How to buy free and clear houses better than no money down

How to Make $72,000 Buying a House for Top Dollar

Instead of trying to convince sellers to take less than market value, how many houses could you buy if you offered above market value? And how can you make a great profit if you pay top dollar?

The answer lies in your “investing strategy” which includes

1) How you find it,

2) How you fund it,

3) How you flip it or make your profit

One way to generate huge profits per deal while offering sellers top dollar is by using the “free and clear real estate investing strategy.” I developed this approach and began using it as my main investing strategy back in 2008 when the housing and lending markets began making their historic changes. It has proven to be a great approach ever since -- regardless of what’s happening in the economy.

How to FIND Great Free & Clear Deals

The first step is to find sellers who own free and clear homes. You can order a mailing list based on property type, loan to value, market value, zip codes and owner type. Then you can target these owners using direct mail.

Think about it. Even folks with free and clear houses have to compete against distressed properties being offered at a discount, not to mention the challenges of finding a qualified buyer with today’s stricter bank lending guidelines.

Our primary “target” are absentee owners. This has always been a good list (for all types of investing strategies) and you’ll get the bonus of finding “retiring landlords” with multiple free and clear properties.

My best method for generating calls and emails from prospects is to send small, cheap postcards with my proven “free and clear owner” message. Once you create an account with a good mailing list provider you can download a list and mail a batch of postcards all online using www.click2mail.com in about 30 minutes. I've even hired a staff member to do it for me and my clients, so it can be all “done for you”.

How to Raise Cash for Free & Clear Deals

With this strategy you’ll never have any of your own money tied up in a property. We fund each deal with a small private money first mortgage and a larger owner carryback second.

Every deal needs some cash so we raise this cash from the small private money first. This amount includes any seller down payment, closing costs, repairs costs and holding costs. It also includes reimbursement of any money spent on mailing postcards.

But that is not all. You need cash! So we always pull out extra cash out at closing (usually $10,000 to $20,000). This is key since we want to be able to “buy and hold” yet we still need some cash profits -- now.

Consider borrowing up to 50% of the value of the property on the first mortgage without bank qualifying. Would this a pretty safe, well-secured note for a private lender? I’ll say. They have a first position and tons of equity to protect them. If you make this opportunity available (flap your lips) you’ll find folks who’ll be happy with 6% to 10% annual interest. I offer 8% and am very comfortable making this opportunity available to friends, family or anyone else I know.

Actually you can offer whatever interest you want to a private lender. It does not cost you anything. The note payments are covered by the income you collect on the property. And the total cost of the loan is accounted for when determining the price you’ll offer to the seller. So if you pay more to a lender you simple offer less to a seller.

You can even pay hard money lender rates of 12% to 15% plus points if needed to get the deal done with a $72,000 profit. That’s because any profit goal you choose is treated an expense. The higher your costs the less you offer a seller. So you always lock in your profit.

These first mortgages are so well-secured that I’ve found money partners who will do them nationwide for me and my clients -- even though they can’t inspect or visit the property. We simple provide them with a certified appraisal and close with a nationwide title company to protect them.

How to Get Sellers to Carry a Note with Little or No Interest

Sellers agree to carry back a note because they love the price and other benefits you can offer. About one out of 10 free and clear sellers will accept your offer because they understand it, see the benefits, feel comfortable with you and it works for them.

Monthly payments on their note are determined by the available cash flow generated from the property. The “net” cash flow is the market rent less expenses like taxes, insurance, HOA dues and a fixed amount we’ll keep set for ourselves to cover future vacancies, repairs and maintenance. Remember, we do not what any of our money put into a property, now or in the future. Avoid the mistake of feeding properties. Only offer a seller a monthly payment that the property can easily afford.

Ask sellers to take the lowest possible interest rate on their note. This reduces our expenses and therefore increases our offer price. We can also demonstrate to a seller that they will pay less in income taxes by taking a higher price and a lower interest verses a lower price and higher interest. That’s because interest is normally taxed at a higher rate than any gain they get.

The IRS publishes “Applicable Federal Rates” each month. This is the minimum interest they want a seller to charge you on a real estate note. The current rate on a 9 year note is 1.61% a year! By using this low rate you will rapidly pay down the note principal each year -- paid for by the income you get from your occupant.

Normally there will be a balloon payment due to the seller on the “maturity date.” So on a 9 year note you’d sell or finance the property by the end of the term to pay them off. Of course you have the option of asking the seller to extend and can give them some incentives to do so, if desired. You can also pay off the seller sooner if you sold or refinanced early. But they must agree to a discounted "Early Pay Off Schedule” upfront to ensure you make your desired profit.

How to Lock In Your Guaranteed Profit

Your profit on free and clear deals equals the total received in cash now, cash flow and cash later:

1) You always collect $10,000, $20,000 or more when buying for cash now.

2) You then add up your total positive cash flow over the years, taking into account increases in market rent for your cash flow.

3) You then project what you could sell the property for at the seller note maturity date, taking into account some modest and conservative appreciation. Your back-end profit or cash later the future resell price less selling costs and loan payoffs.

So to construct offers for a seller you take your resell price and subtract all your expected expenses for buying, holding, selling and profit. This will determine your “maximum allowable offer” with terms or Terms MAO.

How to Increase Your Income while Reducing Expenses

Normally you’ll occupy each property with a tenant, tenant-buyer or terms buyer. I prefer dealing with “buyers” to avoid landlording hassles and expenses. But I do not rely on them to close. If they do, great. If they don’t, great.

Most of my properties are occupied by tenant-buyers. They agree to buy the property at a future date and maintain the property themselves. I give them different credits toward closing in exchange for keeping their agreements, paying on time and -- never calling me.

You can also offer “no bank qualifying” owner financing to a “terms buyer” using an installment land contract, agreement for deed, all-inclusive deed of trust or wrap around mortgage. Here you collect a good size down payment and finance the rest. Their loan “wraps” the underling loans that you continue to pay on -- so you can further reduce your management and create a spread on the interest or monthly payment.

How to Make $8,000 on Every Offer You Make

As you can see, there is a bunch of numbers to crunch when using this investing strategy. So I created a software program that calculates everything in minutes. I would not do it any other way. Enter a few numbers and it spits out multiple offers.

9 Year Note Example: Assume a single family home in Florida needing $5,000 in work valued at $180,000 after repaired. Market rent is $1,295 and we offer it with flexible terms to a buyer for $187,500. We’re going to target a total profit of $72,000 including $10,000 now and the rest over time.

After calculating the numbers we buy it “as is” for:

1) $214,000 with no money down and $800 a month

2) $202,000 with $15,000 down and $700 a month

3) $182,000 with $40,000 down and $500 a month

Each offer gets the seller a quick sale -- well above what they might net selling through an agent down the road. And we get at least $72,000 from the cash now, cash flow and cash later.

And if on average we close 1 out of 10 offers it’s like making $8,000 every time you make an offer -- whether it is accepted or not! It’s simple a numbers game.

A Great Strategy to Add to Your Real Estate Business

There are many good, safe ways to make big money in real estate and this is just one of them. According to the latest US Census data over 34% of the properties in the U.S. are free and clear. How many real estate investors do you know who are targeting these sellers or using this approach? There’s very little competition and lots of opportunity.

Please post your feedback or questions!