We got a request from FFN member Robert Pinsky to address the subject of high priced houses VS market rents and how to do lease options in areas like his, Southern California, where the payment is more than rent.

 

Thank you, Robert, for submitting the request and let this be a cattle call to all members to do the same. These monthly lessons are for you and should address issues that bother you as well as things I think you should know. So, let Dennis know what keeps you up at night and I’ll fix it for you. Papa can fix anything. At least that’s what my grand kids think. Beverly knows better.

 

So how do we do a magic trick and kill negative cash flow? There are several options you have available if you’ll get out of the box a little and use the training you have, or get it if you haven’t. Much of the fun in real estate is being able to solve problems others can’t. It gives you a feeling of power and control and a sense of serenity when you know you’re smarter than average and can deal with any problem and turn it into a big fat check. Robert’s problem is just one of many and, frankly, is a fairly easy one to fix.  So, let’s get to it.

 

Let’s create an example so we can clearly see the problem. You find a seller who has a house worth $700,000 with a loan balance of $550,000 with a payment of $3,600 RITI at 6% interest. The market rent is only $2,500 or so. We’d have a $1,100 a month negative to rent the house, which really isn’t a good business plan. The seller agrees to deed you the house if you pay them $50,000 when you cash out and you can live with that if we can get this negative cash flow fixed.

 

Here’s your check list of choices:

 

Solution 1

 

 

 

 

 

Get The Seller To Reference with one of those 1 1/2% loans. You’ve probably gotten a post card, letter, voice mail message, or a live call on this loan in the last 24 hours. You ignored it cause you thought it was a come on gimmick to get you to refi.

 

Well, you’re right! It is. But, it’s also a very valuable tool to drastically reduce a monthly payment or any house loan and cure negative cash flow problems.

 

In our example, if the seller refi’s the same debt of $550,000 at a 1 1/2% payment rate the payment drops to about $2,200-$2,300 PITI. That’s a $1,300 a month difference and can easily change your whole exit strategy with no risk or work on your part and no more risk on the seller’s part. They’re refinancing the same debt they have.

 

Now, it’s obviously a good time to let the seller pull out some cash and your chance to get them paid now; it is also a strong motivation to get them to do the refi. Of course, if you’re properly trained you’ll use it as an opportunity to lower the $50,000 they want you to pay them later to $25,000 they can get now. That saves you $25,000 on one deal and pays for all your training in a three second counter offer you learned because Robert asked.

 

What does that do to your payment if the seller refi’s $575,000 instead of $550,000. It raises the payment a whopping $86 a month! Who’d pay $86 a month to save $25,000?

 

Ok, now the negative about this loan. It is a negative amortization loan. The principal will go up because your payment won’t cover the interest.

 

So what! Let it go up. It won’t climb much and you won’t have the house long anyway before someone cashes you out. Besides, these loans have a cap on how much they can increase and that applies to the payment as well which can’t climb more than 7 1/2% of the previous year’s payment.

 

These loans are offered by the largest lenders in America and are very popular. Do your homework and learn the true facts before you turn your back on them and that goes for all your personal houses as well.

 

It’s really very simple:

 

Any Time You Can Send Less Money To A Bank, It’s A Good Thing

 

 

I could write a whole article on these loans and maybe I will soon. One of our members, Ann Cox, specializes in them. She’s at www.GetMyMoneyOut.com  or email askann@getmymoneyout.com  and I’m sure we have other members who do too so to be fair if you get Dennis your contact info we’ll publish it.

 

      Warning! Warning! Warning!

 

Notice my solution called for the seller to get this loan…NOT YOU! Under no circumstances do you go personally guarantee this loan just to buy another huge house. You either get the seller to do it, which shouldn’t be hard if they are a prospect, not a suspect, or you take one of the other solutions below, or you walk. Violate this advice at your own risk and under threat of personal harm by me if I catch you swapping sellers’ liability for yours.

 

Once the refi is done, you can then take title and lease option the house for whatever the market will pay. It should be easy to cover the debt - and then some - and get $20,000 to $100,000 option deposit from a tenant/buyer which is all your money you almost walked away from.

 

Solution 2

 

Get The Deed And Sell With Owner Financing.

 

“Oh, but Ron, I can’t get a high enough payment from my buyers to cover the debt.”

 

Oh, contraire! Let me splane.

 

You can take over the existing loan of $550,000 ‘subject to’ and give the seller back a second deed of trust for $50,000 with no payments or interest and a balloon at least two years off; maybe less if necessary. Make sure the seller makes the next two or three payments and the house is ready to show.

 

Now you advertise the house for $725,000, No Bank Qualifying, 5 day closing, Owner Financing, Will Take Anything on Trade.

 

Do you think this ad will attract attention? You’ll wish you had a dozen of these babies if you run an ad like this. The calls will beat you to death which is the reason you shouldn’t be taking them. Get to our “Quick Turn Real Estate School” and learn our auto pilot system where you only talk to a buyer after they’ve seen the house and you know how much money they have and if their credit is good, fair or ugly.

 

Never name the down payment or monthly payment you want. Let the market tell you what it has and you pick the best offer you’re made. Simply ask, “What’s the most you can put down?” When they answer you say, “If I take that what’s the most you can pay per month?”

 

You’ll be surprised what you can get if you’ll shut up and let the market speak.  And, don’t forget, you have two or three months before your first payment is due; plenty of time to play the market. Relax and do just that. If you do, since you’re offering owner financing, you can expect to get a large down payment if you’re patient. Maybe $100,000 or more.

 

But, what about that $550,000 loan with a $3,600 PITI?

 

Guessing that you’re impatient. I’m getting there.

 

Let’s say you sell for $725,000, the new market value, because you made it easy to buy, and you get a $50,000 down payment and finance $675,000 yourself at 9% interest. That’s a $5,431 P&I plus T&I payment to you which the market will certainly pay if they are buying, not renting and can’t qualify at a bank or don’t want to.

 

Obviously you can adjust this payment any way you want and it will easily cover the $3,600 PITI payment with a very nice $2,000 plus, per month cash flow on a house you don’t even own anymore.

 

Your $675,000 note to you will wrap around the $550,000 to the bank you took ‘subject to’ and the $50,000 second you gave the seller. You owe $600,000 and you’re owed $675,000 plus you received $50,000 in cash you get to keep. They call that leverage, my friend, and the return on your investment is infinity. You have no investment so you can’t measure the return.

 

How many of these deals can you do a month before you run out of money?

 

Did you hear me say anything about ever using your credit?

 

Perhaps it’s time to start thinking like the bank and receiving payments rather than being a slave to them and paying interest all your life.

 

Now, let’s get real creative. Suppose you need to cash out of your $675,000 note and don’t want to collect payments.

 

Well, my friend Bob Leonetti from Success Mortgage in Austin, TX, will write you a check for about 93% of the face value of your note after paying off the underlying liens. This is a good time to discount the seller to cover some of the discount you’ll take from Bob. He’ll buy the note the day you sell if you wish, but don’t do this deal with the intent to sell the note unless you get him in on the front end before you sell the property. He’s at www.smifunding.com or email callbobfirst@smifunding.com.

 

If you construct the note incorrectly you’ll take a larger discount than 7% if you sell it off and cash out. Get to our “Paper Power Boot Camp” which is part of our Masters program and let Bob work with you a whole day on selling with owner financing and cashing out immediately. He and his partner, Jayme Kayla, teach the event and they will write the check to buy your note.

 

Solution 3

 

Get The Deed And Cash Out.  It doesn’t matter much what the payment is if you’re selling to a buyer who will refinance in a month and pay off the loan.

 

In our example the house is worth $700,000 and we’re getting it free with $550,000 owed and $56,000 more to seller. What’s wrong with a gross profit of $100,000 on a free deal? Surely you won’t let a payment be the deciding factor, especially if you get the seller to make the next two or three, as you should?  All this means is that you should get aggressive in finding a qualified buyer and attracting them to your house.

 

I’m doing a special, never done before session on creative selling techniques at my last, personally taught MIS boot camp in December. If you can make it before we’re full I’m preparing a list of cool things to do to sell houses quickly.

 

Solution 4

 

Get The Seller To Pay Part Of The Payment.  If the seller wants out, many will pay a partial payment each month for a while knowing the house won’t rent for the debt. In our example we could ask them to pay $1,200 a month for up to a year.  Or,  if you really want to play it safe, you could do it the LeGrand way.

 

First, ask the seller what they think it will rent for. If they say $2,500 or more that’s good.

 

Next, make this offer:

 

“Mr. Seller, I’ll buy your house now and install a lease purchase tenant and pay you 90% of the rent I can get the market to pay me.  If your house rents for $2,500, I’ll pay you $2,250. If it rents for $3,000, I’ll pay you $2,800. I’ll ask you to pay the balance for X months or until I cash out, which ever comes first. Is that fair?”

 

Seller:  “Well, how do I know you won’t rent it cheap and stick me?”

 

You:  “Ok, I’ll set a floor of $2,000 per month. That’s the least I’ll pay you regardless. Is that fair?”

 

This strategy can be used as a back up strategy to the 1.5% refinance, which would be my favorite. So, now you have plans 1, 2, 3, & 4.  If all fail, you can always do plan 5.

 

Solution 5

 

Option:  Simply option for $600,000 and sell for $700,000. No payments. No risk except a $100,000 deposit and marketing costs.

 

OK! Enough already. I’m tired. I just turned 60. Time for my Geritol. Go buy the house and make a killing and quit worrying about little things like monthly payments. But, if you must, here’s how you can fix that too.

 

                  Get Someone Else To Make The Payments!

 

Do you know someone with a little money that would like a 25% return on it? Here’s your offer to them!

 

“You make my $3,600 payment each month until I sell the house.  For each one you make, I’ll give you back your $3,600 + $900 additional, (25%), or $4,500 at closing.  How’s that sound?”

 

Investor:  “How long will it take?”

 

You:  “Don’t know, but you’ll make $900 every month it does. How long do you want it to take?”

 

Investor:  “What if I don’t want to keep making payments?”

 

You: “Quit anytime you like and I’ll still give you $4,500 for everyone you make.” (Simply replace them with someone else.)

 

Investor:  “What if the house doesn’t sell?”

 

You: “Tell you what. If it’s not sold in 6 months, I’ll give you your choice of stopping the payments or I’ll give you the house. Is that fair?”

 

Investor: “What’s my security?”

 

You: “I’ll give you a second mortgage on the house that increases every time you make a payment.”

 

That’s enough pearls of wisdom for one lesson. You can take it from here.   When you see Robert, tell him thanks. His question could help you make a killing.

 

Next year will be a fabulous year. Make it the best you’ve ever had.

 

See ya

Ron

 

 

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