Turning paper into profits
As seen on TV, but without to pay for the tapes, here is a good way to make money buying real estate
with no money down.
Let me show you how you can achieve this objective. There are a few pre-requisites. First, the property
has to be free and clear. Next, the seller must be willing to carry back a note that is secured by the property.
So, let suppose you have found a good property. Here are two methods:
You have found a free and clear single family home that is selling for $200,000. The seller wants $40,000 or 20% down.
The terms of the note are:
Length of the note: 30 years
Interest rate : 10%
Value of property : $200,000
Monthly payment : $1755
What you do now is create a note for the full purchase price of $200,000, due in 10 years. The balloon payment at the end
of 10 years is $181,875.
You explain to the seller that you can give him the $40,000 down payment, but he will have to agree to go without the first 30
months of payments on the note. He agrees to this after you illustrate additional financial benefits that he will realize from your
Next, you are going to sell the first 30 payments to a note investor for $44,208, which will result in a 14% yield to the investor.
You pocket the $4,208 difference between the amount the investor will pay for the note and the $40,000 you have to pay to the seller
as down payment.
After the 30 payments are received by the investor ( which you as the buyer will be making), the payments will revert back to the property seller.
Using your financial calculator, the present value at that time will be $196,752, with 90 payments remaining. Remember the seller received
a $40,000 down payment, so he actually makes $236,752, over the 10 years financing period, plus ongoing interest on the remaining balance.
The results are that the seller gets $40,000 cash at closing. You purchase the property with no money down and keep $4,208 at closing.
Make sure that when you sign the purchase agreement the contract states 'this agreement is contingent upon the buyer selling 30 monthly
payments of $1755 for a minimum of $40,000.' Furthermore, you should have the note sale close at the same time as your real estate purchase.
Let create 2 notes on the same property and sell the first one. Here is one way of doing it:
Create a first mortgage for $125,000, at 10% interest, amortized over 30 years with a monthly payment of $1,097.
You will sell this mortgage to an investor for $100,000, or at a discounted yield of 13.8%. You will also create a second mortgage for
$100,000, at 10% interest, amortized over 30 years, due in 15 years. The monthly payment is $877, and the balloon is $81,664. The seller
will keep this second mortgage.
You will give the seller $80,000 down payment from the sale proceeds of the first note and keep the remaining $20,000 difference. Your
benefit is that you get the property with no money down, all the appreciation, and the $20,000 at the closing of the transaction. Yes, you
are paying $5,000 more for the property ($125,000 + $100,000 - $20,000 = $205,000), but you will be paying for it over 30 years.
The seller gets a larger down payment of $80,000 and a monthly payment of $877 for 15 years of $157,860. After 15 years he gets a balloon
So the total amount the seller gets over 15 years is $288,024. Of course, you can give less to the seller and gets more in your pocket, depending
on your negotiating skills.
Claude THOMAS, Realtor©