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Chapter 4 of no money down

 

In the previously discussed methods we concentrated on ways to borrow against assets.  In this case we are going to talk about selling assets.  I'm not talking about the obvious selling the car or furniture.  I'm talking about the most bought and sold item in the U.S. economy:  Money.

 Historically, there is no investment that is more secure than real estate.  Banks know it; private investors know it; so both endeavor to put as much of their capital into real estate holdings as possible.  Many lenders would just as soon buy an existing mortgage as make a loan that creates a new one.  The main reason for this is that if they buy a mortgage that has been being paid on for at least a year or so, they have some assurance that the borrower is going to pay.  Whereas, on any new loan they make, they really don't have that assurance.  What this means to you is that if your financial situation is such that if you have money owed to you, you have immediate access to cash.

 If you find a great buy or need money right away, you can go down to your local bank and sell the money that is owed you.  Something you need to realize is that when a bank buys a mortgage, it will usually want a discount of anywhere from 5% to 20% of the face value of the note

In other words, if you are owed $35,000, and the bank wanted a 10% discount, they would offer you $31,500.

ie. $35,000-$3,500=$31,500.  The person that owed you the money would now owe it to the bank.  (Although, the example I give uses the bank as the purchaser of the mortgage), the fact is, there are many private investors that often buy mortgages. However, try the bank first. 99% of the time, that's where you will get the better deal. 

If for some reason the bank won't purchase your note, look in the newspapers for an ad something like this: "We buy notes...". Although, in most cases a private investor will want a larger discount on the note than would the bank, for the right investment property, it may still make a great deal of sense. 

 Although, at first glance, the thought of discounting the note $3,500 may not seem like such a great idea, the reality of the business world is that it is sometimes necessary to take a small loss now, in order to reap big profits later...

 Example:  Let's say that during your search for a good real estate buy, you come across a property where the sellers are in dire financial straits and in need of a quick sale.  Often this is due to foreclosure being imminent.  Although, there are many reasons for this occurring, the end result is that it creates a good opportunity for you...

Let's assume that the property is worth $80,000 dollars and they owe $50,000 against it.  The owners of this property have $30,000 in equity and definitely don't want to just give it away.  However, in most cases they realize that if they are in a distress situation and need a quick sale, they will not get all that it is worth.  And in the case of foreclosure, they either have to take what they can get, or at the end of the foreclosure proceedings, they will have nothing.

This situation allows you to structure a transaction that is beneficial, not only, to you, but to the sellers as well.  Under the circumstances described above, very often, the sellers would be satisfied to receive $10,000 for their equity.  This is probably enough to allow them to move, possibly buy a different home, and just as importantly, it allows them to protect their credit by eliminating the possibility of having a foreclosure show up on their credit record.

Now, how do you buy it?  Your first task is to raise some cash.  Let's assume that you have a mortgage due you in the amount of $35,000 as in the example above.  You simply go down to the local bank and tell them you want to sell the note.  After doing some calculations pertaining to the desired yield on their investment (what they pay you for the note), they will determine how much they want to discount it and make you an offer.  Let's say that for whatever reason, they insist on a 20% discount.  In other words they won't give you one penny more than $28,000 for that $35,000 mortgage.  It would still make sense, even though it would cost you $7,000 right off the bat.   Here's why...

 If you buy the above mentioned property by paying $10,000 cash for the equity and then assume the loan, your financial situation would look like this:

You paid $10,000 cash; assumed a $50,000 loan so you essentially, paid $60,000 dollars for an $80,000 piece of property. 

So, even though, it cost you $7,000 to raise the down payment, you more than made up for it by acquiring $20,000 in equity. If you were, so inclined, you could now turn around and sell that property and realize a very quick profit.  Plus, you still have $18,000 cash left over from the sale of your note.  What to do with it?  Why not put it in an interest bearing account until you find the next good buy?  There are always good buys available, but you have got to keep looking.  We will discuss how to find them later.