CHAPTER 11

BUY A HOME WITH NO MONEY DOWN AND GET CASH BACK AT CLOSE OF ESCROW

There are many ways to buy houses homes or investments and get cash back at the close of escrow...

I am now, going to show you two variations of a Creative financing method which although is perfect for the right situation, can be very risky to both you and the seller.  It allows you to buy the home with not only no money down, no cash out of pocket but actually gives you cash back at the close of escrow.  But again, these cash back methods can be risky.  Risky to the seller because if not handled right, he will lose money.  Risky to you because if used unethically or fraudulently, you will go to jail!

In your search for real estate you will eventually run into a property that is run down and needs substantial rehabilitation.  The seller owes nothing and wants $100,000.  You know that with about $10,000 of work it would be worth, at least, $130,000.  When a property is run down and needs substantial work, often, the seller is willing to take a small amount of cash and "carry back" the balance.  But even with all the work this property needs, let's assume that this seller insists on $50,000 cash.  With the principles we have already learned, that's workable, but even if you manage to buy the property with no money down where do you get the $10,000 for the repairs?

You explain to the seller that you are willing to give him his price and the $50,000 cash that he wants out of the transaction.  However, you cannot afford to take over the property in its present condition, but since at that price, you don't expect him to pay for the work, you propose this:

1) Sales price to be $110,000.

2) Buyer to obtain a first mortgage in the amount of $60,000.

3) Seller to carry back a second mortgage in the amount of $50,000.

4) Seller to credit to buyer at close of escrow $10,000 for repairs.

What does this accomplish?  First of all, by borrowing the $60,000, instead of only $50,000, you have brought enough cash into the transaction to get your $10,000 cash credit, plus, the seller gets his $50,000.  You now owe the seller a second mortgage of $50,000, so that, plus, the $50,000 cash he receives equals the $100,000 sales price he wanted, so now he's happy.  But what about you...

Instead of paying $100,000, you are paying $110,000.  But, since you get that $10,000 credit in cash at the close of escrow, what you actually accomplished was to buy the property for $100,000 with no money down, plus, borrow the money for the necessary repairs.  Once the repairs are done, you now own a $130,000 piece of property.  Also, if you can get the work done less expensively, which usually is not that hard to do, you pocket the savings.  It's like getting paid to buy a $130,000 piece of property for $110,000.

What if you don't make the improvements and just keep the $10,000 in your pocket?  As long as you continue to make the required payments on the loans, you probably would not have any legal difficulties.  However, if anytime soon after the closing of that escrow you stop making payments and the property goes into foreclosure, it could easily be construed that you bought the property and asked for the credit, solely, for the purpose of defrauding the seller... If you arrange a credit, use it for the purpose for which it was stipulated.

The method we are now, going to discuss is by far the more risky of the two.  Use it wisely...

Let's say that you have found a super deal that you just have to have, but, in spite of your financing expertise, no matter what you do, you are $20,000 dollars short of the cash you need to bring into the transaction.  What do you do?  You can raise $20,000 or more by buying a second piece of property!

Find a piece of property where the seller will accept 40% of the price in cash and is willing to the carry the rest as a second mortgage.  (As we mentioned earlier, properties and sellers who fit this description are not hard to find).  Assuming a sales price of $100,000, structure the transaction as follows:

                1) Sales price to be $100,000.

                2) Buyer to place $40,000 cash down payment to seller.

                3) Buyer to obtain a first mortgage in the amount of $60,000.

                4) Seller to carry a second mortgage in the amount of $60,000.

You now have a total of $120,000 in loans against the property; the $60,000 you borrowed from the finance company, and $60,000 that you now owe the seller.  But wait a minute!  You bought the property for $100,000 dollars.  Where does that extra $20,000 go? In your pocket!  Of the $60,000 borrowed from the finance company, $40,000 goes to the seller as his cash down payment, and the rest stays with you.  You have just raised $20,000 with which you can now buy that super deal.

The problem with this type of financing, is that you have "over encumbered" the property.  In other words, the total of the loans exceed the value of the property.  The property is worth $100,000 but there are $120,000 of loans against it.   The seller is now carrying a second mortgage for $60,000 but there is only $40,000 in equity to cover it. 

This means that $20,000 of the money the seller is owed, is in essence unsecured; it has no protective equity.

If the seller had to foreclose and take back the property he could resell it for $100,000.  But now, since there is a $60,000 first mortgage against the property, the seller would realize only, $40,000 from the sale.  When you bought it, he earned $40,000 dollars.  So he ended up getting a total of $80,000 for his $100,000 piece of property.  He just lost $20,000  The $20,000 that you used for the super deal.

Again, when using these financing methods, be careful! Make certain that you do not get yourself into a situation that will lead to foreclosure i.e., don't close the escrow, put the money in your pocket and not make the payments.  It would not only cost the seller money, it could get you into a lot of trouble...

In order to impress the importance of using this method ethically, I want to relate to you a true story of a couple of men I knew of who used these methods with the intent to commit fraud.  Over the span of about one year, they used the technique we just discussed to buy over 50 properties.  They netted, out of each transaction, anywhere from $10,000 to $20,000 which they stuck in their pockets.  They then put renters in each of the properties; collected rents and deposits but somehow managed to "forget" to make the payments!

There were over 50 sellers holding on to notes of maybe $60,000 each, but secured by only $40,000 of equity.  The sellers were between the proverbial rock and a hard place.  A seller could foreclose and get the property back, but he would have no way of recouping the $20,000 or so, the buyers had already put in their pockets. 

Plus, before the sale, the seller owned the property free and clear.  Now, if he were to foreclose, he would own a property with a $60,000 first mortgage against it; and if he wanted to keep the property, he would have to make payments to the finance company!  Of course, the sellers could just wait and hope that the buyers would "remember" to start making payments, but as you might guess, that never happened.

How was this situation solved?  It wasn't!  Every seller that these men dealt with lost a small fortune.  The only consolation is that at this writing, both of those men are still sitting in prison...

Always remember, if for the right property, the right seller, and the right objective, these techniques are not only acceptable and legal, but they can be the perfect solution to your financing problem. But be careful!

See Chapter 12.