more money by working with me.

To figure out how much the seller makes is you have to figure out a few pieces of the puzzle:

first, how much is a going to cost to resell the house?

I use 10% of value: which is $20,000.
This is 6% commissions, 2% closing costs in 2% incidental costs.

Next is how much is the rehab and how much is the private lender loan interest?

The rehab in this case is $10,000 plus $1000 interest at 10%. I find most of my private lenders at REIA meetings and tell them that they can earn 10% in three months on their money.

So the total rehab plus interest on the loan is $11,000.

Next I charge a $10,000 joint venture fee to put the deal together.

Adding up these three pieces, 20,000+11,000+10,000 = $41,000.

I subtract this number from 200,000 which will give me $159,000 NET TO SELLER.

How does that compare with the wholesaling offer?

Wholesaling offer was $125,000 to the seller.
My offer is $159,000 to the seller. 

$34,000 difference!!!

All you need to do when you find a house it needs remodeling and the owner is older like in their 60s or 70s is to show them the two different calculations.

Many times I hear the sellers say,

"why is the offer from the other real estate investor so low?
"What is the 70% number?"

I basically say to the seller that the 70% of the "after repaired value" is a number that is used in the industry because the acquisition costs are so high with the hard money loan, and the regular banks will not lend on the house that needs work.

Now I know $10,000 is not a huge amount of money in the wholesaling business or the rehab business.

But if it's a minor rehab, just a kitchen remodel, it's not a good wholesaling deal to start with.

A good wholesaling deal is something that needs a huge amount of work, is condemned, it is water damage, it has a fire, serious problems.

A minor rehab doesn't have serious problems, it just needs a real estate investor that's willing to work with them and help them make some money by using a joint venture agreement.

A word about improving houses that you do not own....

Don't take control of a property with a lease with option that needs repairs, youre better off buying on seller financing and getting on title first, because when you're the owner you can do whatever you want, when you are a renter you can't do whatever you want.

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There you have 2 different creative strategies:

1. Pretty houses Low or No Equity - Sub2, Wrap or Lease Option- Lease Purchase

2. Grandma Houses - Free and Clear - Needs Remodel to Sell - Buy on Single Payment Note

Now go make some money this spring!