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The Laurex
Process: Strategy Development
6 Ways to
Raise All the Cash You'll Ever Need for Doing Deals
By Richard Roop
Sometimes a seller
requires some cash... for all or part of their equity. Don't assume
sellers know what the word "equity" means. I tell them "your equity is the
difference between what you owe and the price I pay you for the house."
Magic Words on the phone: "If I gave you part of your money now and
most of it later, would you be able to move, because I could offer you a
higher price if you can wait for some of your equity. Would you even
consider that, if I could pay you more for the house?"
Do you need cash for purchase deposits, or repairs, or holding
costs? How about cash to give the seller to sweeten the deal and get a
bigger equity spread?
Here are a
few ideas:
1. Use buyer's
purchase deposit or down payment.
If you are following my advice and methods for buying houses, then
you're occupying your houses with either Tenant/buyers or Buyers.
TENANT/BUYER: Rents the house and has the right to buy the house at
a preset price. Most of my houses are occupied by tenant/buyers. They put
at least 3% down, non-refundable purchase deposit on a sales contract. I
prefer 5% down. If they don't have 5%, I get a promissory note and have
them pay extra money each month to build up to 5% as quickly as possible.
If they have less than 3% then they may be able to get into one of my
"sweat equity fixer upper" houses. Their down payment can be partial
supplemented by doing required work to the house before they move in. This
is work I would normally hire a contractor to perform so if I don't have
to write a check to fix up the house, the money saved is less cash I need
from my tenant/buyer.
BUYER: Puts down 10-15% down and you close with owner financing,
typically via a wrap. Or the buyer gets a new loan cashing you out
completely, or perhaps you take part of your profit back in a second
mortgage.
Every house I buy will be sold to a buyer or occupied by a
tenant/buyer. Since I cannot predict which it will be, I get into deals
where it does not matter to me either way. Most buyers calling on my ads
do not have 10% down or the ability to get a new loan now. It's much
easier finding 3-5% down, so why not buy houses where that will work for
you?
Bottom Line: You should be collecting at least 3% down on every
house you buy once it's occupied. If you need cash to do a deal, you have
3% of your "resell" price to commit for cash to seller, holding costs,
closing costs, minor repairs and maintenance.
2. Private money or hard money loans.
If you pay cash for a house you'll never offer more than 70% of the
after repaired value less the cost of any repairs. You can borrow 65-75%
of the value of a house from a "collateral" lender. The lender will charge
you 11% to 16% interest, and maybe 3 to 10 points. They should only be
concerned with the value of the property that secures their first
mortgage. Many private lenders will offer you interest only loans so all
their investment is working for them, getting them a nice return. If you
borrow $75,000 on a $100,000 house, 12% interest only payments are $750 a
month. You should be able to get more than that each month from your buyer
in rental income or from a wraparound mortgage payment. This formula does
not work as well on expensive homes.
If the seller owes $50,000 on a $100,000 house, you can sometimes
borrow another $25,000 on a second mortgage. Take over the first mortgage
"subject to" which will have a better interest rate and no points. This
saves you money and allows you to pay more for the house. You can give
part or all of the $25,000 to you seller. If they have more equity coming
to them, you can give them a 3rd mortgage on this house or a 2nd mortgage
on one of your other properties.
3. Deferred down payments.
Take over an existing loan with good terms. Any equity still due to
seller can be offered in the form of a deferred down payment. Basically,
you will pay the seller the balance of their equity (if any) in a single
lump sum payment when you resell or refinance the house down the road.
Ideally, there will be no monthly payments or interest. If the seller
insists on interest or monthly payments, get a lower price to make it
worth wild. This is a "no money down" method. The cash you need for this
type of deal comes from your buyer's new loan, normally 6-36 months in the
future.
4. Substitution of collateral.
I am buying a house on Thursday for $153,000. It is worth
$165,000-$170,000. I'll soon advertise it for $179,500 with "flexible
owner financing" and enjoy a $26,500 equity spread.
The seller owes $18,000. He has agreed to take $63,000 in cash
($18,000 of which will pay off his lien) and $90,000 in second mortgages
on several other properties I own. He wants 6% interest but doesn't need
monthly income. So his interest will accumulate for 5 years. 6% interest,
no payments, 5-year balloon on $90,000.
This allows me to tap into equity tied up in my other properties at
a low rate, and my seller is happy. He would have put his money in the
bank at 1-3%. He is waiting for his mutual funds to come back up so he can
get out of them. Good luck!
Here's the kicker. I am borrowing $130,000 from a "hard money
lender" at 10.99% and paying 8 points. I will net $120,000 in cash from
that loan after costs. That means I collect $57,000 in cash on Thursday
when I buy!
In my audio training course I reveal how to get a guaranteed 35%
return on any extra cash you want to invest. That's what I will do with
this extra money.
A couple of weeks ago I collected an extra $24,000 in cash using
this same type of method when my tenant/buyer closed on one of my houses.
5. Open an equity line of credit.Raise cash by
borrowing against equity you have in your personal residence or other
investment properties. You can also pledge a number of second mortgages
you hold as the collateral. Set it up as a line of credit. Use the money
to do a deal and pay it back immediately when you sell or occupy the
property. You only pay interest on that portion of the credit line you
have tapped into.
Last month I setup a $100,000 credit line pledging $130,000 of
equity I have acquired through taking back installment land contracts,
all-inclusive deeds of trust and second mortgages.
Having this cash readily available allows me to make multiple
offers to a seller:
A. All cash for lowest price. My offer price is 70% (maximum) of
after repaired value less the estimated cost for repairs.
B. No cash for highest price. My offer is $30,000 less than my
planned resell price. The seller gets their equity in the form of a
deferred down payment. I take over existing debt "subject to."
C. Some cash. My offer is somewhere between Offer A and B. The
seller gets debt relief and some cash. The more cash, the lower the price.
Would you pay the seller 5% down if you could get an extra 10-15%
off the price? You have that opportunity if you have established lines of
credit to tap into. This could be a line of credit, a credit card or
checking account overdraft protection. Be careful of having too much cash
laying around in an operating account. You may be inclined to offer more
cash on a deal than you need to, just because you have it.
6. Sell off a house or real estate note for cash.
I have been sitting on one house since February. Ouch! I bought it
for $160,000 and I have $10,000 of my money tied up in it, which is
unusual. It was on the market for $197,000. For one reason or another I
just could not get it under contract. That's a fair price and the home is
in good shape.
I called a real estate agent I have used to buy listed "fixer upper
bank owned houses." I asked the agent to look at the house and tell me
what he would market it for if I wanted to dump it fast. He recommended
$179,500. I gave him the listing. Within a week I had a contract for
$177,000. I decided to slash the price to get this house out of my hair
and recapture the money I have into it. Plus I can focus on occupying my
other, more marketable houses.
If you have cash or profits tied up in real estate or notes, one
way to raise cash is to take some aggressive, proactive steps to liquidate
some of those investments. Then put that money to work on better deals.
Full-time investor Richard Roop has been called The Marketing
Consultant for Real Estate Entrepreneurs. He is the President of Bottom
Line Results, Inc., a real estate acquisition company located in Woodland
Park, Colorado since 1996. As a successful marketing consultant since
1984, Richard specializes in providing innovative business and marketing
advice to real estate entrepreneurs. He is the author of "How to Sell Your
Home in 9 Days" book and "How to Collect 5-Figure Paychecks Buying &
Selling Houses" tape course. His articles have appeared in various
entrepreneurial, real estate and marketing newsletters across the nation.
Article Provided by:
Richard Roop
President of Bottom Line Results,
Inc. |
