The Ultimate Strategy for Buying & Selling Houses

Transcription

1 The Ultimate Strategy for Buying & Selling Houses Creating a Free & Clear Real Estate Money Machine with Richard Roop and Dan Doran Section 6 Funding & Raising Cash: Buying Better than No Money Down Section 6: Funding & Raising Cash Page 1

2 Section 6 The Ultimate Strategy Creating a Free & Clear Real Estate Money Machine Funding & Raising Cash: Buying Better than No Money Down This Section includes: 1) Cash you may need when buying 2) How to fund your purchases 3) How to pay off your houses 4) What is a hard money loan? 5) What is a private investor loan? 6) How to find hard money lenders 7) How to find private investors 8) How to use your private investor s money Resources How to Raise Millions in Private Money Over the Next 45 Days 7 Ways to Raise Cash for Real Estate Deals without Banks - Part 1 of 2 6 Ways to Collect Cash when Buying with No Money Down 17 Ways to Generate Monthly Cash: How to Overcome Real Estate Cash Flow Challenges General Disclaimer Private Investor Flyer/Postcard/Letter Example Additional Resources Maximizing Profits with Private Lenders 7 Ways to Raise Cash for Real Estate Deals without Banks - Part 2 or 2 17 Ways to Generate Monthly Cash - Million Dollar Coaching Call Replay Equity Trust Company Volume #2: Generating Monthly Cash While Building a Fortune Section 6: Funding & Raising Cash Page 2

3 1. Cash you may need when buying Down payment to seller Paying off existing liens and encumbrances Funds for rehab, remodeling or repairs Closing costs to buy Holding costs until sold or occupied Collecting part of your profits in advance 2. How to fund your purchases Borrow from the seller o The Ultimate Strategy Borrow from private investors o Always plan to have at least a small first o Unless buyers down can fund the deal Borrow from hard money lenders o Sometimes quicker and easier o OK until you get private money o You can replace them later with private money Use your buyer s cash down payment o Purchase deposit from tenant buyer o Down payment from contract buyer Use your buyer s cash from a new loan o Move your seller s 0% money to seconds other properties 3. How to pay off your houses Use the net positive income o Pay off 12-15% hard money loan o Pay off 7-12% private investor loan o Pay off 0% seller carry back loan Use additional non-refundable purchase deposits paid monthly from tenant buyer o To pay off hard money or private money faster Use buyer down payment or deposit o 3-5% down or more form tenant buyer o 5-20% or more from contract buyer o You can buy the note back from first position lender Keeps seller in second position Section 6: Funding & Raising Cash Page 3

4 Pay off 12-15% hard money loan first Pay off 7-12% private investor loan next Pay off 0% seller carry back loan last o Negotiate a discount for paying them off early Use your buyer loan proceeds o Move your seller s 0% money to seconds other properties 4. What is a hard money loan? Collateral loan against high equity Sometimes easier and faster than private money Up to 70% loan to value (LTV) o May consider a second lien position Not to exceed maximum total loan to value o May hold money back in escrow until repairs are completed Should loan on value and not purchase price Lender should be OK with owning the property in case of default Loan fees of 2 to 10 points Term is typically one year o May get 2-3 years o May charge you points to extend May require a personal guarantee o Signing as trustee When property is owned by trust House is responsible o Signing as President When property is owned by your corporation All corporate assets are at risk Best not to HOLD investments in a corporation Use LLC or other o Signing personally Added security for lender All your personal assets are at risk May require a credit check o Wants to make sure you are not a deadbeat Lender may do their own appraisal o Could just do online research and a drive by o You can provide most current appraisal and comps Section 6: Funding & Raising Cash Page 4

5 o May charge you extra for this o Cost could be included in the loan fee Lender may do all the closing paperwork o Could be included in the loan fee Lender s Title Insurance policy required For business or investment purposes o They may prefer not to do owner occupied loans o Home Owners Equity Protection Act (HOEPA) Hazard Insurance o Have valid policy at closing properly endorsed o Use an insurance agent 5. What is a private investor loan? Collateral loan against sufficient cushion of equity Up to 85% loan to value (LTV) Investor probably does not what to own the property No loan fees o You could offer 1% to investor if needed o You could offer 1% to a private money manager Someone you hire to find and manage private investors Term is flexible o Get 3 years minimum o Ask them o Shoot for 7-10 years May require a personal guarantee o Only if they ask o Don t offer it needlessly o It s up to you Are you willing to do whatever it takes to protect them? Should not require a credit check o They are protested by: Cushion of equity Seller in second position Income from the occupant Lien against the property o In case of your default, they get The property through foreclosure Section 6: Funding & Raising Cash Page 5

6 All their principle All accumulated interest All collection, legal fees and any other lender disbursements May require an appraisal o Follow federal or state guidelines o Lender may be happy with you value estimate o OK to provide list of comps o Use your resell price or contract price as the value Paperwork is done for them o Use FNMA note and deed of trust o Can be done in houses For experienced buyer only o Best handled by attorney or title company You pay all the costs Explanations in paperwork No payments Interest only payments Special provisions to add o First right of refusal on the sale of the note o Substitution of collateral o Subordination agreement o Due on sale clause Get the right to sell on a wraparound Don t let other assume your obligations Lender s Title Insurance policy may be required o Discounted when getting with an Owners Policy o Will you do it on all purchases? o Will you do it when pulling cash out of a house you already own? Hazard Insurance o Have valid policy at closing properly endorsed o Update policy endorsements as required over time If you replace or add a private investor o Use an insurance agent Section 6: Funding & Raising Cash Page 6

7 6. How to find hard money lenders Local REIA Newspaper Yellow pages Mortgage brokers Referrals o Mortgage brokers o Other real estate investors Online research o o o o TUS Membership Site updates 7. How to find private investors Inner Game verses Outer Game o Outer game is the technical step by step process o Inner game is your check up from the neck up (Zig Ziglar) Habits Attitudes Beliefs Expectations Create your program o So you can easily explain it o anyone and everyone you come in contact with o Example: How to Raise Millions in Private Money Over the Next 45 Days Create a 60 second elevator speech o Examples: How to Raise Millions in Private Money Over the Next 45 Days Build you information and credibility kit o What to include: How to Raise Millions in Private Money Over the Next 45 Days Create your presentation o Deliver one-on-one o Deliver to groups o Deliver online Section 6: Funding & Raising Cash Page 7

8 o Print out and add to kit o Example: Jake Jordan s Presentation use as example only Michael Moulton s Presentation use as example only Flap your lips to everyone you know o Do before advertising for cold leads o List of ideal prospects: How to Raise Millions in Private Money Over the Next 45 Days Indentify interested prospects and follow up o Meet with someone weekly o Create goals and milestones Track controllable inputs Number of postcards, letters or phone calls Number of presentations 8. How to use your private investor s money Questions to ask: o How much do they have to work with? o Where is it tied up now? o When will it be available? o Is it in a retirement fund? o Are you most interested in income or growth? Good to know: o Will they do land, mobile or modular homes? Offer them a deal like this first and then see if they object o Do they want to get a higher return on deals where you need a second lien? They will do it for more money Smaller seconds may accrue interest with no payments Offer payments if you wish to reduce your payoff obligation later If you have a deal now, present your opportunity o I m buying a house worth $220,000 o I m going to borrow $40,000 o I m will to pay my investor 9% secured by a first mortgage o If you were my investor you d get $300 a month Section 6: Funding & Raising Cash Page 8

9 Or offer principle and interest Or offer to have the interest compound each month, or each year Or offer simple interest for the term o Do you have any money you d like to get 9 % on? o How long would you like to get that type of predictable return? If you do not need cash now o I ll put you down as one of my investors and call you on my next deal Action & Implementation Plan 1) 2) 3) 4) 5) 700 W. Hwy 24 Suite E Woodland Park, CO Customer Service: (719) Ext. 105 Fax: (719) Sales & Coaching Support: Section 6: Funding & Raising Cash Page 9

10 How to Raise Millions in Private Money Over the Next 45 Days By Richard Roop If you're being challenged by recent market changes... or struggling from a lack of cash... here s a solution for you Raising and using private money can help you enjoy more profits in a slow, normal, hot or post-hot real estate market. I want to help you start buying more, holding more and flipping more houses... all without ever using any of your own cash or credit. Many cities and counties across the nation have recently shifted from a hot or normal market to a more challenging slow or pot-hot market. This is especially true for regions like California, Florida, Washington D.C., etc. If you're having any trouble collecting cash when you buy, collecting positive cash flow each month or building long term wealth by capturing lots of equity, this article will give you the competitive and strategic advantage you want and need to achieve your financial goals as a creative real estate investor. Dan Doran and I work one-on-one with hundreds of real estate entrepreneurs each month. One of the keys to some of our most profitable strategies (that are working best right now) is finding, nurturing and using private investors as part of your house buying operation. The benefits of developing your private lender program and lining up dozens of investors eager to give you cash are substantial and significant: First, you can begin buying more houses for 'all cash' at significant discounts... up to 70% off retail value. Second, you can structure offers on houses that have lots of equity... receiving $20,000 or more of your profits in advance... in cash... on the day you buy... even if you plan on holding a property for many years. Next, you can get back all the cash it takes to find, fix and occupy a deal so none of your money or credit is tied up in a house... allowing you to collect dozens (or hundreds) of 'free houses' each year for long term wealth accumulation. Finally, you can turn many non-deals with no equity into super profitable deals with substantial equity by paying off existing debt at a discount... using private money. Here are the steps to systematically raising private money: 1) Create your program so you can explain it to others 2) Write your 60-second elevator speech 3) Build your info/credibility kit Section 6: Funding & Raising Cash Page 10

11 4) Create your presentation 5) Flap your lips to everyone you know 6) Follow up on your leads Understand lots of people that you come in contact have idle cash savings or retirement funds that are experiencing little or no growth. Offering double digit returns secured by local real estate is a great opportunity for them. Your private investors can enjoy higher profits thanks to you. And you can make for money, thanks to them. It s quite simple 1) Create your program so you can explain it to others Private Lender Program EXAMPLE: I pay my private lenders 9% interest on a first lien. I prefer paying monthly interest only payments supported by the income on the property but I can pay principle and interest if needed. Interest only payments keep my lenders entire investment working and they make more money. I pay my private lenders 11% interest on smaller second liens. I prefer to have their interest accrue with no monthly payments. My investor can earn interest on interest and I can avoid a negative monthly cash flow. I prefer making no payments on a first or second lien when rehabbing a property that I expect to be sold and cashed out within 6 months. I prefer my note payments are due on the 15 th of each month allowing the properties income to help cover the payment. My minimum investment is $10,000. I am confident that I can payoff an investor early with 60 days advance notice by replacing them with another private investor. I offer a minimum earned interest of 6 months in the rare case I pay off my investor in less than 6 months. Since they probably do not want their money back that fast I will attempt to substitute the collateral or reinvest their payoff into another property. Interest begins on the day their cleared funds are received by my closing or escrow agent. I will never pool funds together. If I need more than one lender to fund a deal I will give one lender a lien and the other lender a junior lien. I will buy my lender title insurance when acquiring a new property. I may not buy a lender title insurance policy if I m borrowing against a property I already own. I always keep valid hazard insurance on all my properties and each and every lender on the property will be added to the policy as a mortgagee. I will never accept private money from my lender until they have received an original promissory note and the security instrument (deed of trust) has been sent off for recording. I will never pressure an investor to do a deal. It s pass or play. If they pass I will offer it to my next lender waiting for a deal. If I cannot find private money I will use hard money lenders as a back up. I structure my offers taking into account the cost points and higher Section 6: Funding & Raising Cash Page 11

12 interest I might have to pay to a hard money lender. Using a private lender instead just increases my profits. If I can t raise hard money or private money from my existing contacts then perhaps the deal is not really a deal. I keep all my promises. If a lender wants me to sign personally I will do so since I am committed to take care of them first if anything goes wrong with the deal. However, I never offer to guarantee my lenders investment as that may violate federal or state rules and regulations related to securities. I prefer to sign as trustee or as president. I follow state and federal rules and regulations related to offering securities and seek expert legal advice as needed. Now create your own program using the example and ASK YOURSELF Will you pay simple interest or compounded interest? Will you pay a higher interest for no monthly payments? Will you do second liens, and if so, will you pay a higher rate? Do you ever want to make quarterly or annual payments instead of monthly? What day of the month will you pay all your notes? What is your minimum investment? How will you handle a lender s request for early pay off? How quickly can you respond to such a request? Will you offer a minimum earned interest or prepayment penalty? When will interest begin? What will you do if you need two lenders on one deal? 2) Write your 60-second elevator speech How can you quickly grab someone s attention and peak their interest about your private lender program? What do you say to someone you know or meet? Review these examples and then develop you own, brief script. Then practice it. Example #1: I m a professional buyer of single family homes throughout <area>. I buy and fix up houses and can offer my sellers call cash plus a quick and easy sale. When I pay all cash I use private lenders. We make excellent profits helping our buyers and sellers and that allows me to offer a high rate of return to my private investors. Do you know anyone who might have cash savings, other investments or retirement funds that are not consistently and safely getting them a high rate of return? Example #2: My company is always looking to buy several houses each month throughout <area>. We can pay all cash and close within a few days if needed. When we pay all cash for houses, we use private lenders and pay them a very high rate of return. Do you have any idle cash or retirement funds that are not getting you a well-secured, double digit return? Example #3: We buy houses and when we pay cash for a house we use private lenders. We pay 9% to 11% on notes secured by local real estate. If you are not getting that type of predicable return on some of your money, I ll be glad to get you the details. We could sit down sometime, whenever you like and Section 6: Funding & Raising Cash Page 12

13 show you how it works. Or I could send you some info. If it looks good just let me know how much you re looking to invest and how long you can have your funds tied up. I ll put you on my list and look for an investment opportunity that meets your needs. When I find one, I will call you. At that time you can pass or play. There s no obligation. Example #4: I ve been building my real estate investment company here in <area> over the last <X> years. We buy and sell a number of houses each month and can pay all cash quickly and easily. That s because when we buy houses cash we use private lenders. My private lenders can make 300 or 400% more money than they can get sitting in a savings account or in bank CDs. Do you know anyone that might have a retirement account or some other investment that is not paying a consistent 9 to 11%? That s what I pay on notes well-secured with local real estate. 3) Build your information and credibility kit Here are some ideas to help you put together an information package for prospective clients. Always carry some kits in your car and a few standing by to be mailed out. Much of what would go into your kit can be used with buyers and sellers also. Personalized Cover letter Bio: Write a biography about you with achievements even if not industry related. Your Team: Write up information about other people and staff in your company. Mission Statement: Tell prospects what your operation is about and what s important to you. Certificates: Memberships, associations, recognition, awards, licenses, etc. Testimonials: From buyers, sellers, investors, CPA, attorney, banker, insurance agent, title company, etc. Free Special Reports: For sellers, buyers and foreclosure. It s OK to use the one page advertorial flyers or copies of advertorials that have run publicly. Press Write-Ups: Stories about you, your company, your community service, etc. and articles you have had published in print or online. Actual Deals: Show a number of buy/sell transaction perhaps with how much your private lender made or could have made on the deal. Photos are an added touch. Associations: Real Estate Investor Association, BBB, Chamber of Commerce, Rotary, etc. Private Lender info: Sales letter, information kit or lender presentation slides. Lumpy mail items: $100 bill business cards, customized pens, magnets, custom key chain, audio CD, DVD, etc. 4) Create your presentation Use a written outline, brochure or PowerPoint slides to cover all the important benefits of your private investor program. Use examples, answer common questions or objections, include testimonials and have a call to action. 5) Flap your lips to everyone you know Always be on the lookout for an opportunity to deliver your elevator speech. Explain your program to anyone who shows an interest. Many of your best prospects will not be wealthy. Offer to mail Section 6: Funding & Raising Cash Page 13

14 information to anyone interested. Set appointments whenever possible to more fully explain your offer or to deliver your prepared presentation. Work your warm list before ever cold calling or cold mailing. Your warm list includes: All friends and family members Business associates, employees, contractors, vendors and dream team Fellow attendees of seminars, conventions and retreats Sellers, homeowners with equity and retail buyers Real estate entrepreneurs, investors and landlords Your previous and current private lenders plus their referrals Business owners, executives and professionals you meet Members of your REIA, Chamber, Rotary Club, etc. Contacts made during business or pleasure travel Retirees, retirement plan owners or IRA holders you know Your in-house buyer/seller follow-up list Your entire in-house contact list 6) Follow up on your leads Close for a phone appointment, office meeting or lunch. Deliver your presentation one-on-one by appointment. Take a new prospect to lunch once a week. Add your goal for 4 appointments to your monthly marketing plan. Follow-up after appointments with phone calls, postcards and letters. Add new lender marketing campaigns for generating new leads to your monthly plan. In Conclusion There you have it. Six steps for getting more private money. Now for some good news all you have to do immediately is step 1 and step 5. There is no need to what until everything is perfect to get started. Build this bicycle while you are riding it. Perfect your elevator speech and lender presentation as you re flapping your lips to everyone you know and lining up cash for when you need it. Entire contents 2007 RichardRoop.com, Inc. About the Author: Richard Roop is one of the top direct response marketing gurus and consultants dedicated to helping real estate investors generate more leads, negotiate better deals and create more consistent, predictable cash each month. He has done over 300 deals, manages millions of dollars in real estate and still actively buys and sells houses every month. But his real passion is to sharing his knowledge, systems and strategies with other investors. Very few speakers and trainers get down so in-depth into the real nitty gritty, step by step and how to of capturing equity and generating cash without using your own cash or credit. Known as THE Marketing Consultant for Real Estate Entrepreneurs, much of Richard s time now is dedicated to helping other investors improve their marketing results and increasing the profits generated from each deal. He has developed some of the most effective marketing systems and strategies that can help you leverage all your efforts toward growing your investing business. He specializes in creating direct marketing strategies and automated systems that have proven to work with all types of properties especially single family homes including both pretty or ugly houses. Section 6: Funding & Raising Cash Page 14

15 7 Ways to Raise Cash for Real Estate Deals without Banks Part 1 of 2 By Richard Roop Buying and selling houses is a great business. Actually it s one of best business opportunities around. Savvy real estate entrepreneurs learn how to buy houses with little or no money down. They also learn how to pay all cash if the price is right. Here are my rules for doing deals that require cash at closing: 1. Avoid using your own cash Putting your money into a deal reduces your cash reserves. That means you can actually run out of cash. Your own funds are limited. If you use your own money, you may get to the point where you might have to pass on a great deal because all your money is tied up in other properties. 2. Don t rely new bank financing Many real estate entrepreneurs are self-employed. Some may have bad credit or no credit. Therefore, qualifying for a new mortgage to buy an investment property is a limited strategy. Even if you can qualify, it is possible for a bank to cut you off at some point maybe even after just 5 houses. What about all the paperwork and loan processing? What a pain in the butt. Besides losing control on when your deal closes, things can crop up that can kill your deal altogether. 3. Don t use your own credit Cash on hand is a limited asset. Your personal ability to borrow is also limited asset. Save your credit for business emergencies or very special opportunities. Keep you borrowing power available for personal requirements, not business or investing needs. 4. Flip deals if you don t have sources for cash You can make an all cash offer to buy a house at a deeply discounted price even if you don t have any cash. You can also offer some cash at closing on subject to and owner financed deals. Assign or flip these deals to another investor if you can t raise the cash needed. However, you must leave money on the table. Therefore, it s better to line up sources of funds you can rely on. 5. Use your buyer s money to fund a deal I have 4 typical exit strategies after buying a new property: Section 6: Funding & Raising Cash Page 15

16 1) I find a buyer who quickly pays me off in full with cash or a new loan. This is rare for my business since it s not my focus. I call this retailing or selling to the retail market. That s a world for real estate agents, builders and rehabbers. It s not my world and I never rely on finding an immediate cash buyer. 2) I find a buyer who comes up with most the cash from a new loan and I take back a small second mortgage to help them get closed now. This is more common than getting completely cashed out. That s because I usually advertise the home for sale with owner financing using phrases like these: Owner can finance Owner can finance or rent to own Owner can help finance Seller can help finance down payment and closing costs Flexible terms No money down No bank needed 3) I find a buyer who would like to avoid qualifying for a bank loan now and wants me to finance them. I will sell on a wrap if they have 8% or more of the purchase price in cash to put down at closing. In most cases I have an underlying mortgage to pay on so I close using an installment land contract or similar instrument that places their deed in escrow pending their successfully performance on the owner carry back note. Most of my prospective buyers seeking flexible seller financing have less than 8% to put down on one of my houses for sale. Therefore 4) I find a buyer who can put at least 3% down as a non-refundable purchase deposit. In this case I will move them in as a tenant buyer, allowing them to rent the house until they can close with owner financing or a new mortgage loan. Because of the smaller cash requirement and lack of bank qualifying needed, this type of owner financing works for the largest number of buyers. When you re in a cash flow position to keep your profits tied up in houses, you can enjoy these benefits: You get market appreciation and wealth building Not long ago, I analyzed the increased tax assessed values of the properties I hold that are occupied tenant buyers. About 51 of my properties increased a total of $538,000 in one year. You get tax benefits By keeping the property you avoid having your profits treated as ordinary income or shortterm capital gains. You can also reduce your tax liability through deprecation. You get a better tenant with an owner mentality My tenant buyers do not call me for minor maintenance and repairs. Our deal is they take care if it. I offer a credit good toward buying the house for each on time payment. I do not Section 6: Funding & Raising Cash Page 16

17 require a security deposit (which I d have to manage and potentially return) since I am protected by collecting at least 3% of the purchase price in cash before they move in. You occupy your houses faster Many homebuyers need some flexibility and help to own a home. By offering time to close, you ll be providing a valuable service that is in high demand. You avoid relying on mortgage brokers and real estate agents Get your houses occupied fast with yard signs, pointer signs, flyer boxes, classified ads and an in-house buyer s list. You can even do a round robin bid sale for terms by doing one open house and then have buyers bid up the price, down payment and monthly payment. This is a good strategy for finding a buyer or tenant buyer. However, I mostly use signs, ads and my buyer s list. Be sure to incorporate a real estate hotline, website and lockboxes to automate the process. As you can see, whenever I buy a house, I will get at least 3% of my selling price in cash quickly. Sometimes I will get 8% or more. Sometimes all cash. If a prospective deal requires some cash, I m OK using my cash temporarily until I get it back from the 3% deposit I get from my tenant buyer. Otherwise, I prefer to have the seller wait for any equity they are getting out of the deal until my buyer cashes me out. Since I do not rely on getting more than 3%, I use a different strategy for raising that money which I will share in a moment. 6. Use cash from hard money lenders I have borrowed millions of dollars with no bank qualifying from lenders who do collateral loans on real estate. Since these lenders are in the business of getting their money out they charge points. One point is one percent of the loan amount. On average I pay 5 points. That means if I borrow $100,000 then I only net $95,000 in cash. His loan fee is $5,000. Or my lender will lend me $100,000 divided by 95% (which totals $105,263) and then I net $100,000. His fee in that case is $5,263. A lot of money? Expensive? Yes. So what? I just make sure I buy the house for at least $5,000 less (usually $10,000 less) than I would if I did not need to get such a loan and raise the cash. Imagine... I've paid about $250,000 in loan fees for the last $5,000,000 I borrowed but my net profit in doing so (after all expenses) probably exceeds $2,000,000. It certainly can be a profitable strategy if you use the money right. The maximum loan to value (LTV) on this type of money is 65% or 70%. 7. Use cash from private investors How do you fund a deal that requires up to 85% of the properties value in cash? I look at it in two ways when you are not using your buyer s money or having the seller help finance the deal. Both ways involve private investors or private lenders same thing. And unlike hard money lenders, I do not pay points to my private investors. The first method is to get a private investor first mortgage for up to 70% of the property s present value. The second method is getting a private investor second mortgage for up to 85%. Section 6: Funding & Raising Cash Page 17

18 #1: Private investor first mortgages You can borrow up to 70% of a properties value without qualifying and without going through a bank. Private investors are people you know who want to get a high return on their idle cash or retirement funds secured by a safe loan to value on real estate. As of today, I offer 9% interest only payments. If I borrow $100,000 to buy a $160,000 house, my payments are $900 a month. I give my lender a promissory note secured by a first mortgage or deed of trust (one of these security instruments will be in use in your state). They get a lender s title insurance policy. I put them on as the mortgagee for my hazard insurance policy. I will close the deal with an attorney or title company so they send their money directly to the closing agent. The agent can prepare the note and security instrument using terms and instructions I provide. Notice that if I can buy a $160,000 house for $100,000 cash, I am getting in with no money and the property will have positive cash flow, even at 9% interest. My formula for offering all cash to a seller is 70% of the after repaired value, minus the costs of repairs. If it s worth $200,000 fixed up and needs $10,000 in remodeling, then my Maximum Allowable Offer (MAO) is 70% of $200,000 or $140,000 less $10,000. Therefore I cannot offer more than $130,000. I can then borrow up to $140,000, give the seller $130,000 and have my $10,000 for fixing it up. I prefer to get a 2 to 5 year term, usually 3 years. I prefer interest only payments but might do a 30, 20 or 15-year amortization with a balloon payment due at end of the term. Any cost of closing the loan with a closing agent, recording documents or cost of title insurance is paid by me, the borrower. There is no cost to the private lender. Common elements of any loan are: PV = Prevent value or principal amount N = term in number of months PMT = monthly payment amount I = annual interest FV = Future value or balloon amount COMMON TERMS for private 1st mortgage: PV = Up to 70% LTV N = 36 months PMT = Interest only payments monthly I = 9% interest FV = PV WHEN TO USE private 1st mortgages: Use these loans to fund all cash offers to homeowners or on houses owned by banks. It is most commonly used on fixer upper properties where we can get a deeply discounted purchase price. Use these loans also on short sales with banks and for buying defaulted real estate notes at a discount. Sometimes a seller will insist you pay off their loan instead of unofficially assuming their existing debt (i.e. taking it subject to the existing mortgage). If they owe less than 70% of the value, then you can fund it with this type of loan. Section 6: Funding & Raising Cash Page 18

19 Many times I have bought houses where the seller owed little or nothing. I have used these loans to payoff anything they owe, plus have cash to give the seller as a down payment, plus have money for remodeling the property plus have money for holding costs. If the seller is getting any money beyond the cash they get at closing, I like to give them a second mortgage with very good terms to me. You pay off your lender when you sell the property later for cash or refinance it in the future. At the end of the term you can get a permanent bank loan, extend the term with your lender or replace your lender with a new one. #2: Private investor second mortgages This is a more advanced strategy that very few investors use or know about. It offers less protection (breathing room) because you ll have less equity left in the property. It would normally be used to raise cash in the 70% to 85% LTV range. It is best used on deals where you have created an owner carry first mortgage or on deals where you have bought the house subject to the existing bank loan, taking over the monthly mortgage payments with the seller s permission. You can also use these smaller second mortgages to pull dead equity out of properties you already own, raising cash when you need it. Here is an example of how it works: You have a deal worth $200,000 after it is fixed up. The seller owes $110,000 plus $5,000 in back payments. Their existing loan has 25 years remaining and has an interest rate of 7%. Monthly principal and interest payments are normally $777. It needs $5,000 in repairs. The seller insists on getting $2,000 cash or they cannot move. They want $165,000 for the house. Therefore, you need to raise at least $12,000 in cash to do this deal: $2,000 in moving money $5,000 in repairs $5,000 back payments You plan to sell the house for $209,500 with flexible owner financing or rent-to-own terms. Let take off a $29,000 minimum equity spread and the $12,000 cash needed. That s $168,500. I then like to take off another $12,000 for the inconvenience factor of raising the cash and paying extra interest on that cash. So I d prefer not to pay more than $156,500. My offer: $110,000 taken subject to $5,000 in arrears brought current $2,000 to seller at closing $39,500 (up to) to the seller in a third lien due upon the resell of house Total purchase price (up to) $156,500 How much cash could I raise on a private second? 85% of $209,500 is about $178,000. Subtract the $110,000 first for $68,000 in borrowable equity. I would probably raise $18,000 on this deal so I have some extra money for holding costs. I offer my private investor 11% interest, no payments, compounded interest, 36-month balloon. This $18,000 note grows to $25,000 if it goes the full 3 years. Section 6: Funding & Raising Cash Page 19

20 Here is how the financing looks at closing: 1st lien: $110,000 at $777 P&I monthly, 7% interest 2nd lien: $18,000 at $0 monthly, 11% interest 3rd lien: $39,500 at $0 monthly, 0% interest Total owed is $167,500 We walk away from the closing with $6,000 in cash. We get at least $6,000 more when we move a tenant buyer in (3% down). Here is how the financing looks after 3 years: 1st: $104,600 2nd: $25,000 3rd: $39,500 Total owed is $169,100 If we held the house for 3 years, perhaps we sell it for $235,000. We ll assume we only took one purchase deposit (or option consideration) from our buyer of $6,000 and they earned $1,200 in rent credit from our rent-to-own program. We collect $58,700 on the back end. Not bad. What about positive cash flow? Getting $300 a month on above example is not out of line. That s another $10,800 we collected. COMMON TERMS for private 2nd mortgage: PV = Up to 85% LTV less PV on 1st mortgage N = 36 months PMT = No payments, interest accrues I = 11% interest FV = PV plus accrues interest Realize that your private investor will yield a 12.75% annual percentage rate if the note goes the full 3 years and the interest compounds. That is very attractive. You will find more people with $5,000 or $10,000 or $20,000 to invest on 2nd liens than investors who can fund a 1st mortgage for up to 70% LTV. This program is great for your private lenders retirement funds. Usually the investor does not need monthly payments. If you do make monthly payments from you positive cash flow ($165 in this case), your investor may squander that money away. The I.R.S. allows you to invest in real estate notes using a tax free or tax deferred retirement account but you need a custodian such as Equity Trust Company at In part 2 of this report I will cover the 3 M s of marketing to find all the private money you may need. Password: cash Section 6: Funding & Raising Cash Page 20

21 6 Ways to Collect Cash when Buying with No Money Down Part 1 of 2 By Richard Roop By definition, a real estate investor puts up some money and invests it into real estate deals. As a real estate entrepreneur, I prefer to avoid tying up any of MY money in my investments. In fact, I prefer to collect some of my profits on the same day I buy a house. That way I don t have to be in a hurry a sell. Then I have money to further my real estate education, pay my operating costs, invest in systems to grow my business and write myself a paycheck! Now, I m willing to wait for my profit on the back end. And I ll even consider investing small amounts into a house like a small down payment plus money for holding and touching up the property. Ideally though, I ll want to quickly get MY money back out when the house is occupied by a buyer or tenant buyer. There are many different approaches to real estate investing. And I certainly don t have the perfect plan. Your approach will depend on your own personal desires and skill set. But to put these collect cash when buying strategies into context, I ll briefly describe my real estate business I buy mostly single family homes. I rarely buy houses listed with real estate agents unless it s an all cash deal. I prefer to be negotiating directly with the owner. I don t use my good credit or banks to finance my purchases. Typically I acquire homes taking them subject to the existing mortgage using a land trust or agreement for deed. That means I get no bank qualifying owner financing. For cash deals, I use hard money lenders or private lenders. To buy directly from sellers, I use a number of low-cost marketing methods to get sellers calling me, ASKING ME to buy their house. I prefer using marketing systems which are easy to implement and easy to repeat. I don t call sellers. For each of the 5 to 15 calls I receive, I ll find at least one seller who is flexible and motivated enough to allow me to buy creatively, or at a price and terms that works for both of us. You won t get that type of closing ratio calling ads in the paper. Working 10 hours a week with a small staff, I buy and occupy 2 or 4 houses a month. If I cannot make at least $20,000 net profit, it s just not a deal. If the seller has lots of equity, they typically take it back in a note due upon the refinance of the home. The refinancing occurs when my buyer or tenant buyer gets their new loan. That s between 1 and 60 months down the road. Most common is 2 to 3 years. But some of the 57 or so properties I own today were bought over 7 years ago and have appreciated nicely. Section 6: Funding & Raising Cash Page 21

22 After I buy a house I put it on the market with a flexible seller financing. That includes doing wraparound owner financing or selling on a rent-to-own. I don t list my homes with agents or rely on my buyer getting a bank loan to close. By offering terms, I make the home more desirable and more valuable. I get it occupied fast and under contract for top dollar, even in a slow market. I can also sell a house as is if it needs some work offering my trade sweat for equity program. Many buyers like that opportunity... and I can eliminate some of the frustration or costs that are common with dealing with contractors. I avoid dealing with renters and all the landlording challenges that come with that. Instead, the homes I still own are occupied by tenant buyers who have paid me a non-refundable purchase deposit to buy at a later date. They can earn a modest credit toward buying the home for each on time rental payment plus they agree to take care of all repairs and maintenance. Since they are planning to buy, they typically are interested in taking care of the property even doing major improvements which are also non-refundable in the event they do not close. Think about it. If you don t tie up your own money for very long when you buy, or you actually collect some cash when you buy, what s the limit to the number of houses you can buy each month? And if you avoid landlording headaches by selling with owner financing or rent until close terms, what s the hurry to cash out? Most of the homes I buy require little or no money down. I still find investors to this day who say that that is not possible. That amazes me. On my best deals, I actually get cash when buying So here are my top 6 ways to put cash in your pocket when you BUY a house Over borrow with no bank qualifying when paying all cash. Most of the houses I buy are subject to the existing mortgage. That s because most sellers owe more than I d be willing to pay cash. So I tell them, You owe more on the house than I can pay cash as an investor. I get a high return on my cash. It wouldn t make much sense to pull my cash out of other investments to buy your house at the price you say you need. The only way I could come close to your price would be to take over the existing loan and relieve you of the debt. Would you even consider that... if I can get you an acceptable price? Other times they have enough equity. What if the seller insists on all cash? Most of the houses I buy all cash need a lot of repairs, or are owed by a bank, or both. That s for my market. Prices here range from $50,000 to $300,000 with an average $165,000. When you buy in the very low price ranges, then you may be doing more cash deals. For me, only one out of 10 houses I buy require a lot of cash. I get my cash from hard money lenders and private lenders. I pay 9% to 13% interest for quick and easy money. And then I pay 0 to 10 points. I have credit lines that would cost me less, but they have limits. I like having unlimited funds to buy houses and keeping my credit or credit lines open for emergencies. I consider the cost of these funds when I construct my offers so I ll make a huge profit regardless of the interest or points I pay. My collateral lenders don t look at my credit report, only the value of the property being used as security. I can borrow 65%-70% of the property s value with no qualifying. In fact, if I cannot borrow enough to buy and fix the house without qualifying, the it may not be a great buy and there are better deals to out there. Section 6: Funding & Raising Cash Page 22

23 EXAMPLE: So, a seller of a $100,000 house needs cash, I may offer $61,237 cash, an amount plucked out of the air (near 60% and looks like I really crunched the numbers). I then borrow $70,000 and pay 5 points, costing me $3,500 and netting $66,500 in cash to close. I walk away from the closing table with over $5,000 in my pocket on the day I buy the house. Recently, just so there d be no confusion on a transaction, I called Beth (my closing agent at the title company) and let her know I d be GETTING money at closing as the buyer. She responded, Richard, that s no surprise. It would be more unusual if you BROUGHT me a check to closing. Can you find a lot of deals like this all the time deals you can buy so cheap? No. But they are out there and you ll find them now and then if you re in the game. 2. Over borrow with no bank qualifying when buying with owner financing. When I started my real estate business in 1996, I couldn t find enough cash deals to keep me busy. I still can t all cash deals that is. That s why I developed a number of ways to buy all types of houses, using creative financing. And this is my favorite. When I find a motivated seller with lots of equity, there s a good chance I ll use this strategy to get them a higher price than an all cash offer. CASE STUDY #1 I had a seller who agreed to sell a free and clear property for $107,000 if I gave him $30,000 down. He d carry $77,000 at 7% interest, or about $700 a month for 15 years. It needed $20,000 in repairs and would resell for $169,500 with owner financing after it s fixed up. I borrowed the $30,000 down plus $20,000 in repairs plus an extra $20,000 for a total of $70,000 from a private lender. My lender got a first lien and the seller got a second lien. The seller also agreed to subordinate (stay in second position) to any new first loan on the property in the future. The terms of the first lien were 13% and 5 points with a 3 year balloon. Payments worked out to about $760 a month. The total monthly with the first and second mortgages totaled $1,460. Market rent was $1,395. I d have a small negative cash flow but I d walk away from the closing with $36,500 in cash which included my rehab money of $20,000 (less a couple thousand for closing costs.) I put the house on the market for $169,500 fixed up, make offer as is. Owner can finance. After 2 weeks I did not have a buyer so I began fixing up and spent $5,000 but then found my buyer. They agreed to buy for $160,000 on an agreement for deed if they could do the rest of the work as their down payment before moving in. They agreed to pay $1,300 a month and refinance within 2 years. To me it was like getting $15,000 down because that s what I would ve paid to finish the house. Some real estate investment educators say don t over borrow. But I only owe $147,000 and I am collecting on a $160,000 note. I still have $13,000 coming to me. 3. Over borrow with no bank qualifying, buy with owner financing and substitute other equity as collateral. Section 6: Funding & Raising Cash Page 23

24 CASE STUDY #2 On a recent oversized postcard I bought five houses in six weeks. On the 5th house, the seller only owed $18,000 on a nice $170,000 house. He did not need all his cash but he insisted on getting $63,000 at closing. The $18,000 he owed would be paid off out of that. He also insisted on 6% interest on the money he carried back in a note. And he insisted on a price no less than $153,000. He s getting 90% of retail value. That s quite a fair price, isn t it? Here s what I could ve done... Borrow $70,000 at 11% and 8 points, 15 year amortization with 3 year balloon. Loan would cover cash to seller, lender points and closing costs. My payments would be about $800 a month, leaving enough extra positive cash flow from rental income to give the seller a monthly payment on his equity. At a price of $153,000, he would have a second mortgage for $90,000. I d owe $160,000 on a house to be sold for $179,500 with terms. But here s what I did instead... I borrowed $123,000 from my private lender. Payments are about market rent, or $1,400. I gave seller his $63,000 cash, but I walked away at closing with $60,000 less closing costs. The seller agreed to have his $90,000 secured with five different second mortgages on five different houses the five houses I just bought from the postcard campaign... including his. If I used his house in the deal only, I d owe $213,000 and be upside down. So... I offered his price for $153,000 with $63,000 down. I gave him 5 second mortgages each with no payments and a five year balloon. I agreed to the 6% interest but it would accumulate for 5 years with no payments. His $90,000 would grow to $121,000 by the time I paid him off. In essence, I was able to tap into the profits I just created in these 5 houses... equity at the highend of each house s loan-to-value PLUS I got it at 6% interest, no bank qualifying, minimal closing costs, no discounting of my equity and no payments. AND I had him grant me the right to substitute equal or better collateral in case I resold any of those homes over the next five years! What would you do with an extra $60,000 in cash? CONTINUED Richard Roop has fast become known as The Marketing Consultant for Real Estate Entrepreneurs. He has been a full-time creative real estate investor since 1996 and continues to buy and sell 3 to 4 houses each month near his home in Woodland Park, Colorado. Besides running his own real estate investment business, Richard shares his marketing expertise to help individual investors build their businesses nationwide. Each month he speaks to hundreds of real estate investors from experienced pros to budding entrepreneurs. He specializes in sharing proven, low cost direct response marketing strategies for getting a steady flow of motivated sellers calling you to buy their house, as well as systems for getting your properties occupied fast. Richard also likes to teach systematic approaches to growing your business, leveraging your time and increasing the profitability on each deal. Richard s marketing approach to investing is an excellent model if you like the idea of achieving your financial goals WITHOUT the need to hunt for deals, rely on agents, use your credit, offer large down payments, struggle with tenants, borrow from banks or call sellers. FREE real estate investor how to articles, steaming audio presentations and eletters can be accessed instantly online at Section 6: Funding & Raising Cash Page 24

25 6 Ways to Collect Cash when Buying with No Money Down Part 2 of 2 By Richard Roop In Part 1 of this article you discovered the first 3 methods for collecting cash when buying with no money down: 1. Over borrow with no bank qualifying when paying all cash. 2. Over borrow with no bank qualifying when buying with owner financing. 3. Over borrow with no bank qualifying, buy with owner financing and substitute other equity as collateral. Let s look at a few more strategies 4. Close only when you find your buyer If you ve noticed a slow down in your housing market, or found it s taking longer to get your houses occupied, then be more cautious and buy better. In fact, you can buy with no risk when you find the right type of house and motivated seller... EXAMPLE: I appreciate the fact that you ll sell me your house for what s owed plus $1,000 in moving money, but with the way things have been going, I cannot commit to taking over your loan until I line up my occupant. Your house has too much owed against it. Now, I do have a program to help homebuyers get into a house when they need some time before getting a bank loan. And 60% of the general public is in that position. This gives me a strong marketing advantage when I buy houses. I can offer to finance my buyer myself or rent the home until they close later. Therefore, I ll agree to buy your house if you can give me some time to find a buyer. Once I do, I ll give you your $1,000 and start making the loan payments, getting that debt off your back. When they agree, I advertise the house with Owner financing or No bank qualifying or Rent-toown. We get at least 3-5% down from a tenant buyer as a non-refundable purchase deposit. This works the same as option consideration on a lease option. If I m selling for $179,500 then I ll get at least $5,000 plus the 1st month s rent. Then I can complete my deal with the seller, and enjoy the difference ($4,000) immediately. Be careful to use this only if the seller doesn t care what you sell it for, or use it when they have already vacated the home. Sometimes I ll have the seller show the house for me! Section 6: Funding & Raising Cash Page 25

26 You can also use this strategy if the seller s payments are behind, and then use your new buyer s money to cure up the default. 5. Require the seller to pay you when buying the house An important lesson here. For years I did not do this. I think it s critical to always tell the seller what you are willing to do, even if (in your mind) it s unlikely they would ever accept your offer. You ll never know ALL their underlying motivation, so don t make decisions for them. When you re not EXCITED about the deal, consider what price or terms WOULD get you excited. CASE STUDY #3 I had a couple call off my marketing. They owed $147,000 and wanted to sell for what they owed. I did comps and determined it was worth $147,000 and I could sell for $157,000 with easy terms. At the time I needed a minimum $20,000 spread between my buy price and my sell price. These days it s a minimum $30,000 or 10%. I told them they owed too much, and thanks for calling, but there was nothing I could do. They called me back one year later after listing it for $159,500. It didn t sell because it was overpriced to cover commissions and closing costs with a retail buyer. When they called the second time it was still the same situation. But this time I said The only way I can buy your house is to take over your loan and have you come up with $10,000 in cash at closing. Are you in a position to do that? Apparently they were going to raise the cash anyway to get the house sold through another agent at a lower price. The house was now vacant and they were getting desperate. They got a signature loan not secured by the house and brought $10,000 to closing one week later. Three weeks later I found a buyer with $13,000 to put down. When occupied, I had already collected $23,000 of my $20,000 spread! I knew I d have to bring some money to closing once my new buyer refinanced down the road. But that was OK. I could have paid down the mortgage by $3,000 but I decided to keep the cash. 6. Simultaneously buy and sell for cash Bonus Strategy! Need cash to get started in real estate investing... or pay some bills? Find a deal and sell it the same day you buy it. No cash needed, no holding costs and no landlording. This is called flipping and yes, it s legal. There are several ways to do this. I use this strategy only when a seller must have all cash, but needs more cash than I can raise using a hard money or private lender. Retailing for me is when you sell a house for cash or new loan for market value. I hate retailing. I prefer to be offering a great price or great terms. I need a marketing advantage to resell. Otherwise I m not interested in the deal. I can still offer terms to a buyer who is getting a new loan by taking up to all my profit in a second mortgage. I d be willing to do this rather than lose the deal. CASE STUDY #4 Section 6: Funding & Raising Cash Page 26

27 Recently a seller called me. Sometimes I get so many leads I don t have time to call back everyone, as in this case. He called several times which forced me to respond. This is a lazy way of prescreening leads... but to works! His house had gone to foreclosure. In my state, he had a couple months to redeem the house by coming up with the auction sale price in cash. I agreed to buy his interest (get the deed) and then look for a new buyer. I made no guarantees. He had nothing to lose. If successful, I d get the first $10,000 in profit and then we d split any profit over that. He agreed. He was about to get nothing. I placed a sign in the yard, ran a classified ad and added the house to our website. I said owner can finance since I d be willing to take my profit in a note. Bottom line: The neighbor bought the house with a new loan, did not ask me to carry a note so we got cashed out. I made $18,000 and the seller got $8,000. My only risk was the cost of marketing and a little time. I also created the equity by getting the second lien holder to take a huge discount. The bank was happy to get $4,000 for their $40,000 mortgage because they were about to be wiped out after the redemption period. I forgot to ask the first mortgage holder to discount! Conclusion: There s no limit to the number of houses you can "invest in" when you buy AND collect cash at the same time. The top reason real estate entrepreneurs sell off a house is for cash. Use these ideas when you have the opportunity to supplement your monthly cash flow needs. Then you can keep more houses, enjoying additional real estate benefits including depreciation, appreciation and principal pay down helping to build a bright financial future for you and your family. Richard Roop has fast become known as The Marketing Consultant for Real Estate Entrepreneurs. He has been a full-time creative real estate investor since 1996 and continues to buy and sell 3 to 4 houses each month near his home in Woodland Park, Colorado. Besides running his own real estate investment business, Richard shares his marketing expertise to help individual investors build their businesses nationwide. Each month he speaks to hundreds of real estate investors from experienced pros to budding entrepreneurs. He specializes in sharing proven, low cost direct response marketing strategies for getting a steady flow of motivated sellers calling you to buy their house, as well as systems for getting your properties occupied fast. Richard also likes to teach systematic approaches to growing your business, leveraging your time and increasing the profitability on each deal. Richard s marketing approach to investing is an excellent model if you like the idea of achieving your financial goals WITHOUT the need to hunt for deals, rely on agents, use your credit, offer large down payments, struggle with tenants, borrow from banks or call sellers. FREE real estate investor how to articles, steaming audio presentations and eletters can be accessed instantly online at W. Hwy 24 Suite E Woodland Park, CO Customer Service: (719) Ext. 105 Fax: (719) Sales & Coaching Support: Section 6: Funding & Raising Cash Page 27

28 17 Ways to Generate Monthly Cash: How to Overcome Real Estate Cash Flow Challenges By Richard Roop One of the biggest challenges you may face buying and selling houses, and building millions of dollars in equity, is balancing your desire for building wealth with generating the cash you want (and need) each month. Without knowing and applying these strategies, you face the danger of cash flow crunches that can slow your growth, cause you to miss out on killer deals, and maybe even put you out of business altogether. In the pretty house business you can build tens, even hundreds of thousands of dollars in equity each month. But you can t spend equity, can you? We all have bills, expenses, overhead and personal income requirements. Being able to meet all those monthly cash flow needs without selling everything you get your hands on will put you in a stronger wealth building position. Now there are pros and cons of trading your equity for dollars. Creating a fine balance between building equity for cash later and raising plenty of money for cash now can help you achieve your financial goals more quickly and easily. I have found that most investors, even wildly successful investors, think they need less cash flow than they really do. Not knowing their numbers is a common mistake. But think about it. Why do you need cash? As a creative real estate entrepreneur you need to shell out dough for both capital and expenses. Capital gets you equity or a good return on your investment. Expenses on the other hand are a cost of doing business. First, there s capital or investments that can get you a high rate of return: Offering binder deposits and option consideration to control properties Giving down payments to sellers at closing Funding your all cash offers so you can buy at deep discounts Paying off other people s defaulted loans at a discount to create equity Paying off owner carry back notes at a discount for bonus profits Marketing campaigns to generate leads for both buyers and sellers Rehabbing, remodeling and making improvements Hiring contractors or employees to make more profits while working less Furthering your education through books, CDs, seminars and mentors Eliminating high interest credit card debts Funding your retirement or savings plan Section 6: Funding & Raising Cash Page 28