CHAPTER 10
How to buy a home with no job,
no credit, and no money?
As a real
estate financier, you are much
like an artist and the
property's existing financing is
your canvas.
If you were
asked to complete a painting
that were 90% finished, you
would be very limited as to what
you could do. There would be a
certain color scheme you would
have to follow and if the rest
of the painting were of a desert
landscape, you could hardly
start painting fish! If the
painting were only 10% complete
you would probably be able to
take it in any direction you
wanted and still end up with a
viable work of art.
Financing is much the same.
The
higher the percentage of
property value that is taken up
by existing loans, the fewer
options you will have available.
If you are buying the
property for $100,000 and it has
a $90,000 dollar loan balance
and the seller absolutely must
have $5,000 dollars out of the
transaction, there are not many
ways to accomplish it without
taking something out of your
pocket. However, if that same
property had only $50,000 owed
against it, getting $5,000 or
more for the seller would be a
simple matter of assuming the
existing loan and
creating a saleable note (see
Chapter
8 Assumption andseller
carries 2 notes.).
Using the art analogy: that
option was available because the
canvas was only 50% full.
A property
that is "free and clear" (no
loans against it), is like
having a blank canvas. You can
do almost anything you want; the
options are virtually
limitless...
One of the
most valuable principles of real
estate financing you can learn
is this:
Many
lenders will
consider
only the property
in evaluating the decision to
lend.
In other
words, if
they feel that the property is a
secure investment on their part,
they won't worry about your
income, how much is in your
savings account, your credit
history, or whether or not you
are putting any money down on
the property.
Where do you find these
lenders? As a general rule,
banks and savings and loans will
not get involved with "no money
down" situations, with the
possible exception of larger
commercial ventures. However,
you can look in your local
newspaper and probably find a "trust
deed" investorwho
would lend or you could look in
your local phone book under
finance
companiesand
ask what their lending criteria
is. Ninety percent of the time
their main consideration will be
the property.
If the finance company can
see that there is no way
that they can lose on the deal,
they will lend.
PERIOD!
Consequently, their criteria
is usually this:
They will
lend no more than 60% to 70% of
what the property is
worth in its present
condition. This means
what the property is
WORTH
not the sales price.
If the property were
worth $100,000 but you were
buying it for $70,000, they
would lend 70% of
$100,000=$70,000 not 70%
of $70,000.
If
you bought it for $60,000, they
would still be willing to lend
you $70,000; you then pay the
seller his $60,000 and put
$10,000 into your pocket!
Read this last statement again.
It is GOLD.
Why are
these lenders so "generous?"
Well, lets examine the
situation. Let's say you bought
a property that was appraised
for $100,000 and they lent you
$70,000 dollars to purchase it.
If you did not make even one
payment and the lender had to
foreclose, what happens?
They end up
foreclosing and taking ownership
of a $100,000 piece of property
with only a $70,000 dollar
investment. They just made
$30,000. It is easy to
understand why the lender's only
concern is,
"Is
there ample protective equity?".
As
long as the lender's investment
is covered by enough equity,
they don't really care about
your personal financial
situation or how much cash, if
any, you put into the
transaction.
Now, how to use this
knowledge to your advantage...
You have
just found a property with no
existing loans against it. The
seller wants $100,000 sales
price and needs
$60,000 dollars cash. By
applying the principles we have
just learned, this transaction
becomes the essence of
simplicity...
1) You
trot on down to lender and
borrow $60,000 that will be
secured by the property you are
purchasing.
2)
Then execute a second mortgage
in favor of the seller for
$40,000 dollars.
The seller
has now sold his property for
$100,000, he got his $60,000 in
pocket, and you bought another
property with "nothing down".
See
Chapter 11.
Buy
and Get Cash Back
