No Cash or Credit Needed
If you know where to look and develop the proper mind set, there are plenty of deals out there that you can put together without any cash or credit. Many very successful investors never put their own money into a deal. They take the attitude: “Why risk it?” It is not that they are afraid of losing their own money – they are smart enough to only work on deals where it’s not likely that they’ll lose money – they just know they don’t need to put their own cash into a deal. Their feel that their attitude creates a self-fulfilling prophecy.
Then there is the question of your credit score. Highly motivated or highly distressed home sellers really do not care what your credit looks like. If you have bad credit, don’t feel like you need to tell them about. They probably won’t ask.
In short, if your first thought is always to do the deal without outside financing, you stimulate your creativity and creative ideas will be more likely to flow. With the right creative ideas, your transaction will not depend on your credit history – your credit score has no role in your investing.
This is the way that many investors work. Their deals require no cash, and their personal credit worthiness has no impact. You may think that a cashless strategy might limit the numbers of properties available to these investors, but they will tell you that it also has a tremendous focusing effect. With the freed-up creativity they can target their market more effectively. They still find plenty of good deals.
One profitable, yet easy-to-learn method of creating cash flow is to buy and re-sell properties in back-to- back closings. At most you may have to pony up $100 to bind the purchase contract, but you get that back right away. Otherwise, all you have to do is find a house, negotiate a great deal, get it under contract, and then let someone else take over the contract for a fee.
Bear in mind: you will get paid for your work, not for your money. Flipping properties in this manner requires you to keep working and put in the effort. When you stop working, the cash flow stops coming in. On the other hand, this is a great way to get started in the investing business. You need no credit, no cash, and no particular expertise. You don’t even buy the property!
The truth of the matter is that you can make money in real estate without owning a property as long as you have control of it. The control comes when you make an offer, the offer is accepted, and you execute a contract for purchase of the property. At that point, you now control the property because nobody can purchase that property without your say-so. The seller cannot sell the property to anyone but you without your consent. However, if this is a good deal, other people will desperately want to buy the property.
Their ability to buy is under your control – if they want the right to buy it, you could grant them that right if the price is good enough.
Contract turns offer a good starting point in a real estate investing career. Flipping contracts allows you to earn while you learn: you get great exposure to how to construct and even fund and close deals by observing other people do it. If you do it right you don’t have to worry about risk, either.
How It All Works
Flipping a contract turn means you find a great deal, execute a contract to purchase the property and then sell your right to purchase to a third party. This is a great, low risk and very legal way to generate quick cash.
Let’s look at a quick example. A while back a new investor in Seattle that we have worked with (the location is not important — this is a real story, but it can happen anywhere) found a 6-unit apartment building downtown at a fire sale price. The reason for the fire sale price is that the building had been damaged in a fire, and the owners had not had good fire insurance. They had to sell to recover anything.
Because the sellers were highly motivated to get rid of the property, the new investor negotiated an excellent purchase price. Then he brought in a contractor to estimate the cost of making the building inhabitable again. Unfortunately, the bid came in at $75,000, which for a kid fresh out of college with no cash on hand is hard to come by. In essence, he was in over his head. However, he didn’t want to walk away from so good a deal without any profit. Even costing $75,000 for rehabbing, this building would be a great deal for someone.
The neophyte investor advertised in the newspaper, offering the building at the purchase price he had negotiated. One of the respondents was a building contractor who had the workers and the equipment to fix up the building, and the capital to buy the building. The investor assigned the purchase contract to the builder and walked away with a $4,000 cashier’s check.
Given inflation since then, his $4,000 would be more like $8,000 today.
Kinds of Contract Turns
Contract turns come in two forms, wholesale and retail. The difference depends upon who ends up with the property. If the person you assign it to plans to do some work and then sell the house, it is wholesale. If the people you turn the contract to buy the house to live in, it is retail. Let’s look at the two separately.
Wholesale flips give us a means of buying low and selling low. Clearly the ability to sell for a low price speeds up the sales process, especially when the low price still brings in a profit. You sell quickly by assigning a contract to an investor, who will be using the property for business purposes –thus, a wholesale deal. From your point of view, the buyer/investor would become responsible for any rehab work to be done.
Important elements of a wholesale turn include:
You do your homework, get your reports of comparable sales, get to know the market
You build and maintain a good network: attend meetings of the local investors clubs, visit real
estate auctions to network with investors, and call on the “We buy houses” signs and ads. Stay
in touch with other investors to maintain a good working relationship
Make a large number of lowball offers on distressed properties that need cosmetic rehab (or,
even better, require the kind and level of repair that your contacts are looking for), and get
them under contract immediately upon acceptance of offer
Include good escape clauses in all purchase contracts in case you can’t move the contract
The turn happens when you assign the purchase contract to another investor in return for a cash contract consideration. Depending on the amount of the purchase, the consideration can range from $1000 to $10,000, sometimes more. The amount is subject to negotiation between you and the assignee.
Here is an example of how this might work: Frank has a house for sell. He has owned it for about 35 years, and has it free and clear. However, it’s been a rental for 10 years so it’s looking pretty shabby. The market value is $100,000. It needs $10,000 worth of work. It turns out that Frank recently bought a retirement condo in Key West – or was it Maui – anyway, he’s desperate to get out of town, so he gives you a purchase contract for $65,000. Then you call Ed, a rehabbing handyman investor you met earlier. He enjoys doing rehab projects and would likely pay $3000 – $5000 for the privilege of buying this $100,000 house for $65,000. Even after spending $10,000 on rehab, Ed’s total outlay will be less than $80,000; he can discount the house at $95,000 and make a quick $15,000 profit.
Retail transactions involve buying low and selling high. Because you are selling high, this has more potential profit than a wholesale turn. The higher profit requires more effort on your part: for one thing, you should have an end-buyer lined up before you purchase. The end-buyer will most likely live in the house, so this involves finding a home for somebody to buy that fits their needs and desires. Your profit comes from the service of finding a suitable home and negotiating a good deal that the end-buyer will accept. The house either needs no rehab or you have an end-buyer willing to do the work needed.
Here’s an example of how it might work: Let’s say Frank’s next-door neighbor, Sam, has essentially the same house as Frank, worth $100,000, and he has also bought a retirement condo next door to Frank’s in Key West. The difference is, Sam has been living in this house for 35 years, and has kept it up nicely. It looks great. That means he probably isn’t going to give you a $65,000 contract to buy his place. Maybe though, because he’s so eager to get down to the island, he’ll let you have it for $90,000.
Understand this: you don’t ever want to actually purchase a house at 90% of its value if you want to make a profit. Your cost of the purchase – your overhead – will be close to 10%, so where’s any profit in that? However, Jim and Suzie are a young couple looking to find a home to buy for themselves, and this happens to be right in their price range. I’d think they would be thrilled to have the means of buying a $100,000 house for $90,000, and would probably pay you $3,000 for the privilege of doing so. Now their total cost is $93,000, and for them, that’s a good deal.
You might notice that this latter example pays you approximately what a real estate agents earns on this kind of deal, but for less work. Because there is no license requirement to purchase a house for your own purposes, or to sell a house you own, you don’t have the same regulatory hoops to jump through.
There are two ways of putting together a retail deal:
You could execute a contract assignment as we described with wholesale assignments.
You could also do a double contract closing; let’s say that Sam is desperate, not eager, to
move, and besides, he only paid about $10,000 for this house 35 years ago, and he’s just a nice guy, so you can get it for $80,000. Don’t expect that Jim and Suzie would be happy to pay you $13,000 for the right to buy this house for $80,000. They would feel you are taking advantage of them. In other words, they would be thrilled to pay $93,000 for the $100,000 house, but not if they knew your profit was $13,000 from their pockets.
You can see that it would be right for you to get $13,000, because you were able to strike such a good deal with Sam, but you can’t get it as a fee from them. So what do we do?
You will recall that we call this a retail deal. How does it work in the traditional retail world? Let’s say you go to your local department store and pay a few hundred dollars for a nice sweater. In the back of your mind, you suspect that the store only paid about a fourth of that to get the sweater. What would the sales clerk tell you if you asked how much the sweater cost the store? That’s right, nothing. It’s none of your business. All you know is the amount they are asking you to pay.
This is exactly how you would deal with Jim and Suzie. They would see a contract allowing them to buy the house from you for $93,000. They know nothing of the contract you have with Sam to buy the house for $80,000. Everybody is happy.
All you need to complete the transaction is a knowledgeable and cooperative title company or attorney. These should be part of your team, anyway. Ask around among your investor friends for suggestions. Or, just go in to a title company and ask, “I have two contracts for purchase of the same house. Do you know how to close them both at the same time?” At the closing, everything appears in a single escrow, all the papers are signed on the same day, all the legal documents are recorded on the same day, and you drop by the closing office to pick up your check the next day.
There is a slight possibility that the regulations governing title companies in a particular state might not allow same-day double closings. This is not a legal matter, but is more of a matter of insurance regulations. If you run into that, know that you could close on the first part one day and the second on the next day. You would need the use of enough money to close on the acquisition overnight. You just need to find a person with that amount of money who would be willing to place the money into a regulated and insured escrow account overnight for a $500 – $1000 bonus. A person that understands the power of money would understand that $1000 on $100,000 represents 1% daily interest, or an annualized return of 365%. How often are they going to find that?
The “Wraparound” Transaction
As you want to market a house quickly, you may find some frustration in the fact that so many people interested in buying a house don’t have the kind of credit that will allow them to get a mortgage for purchasing your deal.
Fortunately you have a good alternative to help your would-be buyers. Instead of sending them to get a mortgage loan, you can do a wrap, instead. A wraparound transaction involves leaving the first mortgage in place and creating a new loan to a buyer. You acquire the house by unofficially taking over the existing mortgage. You then provide a mortgage or trust deed (depending on the laws of the state) to the new buyer using the same process used when you get the seller to take back a note. This mortgage is subordinate to the original, existing mortgage.
Your buyer makes monthly payments on the wrap mortgage. You then make payments on the original, underlying mortgage. What you receive from your buyer covers the monthly due on the first loan with a little bit extra that you keep. This extra amount represents residual monthly cash flow that continues until your buyer pays off the entire balance of the loan. You could set that up for a 30-year term if you desire, although you might do better by having a balloon payment for the total remaining balance due in five years. Your buyer would handle this by refinancing.
Here is an example of how this might work:
You buy a $100,000 house for a 10% discount ($90,000), borrowing $90,000 from First Federal Financial on a favorable 7% thirty-year loan. Your principal and interest payments are roughly $598 per month. You sell the house to Ed and Lucille on an installment land contract for $110,000 (about 10% above market), taking $10,000 down and carrying the balance of $100,000 at 9% for thirty years. You maintain your $90,000 loan with First Federal in place while you collect payments ($804 per month) from Ed and Lucille on a monthly basis. The difference between what you pay ($598) and what you collect ($804) provides you $206 per month cash flow on the “spread,” potentially for 30 years!
This is a basic example of a “wraparound”. The existing loan remains in place, and a newly created loan wraps around the existing loan. Your profit comes from both an interest rate spread (your 7%, their 9%) and a markup on the purchase price. People with poor credit rarely question the price of the property. To them, and to most first-time buyers, in fact, the terms are much more important than the price. In this case, the great terms come from the fact they don’t have to qualify for a mortgage from a traditional lender, a lender who will check credit.
As your buyers pay off the extra remaining balance, you pay off the underlying loan. In the meantime, you collect a regular monthly cash flow as we already described. Better yet, you get the cash flow without the need for property management, maintenance, tenant issues, vacancies or city code violations. You can collect your monthly checks for thirty years, or you can sell your “wrap” note for cash and let another investor collect payments while you get cash here and now! You can also write a balloon payment into the note you give the buyer that calls for payment of the full remaining balance in three to five years, once they have fixed their credit and can qualify for an institutional loan.
Clearly, you can tweak the numbers and get even better cash flow. If Ed and Lucille are paying 10% interest, their payment to you is $877, or a cash flow spread of $279.
You can see that this kind of deal is not difficult to do. You didn’t have to buy a property at 65% of its fair market value. There are always plenty of people who can’t get a home in any other way than paying a little higher price for convenient terms.
But, if you have been paying attention, you should recognize that this module is about ways to acquire property without cash or credit!
So how can you do the deal we just described without having good credit and some cash? The answer is: find a partner who will put up his or her money and credit.
Let’s go through the steps:
Locate an open-minded individual who has good credit and provable income.
Form a limited liability company (LLC) with both you as 50% members.
Locate properties in nice working class neighborhoods available for 10% or more below market.
Execute a resolution from the LLC that your investor member will purchase a particular property in
his or her name, for the benefit of the LLC. The investor then purchases the property in his name,
using his credit and down payment.
Advertise the property for sale by owner “no bank qualifying required.” Find a buyer willing to pay at
least 10% more than the appraised value of the property with 10% or more as a down payment. The
down payment allows your partner to recoup the investment in cash.
Execute an installment land contract to the new buyer.
Collect monthly cash flow and split it with the investor.
The reason you are entitled to a 50% split of the monthly cash flow is because you did the work. People with money always want more money, but they would rather not have to work hard for it when they can instead put money to work for them. Besides, it is your creative idea that makes the whole deal possible. Doing a first deal like this means you will gain a reputation as someone who helps people make an excellent return on investment. Word will get around, and other people will want to work with you as you become a known commodity.
Rent to Own
You may recall we made mention earlier that you can make money in real estate without owning the property, as long as you have control of it. We also explained that a purchase contract is how you gain control of it. Now let’s look into the fact that some purchase contracts differ from others. A typical purchase contract stipulates that the closing will take place within the next few weeks: as soon as the loan is approved, the appraisal is made and the title search is completed. The salient difference between the purchase contract and an option agreement is that option agreement intends that the purchase will take place sometime in the future, be that six months or two years. Otherwise, they both allow the buyer, whether with a short-term standard contract for purchase or sale or with an option agreement, the right to purchase the house.
When you acquire control over a house with an option agreement, you can now market it for a profit. If you wish, you could offer it for sale. Your option allows you to exercise it at any time up until a certain date, as long as you pay the price required. If it is a one-year option but you choose to exercise in two months, it is your legal right. Your profit is the difference between what you agree to pay with the option and what the buyer agrees to pay you on a retail basis.
Or, if you prefer, you could place a tenant in the house that will pay you extra for the option to buy it. Ideally have paid only $100 to get your option, and the new tenants pay you 2 – 3 % of their purchase price as up-font option consideration. Option consideration is non-refundable (it pays for purchase of the right to buy) – you keep it whether they buy the house or not). In addition, they pay a few hundred dollars more than standard rent, which also counts toward the option. When the tenant exercises the option, you get the rest of your profit. If the tenant fails to exercise the option, you can always put a new tenant in and get another 2 -3% of the market value as a lump sum plus a little higher rent amount and the monthly option consideration. It just keeps getting better.
We call this strategy a sandwich lease-option, and you will learn more about it in a later chapter. For the purpose of doing deals without your own cash or credit, we emphasize here that your ability to get a property owner to give you an option to buy the property grants you control, just as any purchase contract does. With control, you now have the legal right to sell the property: we call this “equitable title,” and it provides you an excellent means of doing deals that do not require cash or good credit from you.
Later in this course you will learn about how to find potential deals – what we call “leads” – from public records, usually on a county level. For example, if you look at property tax records and discover properties with an out-of-area owner, you may find an owner who is tired of the hassle of managing the property and tenants and is now trying to get evict a tenant who has stopped paying rent. For that matter, a vacant house up for rent may have a disgruntled owner who might like the thought of letting you rent the house – after all, he is looking to get it rented anyway – while getting rid of what he may see as a burden.
An obvious complication presents itself when the landlord lives 1000 miles away from the house. This might be a situation where you can help a sick-and-tired landlord solve a big problem – all the more so if the house happens to be vacant at this time. How easy would it be to put a new tenant in from 1000 miles away? You explain how the landlord still gets the same monthly income as ever, only now has no work to do, no need to find tenants, no maintenance to do, no tenant problems to deal with, no need to collect rent, no evictions to do. You take care of all of it, and there is no fee to the landlord. The only cost is an acceptable option price.
Perhaps you talk to some of the landlords in the midst of evicting a tenant. This is always painful. Even if a landlord follows the letter of the law and turns in all notices and paperwork on time, in the best of circumstances, a month’s revenues are lost and the expenses still go on. But most landlords are not good property managers, and they don’t stay on top of things. An eviction rarely goes as quickly as within a
month for these people. The landlord needs to get the place filled as quickly as possible. Knowing that you will not only be paying rent but also taking the property of his or her hands will add great incentive.
Control without Purchase Expense
We have looked at several ways to make money in real estate without the need of paying for a purchase. These are:
Gain control with a contract for purchase and sale, and then flip that contact to another party who will complete the actual purchase, either for business use or for a personal dwelling.
Purchase the property “subject-to” by taking over the existing mortgage on the property. In an ideal situation you can get a purchase price equal to the mortgage balance, meaning you have no further cash obligation. If the seller is motivated enough, your down payment can be minimal and your only other obligation is to make monthly mortgage payments on the underlying obligation. As soon as you find a buyer, that person gives you the money to make these monthly payments with extra cash left over to provide extra income.
Obtain an option to buy the property. Legally, your only obligation to make the option binding is to give something of value that both parties accept. If the current property owner accepts a handshake and signs the purchase contract with those terms, it would be binding, although to avoid any ambiguity you ought to make it more material: a service you provide (such as painting the wood trim on the front of the house, give the seller a piece of used furniture), or cash. The amount doesn’t matter much, as long as the property owner accepts it. We recommend $100, but if you can persuade the owner to accept $10, that works, too.
The fundamental message of this module is that there is absolutely no reason why anybody, possessing sufficient desire and determination, cannot make money in real estate. You should bear in mind that in becoming a real estate investor, you are competing with nobody else, other than yourself. There are plenty of deals to go around: if you happen to miss on one because someone else grabs it first, you need only look around to find another. If you can’t find any, you should consider that you may need to put in more time and effort – the deals don’t just come to you until you have done enough of them to have developed a reputation, at which point people will come to you for help.
An additional point, you should always be looking for better ways to get important things done. This leads to working smarter rather than harder. The work and effort still have to be there, but you should never stick with the same way of doing it that you have already done. In your weekly stewardship meetings with yourself, when you review your performance of the past week, analyze what you did and what you accomplished during the week. Each action you took warrants scrutiny: you want to know what it got you. Do you like the results of what you did, or not. If so, keep going. If not, figure out a better way to do it.
This certainly applies to closing the deals you find. With creative thought, with focus and determination, you can do money-making real estate deals. If you have no money, start by focusing on those that do not require money from you, as we discuss in this module. It may be true that it takes money to make money, but nobody ever should believe it has to be your money. But it will require your effort