Joseph Sugerman
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I know from all my experience in buying houses that begin-ning investors can make good money quickly on assumption deals. I have found this to be one of the easiest and quickest methods of buying and selling a property in weeks, days, or even hours. Using this technique, you will find loans that can be assumed, such as non-qualifying FHA and VA loans, or you can create non-qualifying financing by using seller financing.
The beauty of this is that non-qualifying loans require little money and no credit checks, and you need very little training to do them. A non-qualifying loan is any loan that does not contain a “due-on-sale” clause. (Due-on-sale gives the lender the right to call the loan due when the property transfers ownership.) The absence of this clause takes control away from the lender and makes the loan freely assumable with or without the lender’s permission. This creates attractive financing because the buyer does not have to qualify for a new loan to buy the house. If a buyer can satisfy the seller’s need for a cash down payment, he or she can buy a house regardless of their credit or inability to qualify under normal standards.
You must get into these deals with very little cash. In fact, you can even buy these with no money down. Sometimes, own-ers are two or three months behind on the payments, and you just pay the back payments and take over the loan. Often, you
can sell the property before you have to take title to it. If you find a buyer before you close, you can often have the property deeded directly to the new buyer and just pick up a check for the
Chapter 7
difference. If you buy a property for $1,000 down and sell it for
$4,000 down, you keep the fast $3,000 profit.
Here is an example of an assumption deal that was located by my son-in-law, Bobby. Before I tell you about the deal, maybe I should tell you about Bobby.When he was in his twenties, he had hair down to his shoulder blades. His main ambition in life was to be a rock-and-roll star. That’s right, one of those hip- pie-looking, guitar-banging, noisy rock stars. Now, I don’t have a problem with that so long as I don’t have to listen to the racket; it drives me up the wall. Hey, a man’s gotta do what he likes, right?
Anyway, over the years, Bobby has become proficient at putting together deals when he decides
he wants to work, which usually happens only after he runs out of money. Not long ago, a couple called about our ad that we buy houses. They had a house with a $50,000 FHA loan that was assumable with no qualifying, and they wanted $2,000 cash in addition.
Bobby looked at the house and determined that it was in good condition and worth in the mid-$50s. He knew from experience that the less he gave the sell- er, the more he would make when he found a buyer.
He had learned that the only way he could make quick cash on an assumption was to get in with little or nothing down, then find a buyer who would bring a few thousand dollars to the closing and assume the loan without qualifying. He could keep the difference between what his buyer paid down and what he had to give to the seller.
He tried to convince the sellers to deed the house to him. He said he would take over the loan and pay the closing costs, but they wouldn’t bite. However, they did agree to accept $1,000 at closing.
Within two weeks, Bobby had found a buyer with
$5,000 and set up a closing for a few days later. From Fast Cash With Quick-Turn Real Estate
that $5,000, he paid the sellers the $1,000 and put
$4,000 in his pocket.
While that wasn’t a big deal, it was a fast, easy
$4,000 any way you look at it. I forgot to tell you why Bobby wanted this deal. You see, I was about to take a trip to Las Vegas for a speaking engagement, and Bobby and my daughter Vicki wanted to come along.
The only way they could afford this was to work a deal such as I’ve just described. As I said before, Bobby really works when a sense of urgency strikes him. costs can be held to a minimum through negotiation with the seller. For example, if you bought the house in the middle of the month, and the seller expects to be in the house through the start of the next month, you can reasonably ask him to make the next month’s payment, thus reducing holding costs and increasing your profits.
This is typical of a retail assumption deal that generates immediate capital. If the house appraised for $55,000, you could still sell it for $56,000, $57,000, or even $58,000 if you wish. The financing makes the house very attractive to the buyer and, consequently, makes the house worth more. In either case, you have no reason to appraise the house and neither will your buyer. It’s worth whatever you say it’s worth.
But what if the buyer does not have $5,000 cash for a down payment? You can take whatever down payment he has and payments in the form of a second mortgage until it is paid off with interest. Or, let them rent the house until they have paid the entire $5,000 over and above their payment, then deed the house to them.
Assumptions: Using Non-Qualifying Loans
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1. The house must be in good condition, needing few, if any, repairs. You shouldn’t spend more than $1,000 to upgrade and purchase a $50,000 property.
2. Pass by any deal if you can’t get into it with only a small investment of cash. If it doesn’t fit your guidelines, WALK AWAY. There are hundreds of other deals that DO fit.
On the other hand, don’t walk away without leaving an offer. If the seller becomes motivated enough in the future, he may decide that your offer looks pretty good after all.
The monthly payment on any assumption should be about 1% of the srcinal loan. For example, an $80,000 loan should have a monthly payment of about $800.
Similarly, a $55,000 loan should have payments of no more than $550 a month. You would have a problem sell-ing a $55,000 house with a $750 monthly payment.
People living in $100,000 homes are accustomed to pay-ing $1,000 a month. This type of transaction will work on a $150,000 house as well as a $50,000 house. However, with the more expensive homes, it is even more impor-tant to watch your carrying costs and enter into the transaction with very little risk.
3. The property must have an assumable non-qualifying loan, or you must have a good working knowledge of sell-er financing to create it yourself. Creating sellsell-er financ-ing is discussed in Chapter 13. It is an excellent means of creating income.
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4. Ask for the right amount of down payment when reselling the house. I try to match carefully the amount of down payment with what I know about my potential buyer. If you are selling a $150,000 house, then you would expect $10,000 to $20,000 down. Is that too much?
Not really. I know from experience that people who would live in a $150,000 home usually have that amount of money to put down. For a $50,000 house, however, you may not be able to get more than $5,000 down. It is usu-ally difficult to get more than a 10% down payment, so a good rule of thumb would be to keep it to 10% or less.
5. Let your buyer pay all the closing costs. Just write it into the sales contract and act as though it’s normal. The con-tract determines who pays what closing costs.
Remember, buyers of assumptions often can’t qualify at the bank, so they tend to be a lot less picky than buyers who can qualify. You are in control, so you make the rules.
6. Try not to take title to the house. Ideally, you will have resold the house prior to the closing. As mentioned above, if you find a seller who needs $1,000 to get out of his problem, and you find a buyer who has $4,000 to put down, you can set up a simultaneous closing and make
$3,000. If you close and take title, however, you then become responsible for the payments and closing costs.
Of course, I would recommend that you always have the house under contract before you try to market it, and you should be prepared to close even if you can’t find a buyer before your contract expires.
When you become proficient at finding a buyer first and then find the house to buy, the entire process becomes much easier. I have done many of these assumption deals. Some I had to buy first; on others, I did a simultaneous closing with the new buyer and seller present at the same closing. In that case, all I had to do was pick up my check and look for another good deal.
Assumptions: Using Non-Qualifying Loans
Either way will work, but your profit will be smaller if you actually take title, because you will probably pay some or all of the closing costs and some holding costs.
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It is best to look for assumable non-qualifying loans. Those are VA loans closed prior to March 1, 1988, FHA loans closed prior to December 15, 1989, and most private loans that do not contain a due-on-sale clause. VA and FHA loans closed after those dates also can be assumed, but they require qualifying because there is a due-on-sale clause attached to them. This is time consuming and does not fit into our program very well.
Make sure you find out when the loan on a particular prop-erty closed. Get in the habit of asking when the owners closed the loan when you take the information over the phone.
Assumable private loans also can work very well for investors because they can be below normal interest rates and require no points and other fees to assume.
Thousands of houses with good, non-qualifying FHA and VA loans are available. This means that you just have to be alive to assume the loan. There are no other requirements. Simply take over the loan and make the payments. A corporation, a trust, or any other entity can buy such properties. If there are two homes on the market, one with a non-qualifying loan and the other requiring a new loan, the assumption will sell faster every time.
I have seen deals like this in every city to which I have traveled.
You don’t have to steal assumptions. You can buy them for what they are worth or a little less. I’m talking about buying them for 80%, 90%, or even 100% of their value and still mak-ing money. What makes them worthwhile is the loan. It doesn’t require lender’s credit checks or other qualifying requirements.
It’s all in the financing. You can use this technique over and over again to make money. It’s an easy-in, easy-out method.
Most old FHA or VA loans may be assumed for a $45-$125 transfer fee. However, do not assume the loan under your own name. Assume it under a trust or corporate name (see Fast Cash With Quick-Turn Real Estate
Chapter 14 on taking title and land trusts). This will avoid per-sonal liability.
Assumptions: Using Non-Qualifying Loans