A personal creative financing quest

Does creative financing still work? Right now? In June of 2009, in the worst economic climate in 60 years?

I'm going to set out to prove that it does, and at the same time create for you an incredible learning experience on how to finance properties.

With that in mind, let's take journey together. I'm going to get away from the instruction for a while. Basically, for the next several weeks, I'm going to chronical my personal, real-world, nearly real-time experiences trying to put the financing for a deal together.

Those of you who know me personally, know that I am a big fan of Robert Allen's classic book from the 1980's, The Challenge. I'll go so far to say that, in my opinion, it's probably the single best beginner's real estate investing book ever written, because it takes away all the excuses people usually create for themselves. I won't ruin the book by telling you what it's about, but I will say, "get a copy!"

That said, I always wondered what it would be like to be part of such a challenge, and I've often toyed with the idea of creating one of my own. So... here I am...in a bassackwards way...challenging myself, publically. Tounge in cheek, I say, it's time to "put up" or "shut up", put a bit of my reputation on the line, and see if I can do what I know how to do. And, all the while providing you with a roadmap for how to do it yourself!

You see, I believe with every fiber of my being that knowledge of creative financing is the most vital tool a real estate investor can posess. I professed that - even during the crazy bubble of easy money...those days where you could get 110% financing for any purchase just by fogging up a mirror when you breathed on it. I knew that "easy" conventional money was fun, but that it wouldn't last. What's an investor to do now - when, even if an investor loan is available, you probably wouldn't want the terms? In my book, it's right back to what I've preached all along - the assertive use of creative financing.

The question is, does creative financing still work? In particular, can it work in this real estate climate? The skeptics - even lots of the supposed investing gurus - say that none of the old-school creative financing stuff is viable anymore. The worst skeptics say that the days of real estate, as a viable investment are over. Do you believe that drivel? What the skeptics don't understand, never did understand, is that mortgage bubbles aren't the secret to successful real estate investing. Our secret weapon is knowledge of creative ways to finance purchases.

I'm going to set out to prove that creative financing is still the investor's secret weapon. My objective is to show, once and for all, through personal experience and illustration that creative financing can still be done. My objective is to demonstrate - to you...through this deal - if I can creatively finance a purchase, in this lending climate, in this economy, in this housing market, then it can be done at any time, and by anyone. The excuses will be torn down once and for all.

So, here's what I'm up against;
the property is a single family home in the Palm Springs area. It's a keeper, about 2/3 rds of market value, with a purchase price of $84,500. It will need about $15,000 in rehab which I'm also trying to finance.

Here are my basic parameters:

• The seller accepted my contract which cast a 120 day net to obtain financing suitable to me.
• The seller does have the right to take backup offer which can accelerate the 120 days to 30.
• I am commited to no more than 5% of my own money into the deal.
• There is no avenue at the moment for seller financing. The seller and I have been down that road three times - no owner carry, no lease option, no land contract. He needs the cash proceeds. So, it appears the funds will have to come from the outside.
• I won't utilize hard money because it's too expensive for a long-term hold. Can't stand hard money anyway!
• I never, never, never look to my personal residence or retirement account to pledge as collateral for an investment. I've always been commited to the idea that your personal residence and your retirement (liquid) funds should remain sacred.
• Beyond that, I will investigate any combination of financing that I can put together to make the deal work.
• Did I mention that this is an out-of-state purchase, in one of those notoriously down markets in California? Salt on the wound there.

The clock is already ticking...........

Renting as a form of Investment Financing

With last week's final notes in mind, let’s talk a bit about this idea of renting a person’s property as opposed to trying to buy it. I think too many investors shy away from renting or leasing because they don’t perceive any economic benefit. To them, if they don’t own it, it doesn’t count. Nothing could be further from the truth.

The Bundle Rights and Controlling a Property
In reality, ownership is just a social construction. What I mean by that is that man has invented the concept of ownership, which is nothing more than a system by which a huge bundle of rights is transferred from one person to another. But, renting or leasing is also a transfer of rights…just not as many. The important thing to the investor, is control – not necessarily ownership.

Here’s a bizarre way of thinking about this. If you were on your last day of living, it doesn’t matter whether you live in the Taj Majal or in a singlewide mobile home. You can’t take it with you. So, this supposed “ownership” is not permanent; ultimately, the benefits you enjoy last only as long as you do. There are many places on the planet (Hawaii is one of them) that recognize this transience, and never grant ownership of real estate, but rather convey it only on long-term (i.e 99 year) leaseholds.

There are also many times when the economics of renting something make far more sense than paying the full price to buy. MBA types with degrees in finance know this intrinsically. I’m going to assume you don’t, but let me prove the point.

An Extreme Case
Would you see the benefit in this:
A condo owner has a vacant two bedroom unit in a nice professional community; let's say it's worth about $125,000. He owes no money on a mortgage, but can't afford the carrying costs of utilities, condo fees, and property taxes. This owner agrees to rent it to you for just the amount to cover the condo fees and taxes, which are, let's say, $275 total. Can you see the benefit of being able to rent that nice property for a mere $275 a month as opposed to trying to buy it? The mortgage along would run $750! And, you'd have to add the $275 to it since you'd be responsible for the taxes and other costs anyway. Which would you rather pay?

A More Realistic Scenario
Right now, in Phoenix, it’s fully possible to lease a $199,000 house for about $850 a month. Even at a 2% interest rate, allowing for taxes and insurance, you can’t beat monthly cost. And, property isn’t really appreciating in Phoenix right now, so buying doesn’t get you much in they way of that benefit. At 7.25% interest, the carrying costs of a $199,000 mortgage, with taxes and insurance would be about $1500 a month. As a result, renting that property saves $650 a month, or $7,800 a year.

With a little bit of savvy marketing, you could probably sublet that property for $975 a month, for a $125 a month positive cash flow. If you tried to do the same under the mortgage I just mentioned, it would be a $525 a month loss! It doesn’t take a Harvard MBA to see the advantages!

What to Look For
Working this technique takes a couple of things. First, you must ensure the owner allows you to sublet the property. You also don’t want to pay any more getting into one of these deals than is customary for renting a property. In most markets, that’s a 1-month security deposit, and first month’s rent. If a seller wants double security deposit, or first and last months rent plus security, they are probably not motivated enough. You need to find the person who isn’t trying to profit, but has a pressing need that you can solve…and is glad for your help.

Coaching Slots Available for Summer!!
Right now, I am taking reservations for private training and coaching for folks during summer. Spaces are limited! If you are working on deals and need guidance, or trying to learn the world of real estate investing and want one-on-one help, give me a shout:

william@thecoasttocooastinvestor.com
614-886-8233

Financing (Part 8) - How to Think Like a Creative Financier

Today, I’m continuing my multipart series on how to finance properties, but I want to take a bit of a different approach in this post. Let's take a step away from specific technique for a moment (in my next blog post, you'll clearly see why), and look at the backdrop of what makes creative financing possible.

During the heyday of low interest, everyone-qualifies for a mortgage conventional financing, nearly anyone who had a desire to buy a second home or investment could. But, times are different now, and the sub-prime mortgage game is over, probably dead and buried.

As I noted in the last postings, it’s difficult for even the best-qualified investor to get decent investor financing for a purchase right now, and when they can, they probably don't want it because of the terms. Just recently, I came across a supposedly "liberal" lender...a well known outfit in the forclosure financing game...who wanted 6 months of reserve for each owned property in order to finance through them!

And, sooner or later, no matter how qualified you are, you will run into a ceiling on what you can borrow conventionally. So, if you want to continue investing past your own qualification ceiling, you need to find additional ways than just banks and mortgages companies to finance your deal.

So, the successful national (or local) investor needs a repertoire of tools at their disposal for the financing of property purchases. These are the kinds of tools I've been discussing, and will continue to provide to you.

So, with this different approach for this blog entry, I want to begin today by introducing you to two concepts that I think are absolutely critical to your understanding of creative financing…and to investing in general.

Creative Thinking
Part of the process of financing properties is creative thinking – thinking outside of the box in terms of how you craft a deal.

The Don’t Wanter
If you’ve been around real estate investing for any time, you’ve no doubt heard about dealing with motivated sellers. In fact, the bottom line on buying a good investment is generally not in the property, but in the situation.

During the go-go buying frenzy in which people were literally tripping over each other to buy something, it was not uncommon for a property to sell within hours…no sign, no MLS listing, and for far more than it was worth. In fact, I was just reading in Kiplingers today that speculative buying in Bakersfield, CA caused the average price of a property to go from $99,000 in 2002 to over $280,000 in 2005. That, of course, was not sustainable, and you simply can’t win the investment game that way. And, as we know, many, many wanna-be investors have gone belly up after chasing those kinds of deals.

Instead, you need to listen to the age-old sage of investment buying, which is to make your money going into the deal. Or, to put it another way, an investor buys with the expectation that what they are buying will go up in value.

That kind of buying right inevitably involves working with a seller who is in need of selling, and helping them to solve their property-related problems.

Now, this is where I depart from the myriad of investors, who in my opinion, are more of the vulture mindset. So often investors are labeled disparingely because they have no qualms in taking advantage of people who are down on their luck. I’d go so far to say that vulture mentality among investors is more the norm than the exception…and quite frankly I don’t want listeners and students of mine going down that path.

But, you can build yourself a profit while helping other people --- it’s the age-old win-win. In fact, I believe that you will find your highest and best long-term profit within the solution to the problem that the seller needs.

Case in Point
A seller has moved out of state and is saddled with 2 house payments. It’s been 5 months with the property on the market, and no bites. The seller is facing another $950 house payment, their savings are depleted, and they don’t know what to do. As an investor, perhaps the best choice you could offer them is to rent their property for enough to cover their mortgage (combined with absolutely no rent hassles) as long as they allow you to sublet to your own tenant.

If this was a newer property, it’s a far better solution than trying to discount the price --- because they probably have no equity, and discounting is not a viable option. Most people could not sell at a loss and write a check to sell their property, particularly if a 6 or 7% real estate commission was involved. Under a rent/sublet arrangement, you get the property under immediate control, can make some monthly cash flow - - and they are immediately relieved of the burden of the house payments. Combine this with an option to buy (which I'll discuss in a later blog post) and you could have the benefit of control and cash-flow now and equity later. It's truly win-win!

Another Entrepreneurial Opportunity - the Import/Export Business

Make Money in The Import Export Business
Today, I am going to take a sideroad off the real estate highway for just a while. This isn't real estate-related, but since we are all opportunity seekers, I'm promoting it just the same. Better than that, I have an online class coming up that can teach you how to do it!

Those who know me well know that I'm not just about real estate, but about empowering home-based entrepreneurs in a variety of fields. Perhaps you follow my other entrepreneurial blog The Entrepreneurial Highway (http://entrepreneurialhighway.blogspot.com/) about businesses other than real estate. Anyway, right now, a lot of people are leery of the economy and real estate isn't on their radar right now. That's OK...anyone can respect that. There's a world of opportunity out there; not just real estate....this is one of my pet businesses, and I want to make it available to you.

An Ideal Home-Based Business
How would you like to make thousands of dollars, get access to tax-deductible travel, interact with cultures all over the world, and do it all with little or no risk?

If you answered, yes, yes, and yes, the the Import/Export business is what you've been looking for.

Import/export, or International Trade as it's often referred to is one of those ideal businesses that so many people are searching for. Imagine a business where you can make hundreds - or even thousands of dollars a month - right from home and your computer.

Picture a business where you can involve yourself with amazing products and cultures from all over the world, make money, and even be able to travel (if you like) in a tax-deductible way! Envision being able to buy products that sell themselves and sell them for 10 or 20 times what you paid! World traders can do that.

Learn Import Export Online
At the request of a ton of people who missed out on a prior class, who've been begging me to teach this class for them, I'm going to offer it online starting on Wednesday April 22.

In the course, you will learn the how to import and export and will be introduced to how put trade deals together. Not only will you learn, but through hands-on real-world projects, you'll be able to actually identify an international trade opportunity and bring that opportunity to fruition. And, I'll personally counsel you on how to apply the skills you are learning to work your chosen trade deal. In other words, if you are willing to take on the challenge, you can put together your first trade deal right during the class...who knows there might be some nice dollar signs in that first deal!

And, if you follow the podcast or blog, you know that I don't skimp! The class runs a full 12 weeks - that's 12 lessons that will teach you the full A-Z of the import/export business....hands-on...with my private feedback when you need it.

It's fully online, so you can work on the lessons whenever and wherever you can access the Internet. That's the beauty of an online class.

The best part is that I'm keeping the cost way, way down. I'm beta-testing an online course platform, so if you are willing to be a bit of a "guinea pig" with the software, you can get into the class for only $179. That's more than most people pay for a one-day workshop, and this is going to run a full 12 weeks.

Please pass this message along. There are a lot of people out there right now who need ways of making extra income, replacing their income and so forth. This may be exactly what they are looking for.

Details
Course begins Wednesday, April 22, 2009
Course Tuition: $179 (can be paid by credit card)
To register, or if you'd like to reach me to ask questions, feel free to call or email me (614) 886-8233 and whflood@yahoo.com I'm happy to answer any questions you have.

If You Are Facing Foreclosure

If you are facing foreclosure....READ THIS!
If you know anyone who is facing foreclosure...READ This!
If you can pass this along to everyone you know who might be effected by a foreclosure...GET IT IN THEIR HANDS

This is just a quick post - and I want to do my part to spread the word about a way to stall foreclosure that's getting a lot of press.

Those who know me pretty closely know that I have an axe to grind over what many are calling the "sins of Wallstreet" being paid for by mainstreet. You see, this foreclosure mess isn't really about lending as much as it is about Wallstreet wanting to get their hands on, and monetize the one sector of the economy they couldn't formerly touch....the real estate world. They found their way, though, and it was through the world of "mortgage backed securities" that took mortgage instruments and diced and sliced them up into lots of "servicable" pieces.

You see, most people think that a bank is holding the mortgage they obtained. In truth, all kinds of pieces of it were sold off to various investing entities. The interest stream was bought by one outfit, and principle stream by another. The origination put money in some hands, and other fees went somewhere else. To make matters worse, these slided and diced pieces were packaged with pieces from other loans into these "mortage backed securities". It takes a forensic accountant to figure out any of this.

And, don't get me started with the hundreds of billions that were given to...added like salt to a wound...to the Wall Street. They made money going and coming out while individual buyers are paying the price losing their properties.

But...in the morasse of slicing and dicing of the loans apprently rests one of the best foreclosure-stalling strategies available to a homeowner. It's in demanding that the lender "produce the note" or simply put....dig up the note that supposedly shows a particular person is the borrower on a particular property. Apparently, they can't! Producing that paperwork can take months of research, and a foreclosure can't take place if they can't prove that a person owed the money or is the borrower of record.

Here are a couple of video links to explain it. I'm trying to do my part to spread the word about this...put some power back in mainstreet!

http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=12195482

http://www.youtube.com/watch?v=kswEb-iVsms

I am not a lawyer, and I am only reporting what I hear with this, but my jaw dropped when I did, and I knew others needed to hear about it. PASS IT ALONG!

Financing (part 7) Wrap Arounds Loans (also known as all inclusive deeds of trust)

A wrap around loan, commonly referred to as a wrap envelopes an existing loan and any equity into one loan payment. This is sometimes rather difficult process to grasp, so if you would like to ask any questions or seek clarification on key points, email me at whflood@yahoo.com and I will be happy to answer your questions.

So...How Does a Wraparound Loan work?
Let’s say a seller owns a property worth $100,00 and has an existing loan of $60,000. That loan is at 6% and has 23 years remaining to pay. The payment is $400 a month. He is willing to finance the remaining $40,000. But, rather than setting it up where you take over the existing loan and he accepts a second mortgage, he wants to set it up as a wraparound loan. It would work like this:

He sets up the loan terms on $100,000 at 7.5% for 30 years, payable at $700 a month. You pay him the $700 each month. He pays out his original mortgage payment of $400 and keeps the remaining $300 for payment on his equity.

You may be asking, “what’s the difference between the wrap and him just accepting a 2nd mortgage?” Actually, there are several reasons. First, he is in a more secure position because he is ensuring the underlying first is getting paid. And, if you noticed an odd detail or two, it’s actually to his financial advantage – he pays out at 6%, but collects at 7.5%. Thus, he is getting 1.5% on money that isn’t even his! And, the existing loan is due to be paid off in 23 years, but you would be paying for 30 years, so he gets 7 years of money even when the underlying loan is paid off!

Now, wraps can be tricky and there are some pitfalls such as the original owner failing to pay the underlying loan. It’s a good idea to get a trust company or bank trust office involved to make sure everyone is doing what they say. You wouldn’t want to make your payments only to find out the seller isn’t paying the underlying loan! So, you’d set it up so your payment would be made to the trust office. That office would, in turn, pay the underlying loan and send the seller his proceeds every month. It will cost a few dollars a month to set that up, but it is well worth it!

Next time, we’ll be continuing the discussion on creative financing by looking at Land Contracts, Options, Lease options & lease purchases, Private money & partnerships (equity sharing), Hard money, Selling notes, and the use of unsecured credit lines.

Until next time, this is Bill Flood, your host for the Coast to Coast Real Estate Investor. Live your real estate dreams!

Financing (part 6) - Subject To's

In the place of the non-qualifying (or qualifying) assumable loan is another – more complicated – strategy for taking over existing loan obligations. It is commonly referred to in real estate investing circles as taking the loan "subject to" the existing mortgage.

A purchase contract can be written to buy the property “subject to” the existing loan, which means taking over the obligation of the owner. While this may sound similar to an assumption, it has a clear difference. With an assumable loan, you are contractually taking over the obligation to pay. The loan, in essence, transfers to your name. When a loan is taken “subject to”, the original borrower is actually still on the note and obligated to pay if you don’t. You can see that would be a dicey situation, and it’s best for both parties in the transaction to have legal advice as to what’s involved.

The Due on Sale Clause Landmine

Commonsense legalities aside, there are a few landmines related to subject-to deals. Since most loans today have a due on sale clause, which means the loan balance is due and payable upon sale or transfer of the property, taking over a loan "subject to" can still cause that clause to be invoked which can lead to a big financial mess. Because of this, subject to strategies are best done with the advisement of your attorney.

There are a lot of investors today who use the subject-to approach to take over people's payments and avoid having to get new financing. Typically, these investors are targeting homeowners in the early stages of defaulting on their loan. Their idea is to either give the owner some cash and/or take over the payments without formally assuming the loan. Their general game plan is to either:

a) try to mask the transaction from the bank so the bank won't know the property has been transferred, which would potentially lead to the loan being called, or;

b) simply not worrying about the bank at all, doing the subject to deal, and operating from the premise that the bank won't call a loan that is being paid on time, etc.

Both of these approaches assume that a bank will ultimately be or feel better off with an investor who is keeping up the payments rather than a homeowner who is slipping into foreclosure. Along with that belief is that a bank won't call a loan when it's performing, so the due on sale clause is somewhat meaningless....that calling a loan never happens when the payments are being made, and certainly not in this market.

Banks Do Call Loans - Don't Let Anyone Tell You it Never Happens

Let me tell you -- banks can and do call loans due and payable all the time under subject-to and similar arrangements. I just came across one in Phoenix within the last month, with the investor faced with the foreclosure. More important - it's really the original home seller who is now faced with the foreclosure because his name is still on the loan! Again...lots of landmines, and this technique should be guided by some professional legal advice.

But it's Popular with Wholesalers

I'll also note that investors who utilize the subject-to approach regularly are principally short-term "flipping" types of investors. The reason why the due on sale clause doesn't worry them is that they don't plan on holding the house long enough for the bank or anyone else to uncover that it's been transferred. These types of investors are in, get their money, and get the property in the hands of someone else before any of this potentially matters. But, for the long-term investor who wants to build wealth, the chances are, the due on sale clause is likely to rear it's head at some point. Then, you either have to negotiate with the bank to put your name on the loan (assume it) or get refinanced real quickly.

The Bottom Line

So, the bottom line on subject-to deals: useful for the short term investor, not so good for the long-term holding-type investor, and always have a lawyer in your corner.