Re: Questions on top of questions - Posted by Bob (Md)
Posted by Bob (Md) on February 02, 2001 at 13:38:10:
I’ll do my best to answer a couple of these questions - one newbie to another. I have the Sheets course, too, and it’s a good start. Two things to understand are that 1) there are a LOT of things to learn and Sheets is a good introduction and 2) Sheets proposes buying and holding rental properties. This is one way, but not the only way, to make money. The danger lies in using “zero down” techniques and overfinancing rental properties such that they don’t cash flow (pay for themselves). That’s why he says over and over to run the numbers and do your homework before making an offer. You have to buy cheap enough that your rents cover ALL of your expenses. The good thing about this course is it encourages you to (a) “think outside the box”, and (b) actually DO something.
When the seller takes back a second, you are making two mortgages - one to the primary lender and one to the seller. As an example, if you have credit problems such that you can’t qualify for a good financing, you might try asking the seller to carry back a second mortgage. On a $100k house, you might put down 5% ($5k), have a bank give you a first mortgage for $75k, and have the seller carry back a mortgage for $20k. You end up with two monthly payments - one to the bank and the other to the seller. The terms can be negotiated separately - they don’t have to be the same interest rate or length. In fact, many purchasers will offer the seller a “balloon payment”. This means that you make payments just like a regular mortgage, but the loan ends at some point and you pay everything still owning at that time. Beware, though, you have to have an exit plan to cure the balloon when it comes due. Usually, you’ll refinance at that time and pay off the second - leaving only one mortgage payment. The reason it’s called a “second” is because it’s recorded AFTER the primary, or first, mortgage. If the house gets foreclosed on, the first mortgage gets paid first, and anything left over goes toward the second. That’s why a bank would feel comfortable giving you a 75% first mortgage if you’re living in the property. Even if it goes to foreclosure, they have a pretty good chance of getting all their money back.
I have bought two personal residences with owner financing participation. One, they carried 100% financing themselves. The other, they carried a 23% second with a three year balloon.
Yes, you can go after properties that are listed. The realtor will likely keep information from you - like how much equity the owners have, whether the loans might be assumable, etc. Their initial position is “go get financing and give my seller all cash at closing”. You have to work to move from there. By the way, there is no law that says you can’t run down to the courthouse, look up the name of the owner, and call them directly. If you make an offer, however, there is a law that says the agent gets a sales commission. And that’s only fair - it was his sign that told you the place was for sale.
My recommendation is to get your credit clean before you jump in. It will save you a lot in interest charges, and will open up a lot more financing options. I wouldn’t take out your equity unless it’s absolutely necessary. By the way, a technique that is used in owner financing is to create a second mortgage secured by the equity in your home, rather than the one they’re selling. Sellers will typically feel that this is safer because you’re less likely to let your own home go into foreclosure.
Creative financing will work anywhere. But there are about a hundred different techniques and approaches. Not all will work everywhere or for every property. Part of the magic is to figure out what sort of techniques can be used to accomplish the deal at hand.
Bob