Quickstart Guide to Getting Financing - 10 Creative Ways to Buy Real Estate in Today's Market With Little or No Money Down

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Quickstart Guide to

Getting Financing -

10 Creative Ways to

Buy Real Estate in

Today's Market…

With Little or No

Money Down

By

Reggie Lal

www.BeTheSmartInvestor.com Reg@ BeTheSmartInvestor.com

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Your Quickstart Guide to Getting Financing -

10 Creative Ways to Buy Real Estate in

Today’s Market… With No Money Down

What is Creative financing: a term used widely amongst real estate investors to refer to non-traditional ways of financing real estate; in other words, financing techniques not commonly used by Real Estate Agents or Banks.

Why Creative Financing is a Necessary Tool:

One simple way to buy a home is to pay all cash. However, the typical Investor is not in a position to do this, nor is this an efficient use of your Capital. Thus you must arrange for some type financing of your purchase(s). Using Creative Financing techniques, you will be able to get there faster.

In this market- most Investors can afford only a modest down payment and are forced to secure the remainder of the purchase price by mortgage from some source other than the normal lending institutions (Banks). The problem is - in a down Real Estate Market: credit tightens, there is little liquidity in the market place, appraisals tend to come in lower and investor loans are limited and hard to obtain. This makes conventional Real Estate Financing nearly impossible for us Investors. That is why I took the time to write this article for you. The general goal of creative financing is to purchase or finance a property, with the

buyer/investor using as little of their own money as possible, otherwise known as leveraging, OPM (Other People's Money). Yes – “it takes money to make money”. However it does not have to be your OWN MONEY! Using these techniques, an investor may be able to

purchase multiple properties using little or none of their "own money" and still do multiple deals at the same time. Don’t’ worry-As you get better at buying- the money will find you. The more money a property requires, the less attractive it is to us the Real Estate Investor. So as Investors/Buyers; we should not use all of our savings for the down payment or repairs, this deprives us capital for other deals and reserves to fall back on.

I’ve been buying and selling Investment properties for over15 years now. In the process of building my personal wealth through Real Estate, I’ve used many of these techniques to structure the purchase of a property with little or no money down. Note: Please don’t think that every deal can be done with no Money down. Often times it requires some down payment or Rehab money, so be prepared to bring in some capital to the table. Word of caution, some no Money Down deals may not be such a great deal and can even take you down. The deal may not provide any cash flow or profit ; Negative cash flow has taken many good investors down in the past !

If you are just starting out, it’s helpful to have as many no-money-down strategies/techniques available as possible. We have all run low on investment capital as some point in our

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investing life. Thus the better you get at this, the faster you will reach the “finish line” to financial independence.

So keep studying and refer back to this guide often, until it becomes second nature to your way of thinking and the best in your Investing.

#1 Owner Financing:

One of the most common ways to buy a property with no money down is to use owner financing (Seller Carry Back). This is possible when the current owner agrees to finance either all or some part of the purchase price. Instead of getting the cash now, they are willing to get a income stream ( payments) for the terms you both agree on. In this case, the seller is acting as a bank and rather than receiving all or a portion of their equity at close, they can "lend" it to the buyer and receive a regular payments as agreed. They may receive no payments, interest only payments, principal only

payments, or a combination. It could be an interest only loan, or an amortized loan. Additionally it could carry either a fixed rate interest payment or a variable rate. The payments/terms will vary depending on the agreed upon terms of the contract between the buyer and the seller. You’ll be surprised how many people own their properties free and clear, and are willing to finance the entire amount or a good portion of the mortgage at great terms. Just ask !

Get Creative with your deal structuring and terms: Single payment note, no interest note, no payments until property is sold, no payments while property is being

repaired, no payments while it is vacant, Blanket mortgage, Substitution of collateral, Wrap around mortgage, performance note, shared appreciation note, etc….

Note: Please get familiar with the new Safe Act and how it affects Owner Carry back

loans, you may need a local Mortgage Professional to do the paperwork to be fully compliant with Safe Act guidelines.

Bonus: Creative spins to Owner Carry Backs:

Make payments on the Down Payment:

If you have a secure job or future investment income, negotiate with the seller to have your bank deduct a specific amount from your checking account each month until the amount the seller wanted as down payment is made. As additional security, you can give the seller a mortgage on other property (Car/boat etc..) to secure your

performance under the agreement. You get immediate ownership and the seller eventually gets the full down payment.

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Create Other Paper for the Seller:

Write a note secured by a second mortgage on your own house or other real estate in the amount of the seller’s equity. One of the things that a seller thinks about when giving a second mortgage is that he will have to foreclose and would get the property back! The security of your own house may help eliminate the seller’s demand for cash from the investment property you are buying from them, thus giving the seller greater assurance that they won’t get their same property back.

I once had a Seller carry a second back on my ski boat, this allowed me to sell the property on a wraparound mortgage of their fist that they carried on the house. Buy with Seller Carry back of a First and Second,

Then Sell the First for Cash:

Buy a property with the seller carrying back the financing using a first and second mortgage. Then, locate a buyer for the first at an acceptable discount, the cash from the sale of the first loan goes to the seller as down payment. The seller then continues to carry back the second to you. This makes for them getting cash and you getting a zero down deal.

Often times in seller carry back situations; the seller won’t carry back the entire amount of the sale but, is willing to carry some of their equity. This is a great way to get the seller some cash now and the rest later. Usually, by selling the first at a small discount, the deal still works for you. A great no money out of your pocket idea. Substitution of Collateral:

If you are purchasing a property below value(Property A) and own another property that can be used as collateral for the financing of the purchase(property B), you may be able to transfer the Mortgage from property A to property B. This would free up the equity in property A and it can be resold or refinanced. Sometimes called “walking the mortgage”.

Seller Finance or "subject to" :

A Seller can allow the buyer to "take over" the loan that they have in place. This can be done in two ways:

The first way is called a "formal assumption", wherein the lender formally allows the buyer to assume the loan. This usually requires approval of the Bank and buyer's credit, and often a modification of existing loan terms. This not usually done in Bank financed Residential Real Estate anymore, it is more common in Commercial deals.

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The other method is called a "subject to" where the lender is not contacted, and the buyer purchases the property "subject to" the existing financing. This means that the Mortgage stays in the current owner’s name (seller), but the Deed is transferred to your name, Entity or Trust.

This is a great way to take over a property with no money down. This situation

usually arises when the property is not performing and the owner is in trouble with the bank or in Foreclosure.

This can be financially risky in some ways, since many loans have acceleration clauses which permit the lender to call the loan due if the property is transferred. However, more often than not the lender will not exercise the "due on sale clause" if the payments are being made on the underlying mortgage(s).

In the rare event that a lender does call the loan due then an investor could quickly sell the property or pay off the loan using any one of the various financing options available, some of which are described in this report. In this market, the Banks have enough bad loans and will probably be a bit more flexible.

In my early years, I built up wealth very quickly with little money from my own pocket using “subject to” deals. In fact, one of my best ever Return on Investment deals (ROI) was a deal I did in Northern California in 2004. I bought a home in a great neighborhood that was in default. I re-instated the first for $12,600 and the second loan for $ 4,400 and paid the seller $1,000 to deed the house over to me. The seller needed a 6 month rent back so their kids could finish out the school year, I don’t like rent backs, but did it to help the family out as they seemed like great

people. Well by the time they moved out and I rehabbed the house, the CA market had gone crazy. The house appreciated another $ 60,000. I sold it for a very nice profit and paid the existing loans off.

The sellers were very thankful for my help, it also improved their credit and kept the house from going into foreclosure too. I got to help a great family and made money doing it too. What a great business!

How things come back around, I just recently did my first Sub to deal in this

meltdown , seems like it’s been sooo long since any one had enough equity to make it worthwhile buying it subject to the loans. We just bought a home from a “don’t wanter” home owner.

He was behind on his Credit Union loan and the house needed a lot of repairs (sound familiar by now). What makes this fun is that I actually called his Credit Union about his loan and told them that I was bringing it current and taking the loan over with the

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homeowner deeding it to me. I let them know that I would be making payments while I repaired the house and put it back on the market. I let them know that this was far better than them having another non-performing loan on their books and that it would be sold in less than 6 months. I assured them the loan would be paid off in 6 months or less. We are in the process of rehabbing the home right now and I have no doubt that it will be sold in a month or two.

Again, we saved the homeowner’s credit and got them some cash for their equity. They were able to sell the house in its poor condition and close on the deal in just 5 days. He got his cash in a hurry and we got another project.

Note on Land Trusts:

Land Trusts have traditionally been used as a non-profit entity to own property. In recent years, many Investors have developed tactics that allow for Land Trusts to be used to acquire properties in foreclosure allowing homeowners to save their homes and making it possible for investors to see great returns. Please note that Land Trusts are really a sub-set of Subject to deals, however I thought it was important enough to be worthy of its own mention here.

In a Real Estate Investment model Land Trusts bring ease to the transaction and some believe it also brings a benefit of not causing Due-on-Sale clauses to be enforced. While the use of Land Trusts by real estate investors does make it more difficult for a lender to discover a transfer has occurred, the loan can still be accelerated if it is discovered if a transfer ownership/beneficial has occurred.

By federal law- a transfer to a trustee in an inter vivos trust (to which classification a

residential property land trust belongs) cannot be considered a due-on-sale (

due-on-transfer) violation unless all of one's beneficiary interest would have been transferred to another. Title 12 of the US Code Para. 1701-j-3 - i.e., The Garn-St. Germaine Act of 1982, specifically makes this point.

What this means is that a partial beneficiary interest, of 1-99%, can be given

(assigned) to a co-beneficiary without triggering a lender's alienation recourse (i.e., the due-on-sale penalty). Learn more about Land Trusts and use with caution.

#2 Wholesaling:

Wholesalers typically make smaller profits but buy and sell properties in large quantities. They may buy 50 homes at a time from a bank and then sell them for a small markup to move them quickly and do it again.

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A more common wholesale approach among creative real estate investors is to secure properties with no money down and do a "quick flip". Typically the property or owner may be distressed in some way for the deal to be discounted enough make sense. Once a property is tied up at a discount, the buyer quickly sells it at some markup of their contract buying price. Typical amounts range from $1,000 - $10,000, but may be higher depending on the amount of equity in the deal.

In a nut shell, real estate wholesalers put properties under contract and assigns or resells the property to another investor. The end investor uses: cash, lines of credit, private money or hard money loans to purchase the discounted property. This allows quick closings on properties that sometimes need extensive repairs. The wholesaler is usually paid up front, may even get a piece of the back end profit too(when it is fixed and re-sold at a higher price.

A wholesaler works off of the idea that price overcomes all objections. If you can sell a property for a low enough price it doesn't matter what’s wrong with it, somebody will buy it. A wholesaler focuses on developing two things: finding deals and their network of Investor/Buyers to sell to very quickly.

I often wholesale property with a creative twist:

I will often wholesale properties and provide the financing for them to some trusted local contractor’s/rehabbers. They have the skills to do a great rehab but, do not have the capital to acquire the property. Great win/win, we both make money, I get a

markup on the flip (wholesale fee) and made money on the Hard money loan too, they flip and make a nice profit using very little of their own money. I have helped many a beginner get started this way and since my money is on the line, they get some free coaching too as I don’t want them to make a mistake. Its very gratifying to see some of my students complete my courses and we go on to do deals this way. It makes it easy for them to get a jump start in the business. They don’t have to wait to save up a bunch of capital or have to try and raise money when they are starting out.

#3 Double closing:

A double closing is the simultaneous purchase and re-sale of a real estate property involving three parties:

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Typically, a real estate investor first enters into a contract to purchase a property and then subsequently (before closing the purchase) enters into a contract to sell the property (hopefully for a higher price). The investor then utilizes a double closing to close both transactions at approximately the same time.

The mechanics of a double closing vary, depending on who the buyer and seller are, who is providing the financing, and who is conducting the closing. In the simplest form of double closing, the purchaser(C) would pay the purchase monies to the middleman(B) and they would complete a purchase for their transaction. The

purchaser would have to wait while the middleman uses most of the purchase monies to purchase the property from the seller(A). The seller and middleman would also complete a separate settlement for their transaction. The middleman would then instruct the seller to deed the property directly to the purchaser.

To keep the purchaser and seller separate, the closing may be conducted in two different rooms or at two different times or locations. Success is more likely if the closing agent is friendly and accommodating.

To simplify the transaction, the middleman may make one settlement statement

(HUD-1) directly between the purchaser and seller and take his profit as a line item on the settlement statement. This line item is usually on the purchaser's side of the

statement as an assignment fee.

The underlying reasons for having a double closing vary. The most pressing and usual reason is to allow the middleman to use the purchasers funds to acquire the property from the original seller with none of their own money. Another common reason for a double closing is to conceal the identity of the purchaser or seller.

Note: caution with this strategy if you are using it for Short Sales, it may be considered defrauding the Short Sale Lender(s). Get good local legal counsel before using this technique on Short Sales.

#4 Using Friends and Family Money:

Most of us know a family member or friends with some money to invest. They may have: savings, equity in a property that has an equity line of credit on it that they can use loan you some money from. They may have some money in an IRA that they would like to get a better rate of return on (Just show them the stock market returns lately). You may need the help of a local Mortgage Broker and Escrow person to get the paper work done correctly the first few times. This is a great way to find cheap money to do deals with and they can usually act very quickly.

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Note: Always use extreme caution when dealing with family/friend’s money! Make sure that they are secure and always pay them on time. Remember to make it worth their while by giving them a good interest rate on the money and/or share some of the profit from the deal with them. This will give you the ability to use their money again and again… Remember – Always Win/Win for all !

#5 Private Money:

Private money is a commonly used term in banking and finance. It refers to lending

money to a company or individual by a private individual or organization. While banks are traditional sources of financing for real estate, private money may have traditional qualifying guidelines too.

There are higher risks associated with private lending for both the lender and borrowers, but there is traditionally less "red tape" and regulation.

Private money can be similar to the prevailing rate of interest or it can be more expensive. When there is a higher risk associated with a particular transaction it is common for a private money lender to charge an interest rate above the going rate. There are private money lenders in virtually every state in the United States, seeking a chance to earn above average rates of return on their money. With that comes the risk that a private money loan may not be re-paid on time or at all without legal action. However, in the case of a real estate transaction the lender can ask for a recorded Deed of Trust & Insurance on the property the same as a bank lending money would require.

Borrow From A Private Lender For Down Payment:

If you find a great deal, but don’t have the money for a down payment, find a private lender. This is any individual that has extra money set aside that you can use for your purchase. This person can be a family member, friend, CPA, Doctor, Small business owner, a member of your real estate investment club, etc.

Private investors are everywhere; you just need to start looking for them.

Ask them if they have money in an IRA or a savings account that they would like to get a great return on, (6–10%), and the best part- it’s secured by real estate. Just start looking for them and asking them to invest with you.

After completing my “Finding the Money” workshop, many of my students have gone on to do deals with private money. Once you learn how to find and use private money,

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you will not go to the Bank for a Real Estate loan very often.

Note: Private money is much easier to find in times of low interest rates on CD’s. I often do deals in my self directed IRA using private money to do a deal, a great way to build wealth in a hurry using a tax free platform.

#6 Hard Money:

Hard Money is often used to finance projects that are in poor condition,

unconventional properties, great deals, or when money is needed quickly. Typically hard money lenders will lend 50-70% of the value of the property regardless of the sales price (unlike banks). They can typically close loans in 2–10 days. Credit scores and income are often overlooked by hard money lenders, however they may ask to see a business plan or exit strategy for the project. You may need some down payment and show cash reserves to make loan payments.

When investing in Real Estate, if the loan-to-value ratio is 65% or below, many

lenders will finance you with no money out of your pocket, because the value is in the property. If you default, they simply take the property, sell it for 85% of value, and still make money.

Hard Money Lenders make their money via points (e.g. 1 point equals one percent of the total amount borrowed), interest rate (10-20% per year is common), and/or an equitable interest or part of the profits. These will vary based on the size of the project and the agreed upon contract. Hard money lenders are collateral based and typically require first position on the property. Get familiar with the Hard Money Lenders in your market place now.

If you are just starting out and don’t have any money to do a deal, this is not a bad way to go. It may seem expensive, but it’s better than doing nothing.

# 7 Options:

An option is defined as the right to buy a property for a specified price (strike price) during a specified period of time. An owner of a property may sell an option for someone to buy it on or before a future date at a predetermined price.

The buyer of the option hopes the value of the property will either go up or is already low. The seller receives a premium called "option consideration". The buyer may then either exercise the option by buying the property or sell the option to someone else to exercise (or sell).

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This is often done to obtain control over a property without much cash. Option premiums are typically non-refundable. The option represents an equitable interest in the property and may be recorded at the county recorder’s office.

Note- if a Seller won’t let you buy a property “Subject to their loan”, they often times will have no problem giving you a short term option on it. I call this “Sub to financing in disguise”. Try it next time !

One of my students use this strategy very successfully on a quick flip on a “For Sale by Owner” home in San Francisco, CA. They tied it up with an option. Marketed the property well and sold it in just a couple of weeks. They made a very nice spread on the deal. The best part- they did the deal with just a $100, which is what they paid for a 3 month option on the property. Wow only $ 100 !!!

#8 Sandwich Lease Option:

A sandwich lease may seem a bit complicated at first. It also doesn't necessarily work well in all areas. However, when it does work, it is a great way to invest in real estate without much cash.

This technique has been used for a long time, but is still relatively unknown among investors. Essentially, you lease a property with an option to buy it, and then turn around and rent it out to someone else, also granting them an option to buy it. Their rent is higher than yours, of course, and their purchase price is as well.

A Sandwich Lease Example

You find a seller that has had some trouble selling his home. He has already moved, and has no immediate need to sell. He wants $132,000 for his house. You offer to lease the home for two years if he will also grant you an option to purchase it for $132,000 at any time within those two years. He likes the fact that you are offering full price.

You are honest and open with him about your intentions. You explain that you intend to improve a few things and sell the home for a profit. You will want the right to sublet the home as well. Here are the terms you finally agree to:

- The purchase price will be $132,000 - if you buy.

- You pay an option fee of $2,000. It is non-refundable if you don't buy the home, but applied to the purchase price if you do.

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- $200 of each rent payment will be applied towards the purchase price if you buy the home.

- You will be responsible for the first $100 of any necessary repairs each month. This means the seller won't have some of the usual headaches of being a landlord.

For the sake of this example, we will assume you are doing this in an area where real estate prices are rising quickly. This is where the technique will work best. If you have a list of potential buyers you are already in contact with, it works even better. Ideally, you want to have the place leased the day that you close on your lease, so you have no holding costs.

Your buyer is looking to lease a place because he may be transferred by his company. He would like to buy if he isn't transferred. You have the right place for him. Here are the terms you negotiate:

- The purchase price will be $142,000 - if he buys. You explain that at the current rate of appreciation, the home will be worth $150,000 in two years, which is when he will likely be buying it. Of course, he doesn't have to buy it. An option is just the right, but not an obligation.

- He pays you an option fee of $4,000. It is non-refundable if he doesn't buy the home, but applied to the purchase price if he does.

- He will pay rent of $1500 per month.

- $300 of each rent payment applies towards the purchase price.

- He will be responsible for the first $100 of necessary repairs each month. This means any costs beyond that are passed on to the seller as per your contract.

The lease period must be the same or a little shorter than yours, of course. Now let's look at the possible outcomes.

First of all, these kinds of leases are not that uncommon in some areas of Florida, Arizona and California. Investors experience in these places have been that the lessee often doesn't buy the property. What happens then?

You have no obligation to buy either. So if your renter doesn't exercise his option, you can let yours lapse as well. But where are you financially? You were paying $1200 per month, and collecting $1500, so after two years you have collected $7,200 profit. You also lost your $2,000 option fee, but kept the $4,000 fee you collected, adding another $2,000 to your profit. The owner is paying the insurance and taxes, and the renter the utilities, so you had no substantial costs.

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Your total profit was close to $9,000 if the property was rented out at the same time that you signed your lease. You had a temporary cash outlay of $3,200 for the option fee and the first month's rent. But your renter gave you $4,000 for the option fee plus $1,500 for his first months rent. If you had to get a cash advance on a credit card for a month, it would cost you just $40 or less in interest to make this a no money down deal.

What if your renter buys at the end of the two years? Your fee of $2,000 plus $2,400 in rent - $200 times 24 months - is applied towards the purchase, so you need

$127,600 at closing ($132,000 minus the credits). Your buyer is credited $4,000 for his option fee plus a $7,200 rent credit - $300 times 24 months. This means he needs $130,800 at closing ($142,000 minus the credits). Closing costs will be around $2,000.

You make $3,200 at closing, plus you took in $2,000 more for a fee as you paid, plus you made $7,200 in rent beyond what you paid. That's $12,400. After $2,000 or so in closing costs, you have a profit of more than $10,000.

Naturally the owner could just do what you intend to do with his property, so why does he agree to this deal? Because- you are the one that will take the trouble to do it. You are the one who has the renter ready. The seller just wants his problem resolved quickly - and you are the one with the solution - a sandwich lease. (Source: =Steven Gillman)

#9 Use A Credit Partner:

This means you may have to share the equity that is created in the property with an Credit partner/investor who will bring in the down payment and/or obtain a new loan on the property. You will put the deal together and oversee the project. This

sometimes may be cheaper than Hard money. Someone may let you do this for just a small fee ($3,000 - $5,000), which makes this a great source of cheap money.

Note: Remember to always pick your partner(s) carefully and always Always ALWAYS put everything in writing!

#10 Do an Equity Share with the Owner:

You can do an equity share with the owner. The owner transfers title to you, an Entity or Trust and now the two of you are partners on this deal. The property can be sold or refinanced for long term holds. The owner gets out some of their equity now, and becomes an equity partner for the remainder.

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The benefit to the owner is that they may get some of the monthly cash flow, plus an equity position which may be worth more when the property resells or appreciates. This is a great way to get a no interest deal on their part of the equity, which is put on hold for now. Make sure you use good paperwork to spell out the terms of the deal (at a minimum: a contract and a joint venture agreement).

Note: I would not recommend this with a homeowner that is in Foreclosure, as it could be a “law suit magnet” later.

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Want to Learn More?

For a how-to, step-by-step home study system that will show you how to find these deals, how to negotiate the deals, and all the forms you need to complete the deals, go to: http://www.bethesmartinvestor.com

About Reggie Lal:

Reggie Lal is an active investor, wealth building coach, speaker and author with a myriad of experiences in his Real Estate portfolio. Over the last few years alone, Reggie has completed hundreds of deals including: Pre-Foreclosure, Trustee Sales, Retail flips, Wholesaling, New Construction, Private lending and more.

Reggie often speaks and teaches at Investment Clubs and Real Estate Expo’s in an effort to help educate other Real Estate Investors. As the managing broker for his company, Reggie continues to oversee its real estate projects as well as assisting in finding new investment opportunities for this changing market.

Legal Notice

This information is designed to provide accurate and authoritative information regarding the subject matter covered. It is offered with the understanding that the presenter is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert advice is required, the services of a competent professional should be sought. Adapted from a Declaration of Principles jointly adopted by a committee of the American Bar Association and a committee of Publishers and Associations.