The Home Mortgages Blog

Creative Real Estate Financing 101 - Part III - Interest

aaron — Sat, 13 Jun 2009 13:00:05 +0000

I know that I told you that I’d show you how $7,500 would make 10,000 about 2 days ago, however, I got sidetracked. It’s not quite like I have a lesson planner…it’s just how they roll out. But $7,500 will make $10,000 when the interest over time is applied. I showed you to negotiate with your seller for the $100,000 property by negotiating a note on the down payment. The note would be $7,500 over 3 years at 19.8% for a monthly payment of $277.96. If you take $277.96 and multiply it by 36 (months) you will get $10,006.67.

I was poised to upgrade my family home from where we are to a spacious 3000 sq. foot home on approximately 1 acre inside the city. Unfortunately, the seller, a very nice doctor, felt as though he was going to be getting the raw deal on it and pulled out. He listed the house for $178,000 (a price reduction since the house is assessed for taxes at over $250,000.) Here’s the offer we made him:

$75,000 Owner Financed with an OPTIONAL 3-year balloon.

7.9939% Interest on property.

$550.00 Monthly Principle/Interest Payment

BALLOON OPTION

Price would be adjusted calculating 100% of payments toward principle price of $170,000. A loss of only $8,000.

If the seller would have carried the note to term, he would have made $20,000 MORE than asking IF he carried the note to term. However, if he no longer wanted the note, after 3 years he would be able to call the loan and we’d seek conventional financing. However, the doctor invoked his right as seller to say “No.”

Why would anyone do a deal like this?

Many reasons:

1. Retention of property. By the seller acting as the bank for at least 3 years, if we defaulted on payments, he would then turn around and file a foreclosure on us and we would be out a house, but he could then sell it for more if the market’s up, or the original sale price if there’s been no market change.

2. Less in capital gains taxes. By lowering the PRICE and increasing the Interest, the seller would pay less in capital gains taxes.

3. Net Worth. The seller would be able to claim the property as his until the sale was finalized in 3 or 30 years. His net worth would include our home.

Those are a few reasons, and the reasons that I would have made the deal. I’m sure the good Doctor had his reasons, and I hold no ill feelings toward him in the least. Remember, buying a house, whether for personal or professional reasons, emotions need not be involved.

Creative Real Estate Financing 101 - Part II

aaron — Fri, 12 Jun 2009 13:00:48 +0000

If you have negotiated for owner financing, you need to consider the terms. There are a few things that will affect the terms and they are, an existing mortgage, seller’s needs, and flexibility of the seller. Obviously the seller is fairly flexible if he is considering owner financing, however, you need to know HOW flexible he’s willing to be before continuing. The only way to know is to ask. This might be a parental home that was willed to them and they just want to get it off their hands.

Ask the seller if there is an existing mortgage. If there is, ask him if the mortgage is assumable. Most mortgages now are no longer assumable, banks fear the risk of foreclosure transferring a mortgage from one to another. However, even if the mortgage is NOT assumable you can try to get a mortgage that would pay off the existing mortgage (at close) and then owner finance the rest. If the owner possesses 40% equity in the home, all you need a mortgage for is the remaining 60%. Here’s how with that $100,000 home.

Cost: $100,000

Existing Mortgage: $60,000 @5.25% for 30 years = $331.32

Owner Finance: $40,000 @6.00% for 10 years = $444.08

Total per month: $775.40*

*All numbers are estimates and only incorporate Principle and Interest.

By purchasing the house with owner financing this way, you will cover the mortgage, finance the rest and giving the owner MORE than he’s asking for the house. In fact, you will give the owner $13,289.60 more. This will enable you to negotiate with the seller to cover closing costs.

Also, if you can find out why the seller is selling, or even what the seller wants to do with the money. For example, if the seller wants the down payment money for a cruise, make the suggestion of $5,000 cash and two cruise tickets in a nice cabin. This will truly butter-up the seller and loosen him to your negotiations, and it lets him know that you do care about him as a person, not just a business transaction.

HOWEVER, you can treat your customers/tenants like people and not get emotionally involved. With any business transaction, NEVER LET YOUR EMOTIONS CONTROL YOUR ACTIONS. Yes, you may like the seller, but remember, the closer you get, the less likely you will want to negotiate and offer less. Be friendly but do not befriend.

Creative Real Estate Financing 101

aaron — Thu, 11 Jun 2009 13:13:26 +0000

I will start by saying this: These are advanced techniques used by seasoned real estate investors. Failure to research these techniques can result in financial trouble, Please DO NOT hesitate to ask me questions. Your questions will be answered on my blog. For more guided coaching let me know and I will dicuss some options.

There are several basic methods that work for purchasing a home using up to 100% owner financing. There are tale-tell signs that an owner is willing to consider owner financing, such as “motivated seller”. If the property has been on the market for quite some time or if there has been a price reduction.

Some quick tricks are to ask the agent if they are willing to take their commission as a note (small loan). If they are you may be able to negotiate from the stance that you will pay 100% agent commissions. The seller will see more money in their pocket and could come down by 10,000 to 20,000 dollars (less reduction is possible).

You can also ask the seller if they would be willing to take a note on the down payment. If so, all you have to pay are the fees associated with closing cost. Now you have bought your property with little to no money down. Let us keep in mind that you have the cash flow to support those notes. Let us look at some numbers: We will take the $100,000 home I have been using as an example.

“Wait a minute, I thought that down payment was $10,000?”
If you multiply $278 x 36 months, it totals $10,008.
“How did that happen?”
That is for part 2.

Remember, with any and all of these tricks, some people may tell you that it cannot be done…only because they have never done it. And, as always, the worse they will tell you is….”No.”

5 Ways to Make Money Investing in Real Estate

aaron — Wed, 10 Jun 2009 14:09:07 +0000

I have been a real estate investor for about four years, I have snagged some jewels and lost a few. I have bought bad deals and learned how to make money off of them. I have flipped a few houses, but prefer to hold onto properties and rent them out. Like I said, if you can make $100 profit per month renting out a house, why stop at just one?

With real estate, you can buy a property, slap a coat of paint on the outside and inside, fix a few things, then sell it for a profit. This is called “flipping.” You do have to work, and when you sell it, you get paid…so it’s still Earned income. Plus you’ve got the capital gains taxes you will have to pay. That is one way, the most commonly seen way of making money with real estate, it is also a way to get money for a larger property. Remember the roll-over you can do with a Form 1031 and use that money to purchase a more suitable property for rental purposes, or a home for yourself.

By renting the property, your renters are increasing your equity by paying down your mortgage. Also, even with the current housing market, values are still increasing in a majority of states. Plus, next year your house will be one year older, and the IRS allows a certain amount of depreciation on the house.

“Wait a minute? It goes up in value and down in value?”

Yep. Every year your house APPRECIATES in value while the government sees it as DEPRECIATING in values just because it’s another year older. This depreciation is called “Phantom” depreciation, because the only place it is seen is on paper.

Five ways to make money with one real estate property:

Flip it
Rent it
Appreciation
Depreciation
Amortization

Now, here’s another great real estate trick. How many of you have played Monopoly? How do you get a red hotel? By trading 4 green houses for 1 red hotel. You can do that too, just not necessarily with a hotel (unless you are trading with a dumb-blonde hotel heiress.) But if you wish to trade properties, the rules are simple, all properties involved must be Like Kind, meaning similar in fair market values. For more on Like King Exchanges go to IRS.gov and type in Like Kind Exchange or simply download the form.

Understanding Your Financial Report Card

aaron — Sat, 06 Jun 2009 13:00:59 +0000

As a child the school would inform your parents as to how well you do by sending home a report card. As an adult, you too have a report card, it is called your personal financial statement. I know I’ve touched on this before, even gave you a template for one. I have discussed your income, and had you reduce your expenses. Now on to your assets and liabilities. Your assets are all items that have cash value AND put money into your pocket. Liabilities are always taking money from you. Separate them as below:

There seems to be a school of thought that you should work on your smaller debts first, I say, tackle the dragon first. This goes two different ways. If you want to reduce your credit card debt, find which one has the highest interest rate, pay the minimum on all other cards, then see if you can free up $100 - $200 per month and apply that to the highest interest card. Continue this until your cards are paid off. It is important that you DO NOT ADD ADDITIONAL CHARGES!

Now, most people have their mortgage as the highest, in this case my suggestion would be to commit at least $50 per month to your principle. On a $100,000 mortgage at 4.65%, a $50 extra payment can knock off 5 YEARS. Once all your other debts are satisfied, then add the $100 - $200 per month onto your mortgage. Same as above, but $200 extra payment can take a 30 year mortgage down to almost 17 years….that’s 13 years OFF!

As my father used to tell me, “When you find yourself in a hole…STOP DIGGING!” In this troubling time, it is imperative that we take control of our own personal economies. If you do this, I promise you that no matter what the economic problems in the world, you will be fine.

Generating Passive Income

aaron — Fri, 05 Jun 2009 17:20:00 +0000

There are several ways to generate and/or increase passive income; start a business, buy into a franchise, join a network marketing group, or get into real estate. All require education on your part…and some more than others.

Network Marketing

There seems to be a negative stigma associated with network or Multi-Level Marketing (MLM); often times they are called “Pyramid schemes.” Believe it or not, the pyramid is the most solid architectural structure…just look towards Egypt. If it is a pyramid, think of yourself as the apex, the top of your pyramid. Alone, you are not much so you have to recruit a team, then train them to do the same…all at the same time you and your team are selling the products or services offered by the company. Network marketing companies offer some of the best business training with very little upfront cost to you. Do your homework one the company to determine if it will be around next year, or five. I have seen that Amway is making a comeback…it’s worth a look.

Starting a Business

If you decide to start your own business or buy into a franchise, do some research. Find out if your area needs this product or service. When starting a business, you don’t have to like the product/service offered, but it helps. Do some serious research, go to your local college, often times they have a Small Business Development Center (sponsored by the Small Business Administration.) Talk with them, they are a wealth of knowledge, and might be able to assist you in getting funding.

Passive Income from Real Estate

This brings me to real estate. I will focus on this in another entry, but a quick overview as to the benefits of real estate are the multiple streams of income. There are 5 ways to make money from one property. But ultimately, if you can buy a property and rent it out for a monthly profit of $100, my question to you is: How many times would you do this? My answer…do I have to stop?

Another few sources of passive income can come from inventing something or writing a song. The options are endless. Above and beyond this, do not quit your job yet. Consider it when your passive income alone exceeds your monthly expenses. Find a reason and set a goal; I want an extra $500 per month, I want to pay off my car/boat, WHATEVER! Set your goals and do what is necessary to meet (or exceed) them. Your best asset is you mind!

Types of Income - Passive Income vs Active Income etc.

aaron — Thu, 04 Jun 2009 13:00:09 +0000

Everyone knows you work and you get paid. That is only partially true. When you go to work and clock in, your income is earned income; you put in a week’s worth of work, they pay you for what they think your time is worth (of course, you agree with it by not asking for a raise.) But there are two additional categories of income that many do not realize.

Portfolio / Paper Income

This type of income comes from dividends from stock holdings or the sale of stocks or bonds. Many of us already have this, even if we don’t own stocks. Raise your hand if you have ever received a statement from your bank, usually in January, on the interest accumulated from savings or interest-bearing checking accounts? (How many of you still have your hand raised? Put it down, you look silly.)

Passive Income

This type of income is the best because often times it requires the least amount of ongoing work. Passive income is when you do something or create something that pays you indefinitely (or for a set period of time.) Passive income can be business holdings, rental income, or royalties.

Star Wars and Passive Income

A great example of the power of passive income is the story of Sir Alec Guiness. Sir Alec starred in a movie called “Bridge over the River Kwai.” Years later he saw the movie was being played annually on TV, but he never received any royalties for its performance, mainly because he didn’t negotiate for any. So, in the mid-70’s he was approached to do a sci-fi movie. Sir Alec was not a fan of the sci-fi/fantasy genre, but he saw that more and more of these movies were being made and if this one was any good, he could negotiate for royalties and get a little more once he retired. So, he decided to do it, and negotiated for royalties, much to the mockery of his co-stars. Sir Alec asked for only $20,000 up front (not much even by 1970’s standards) and 1% of items with the movie’s name. So, Sir Alec made a little movie with George Lucas called STAR WARS. All of his co-stars said they wish they would have followed suit with their negotiations, even Harrison Ford said if he’d done that, he would never make another movie. Sir Alec Guiness passed away in 2000, but reaped the rewards of the new STAR WARS trilogy, and the toys and all “officially licensed” products.

That my friends is the power of passive income. Now you and I may never get the opportunity to be in a pop-culture changing film, but there are ways to do this, just not that much that quickly.

Generating Passive Income

Personal Finance Education

aaron — Wed, 03 Jun 2009 16:28:37 +0000

Before I begin the next section in looking at creative financing options for real estate purchase, there are some basic financial principles and skills I would like to instill and insist on you knowing. Some that you may know, some you may not, but you need to take them into consideration. I am going to make some suggestions that you might not agree with, but you need to remember that our preconceived thoughts on money and finance are deeply ingrained from what we’ve learned throughout life, our parents, school/college, work, all have shaped our views on money and finances. Keep your mind open to my suggestions, and if you have never read it, I highly suggest you reading “Rich Dad, Poor Dad” by Robert Kiyosaki.

When talking about real estate you will often hear people say that your house is your largest investment, or it’s a real “asset.” Have you ever stopped to wonder what they mean? What is an asset? I view assets as anything that bring you money. Your job is a TYPE of asset, however, you are the asset to yourself, because you go to work…but outside of that, does your house put money into your pocket every month? Most likely it does not. If anything you probably pay more than your mortgage every month on your house…repairs, service, utilities. Therefore, is your home your biggest asset, or is it your biggest liability? I would place your house into the liability category. Usually the person telling you it is an asset is your banker…and it is true, for him. Your house is your biggest asset for the BANK…not for you.

Often times the bank or finance company want you to list your things of value as assets, which to them they are, because rather than drive your car or live in your house, they will sell your car and sell your house. The bank has no emotional ties to your property, so they claim those as assets.
So, when you are preparing your budget, please take these things into consideration:
Assets put money in your pocket
Liabilities take money out of your pocket.
“But Aaron, I’m trying to sell my house.” When you do sell your house, and you’re selling it for even $1 over what you paid for it, THEN it’s an asset. Same with your car, vehicle, or anything else you’ve held on to.
Sit down with EVERYTHING. All debts, bills (due and past due), credit cards, stock portfolios, bonds, business earnings. List them all into these categories.
Income: Earned income from your work; portfolio income from stock dividends; passive income from business holdings or real estate.
Expenses: (Active/Past Due monthly):

Rent/Mortgage
Insurance
Taxes
Child Care Expenses
Loans (car, student, personal)

The above should be listed with as much EXPLICIT detail as you are able to include. This will give you an accurate view of your financial life line. Are you “red lining” or just “in the red?” Red-Lining is when you drive your car until it reaches the red line on the RPM…it’s going forward…but just not good for the engine.
If you have a positive number when you subtract your expenses from your income, then great, you are a step in the right direction. What can you do to increase that number? Work harder? I say, absolutely not. Work smarter? ABSOLUTELY.
The best investment you have is located within the 6 inches between your ears…USE IT!
I will discuss more in detail as we go on, but until then…work smarter.

Reign in Your Personal Spending with Sensible Budgeting

aaron — Fri, 29 May 2009 13:00:31 +0000

Recently I’ve been getting up-in-arms and have my blood boiling listening to the out of control spending by our government (both Federal and State.) I believe that I have nailed down the problem. It boils down to the views on money. Depending on the type of home life you had, or school/college you designed, it all shaped your views on money.

I am not trying to offend anyone for their money beliefs or views. Some view money as the root of all evil, and others believe it’s a world of endless wealth. While the “root of all evil” happens to be the single most misquoted Bible verse, (the real one is “the LOVE of money is the root of all evil.” Essentially GREED, it’s a deep-seeded belief with many people, and those people have the mindset that they will always keep them poor. Yes, I said it, a negative money mindset will keep you poor. But a view that money is never-ending can also keep you poor. There has to be a basis of financial education.

Historically, Democrats for the last sixty years have represented the blue-collar worker. The Republican party represented businesses and white-collar workers. That being said, when a low-income worker needs more money there are usually three courses of action a blue-collar worker will choose:

Take out a loan
Work more hours/Ask for more money
Get a second job

The problem is, a loan will allow him to spend money he doesn’t have (are you seeing the pattern from Washington?) Asking for more money could force his boss to give him a raise that might not be big enough to suffice and cause disloyalty between the boss and worker…which could end in no job at all. Working more hours could do the same, in these times, employers are cracking down on overtime, if the boss comes down on the employee and doesn’t allow any o/t, again, disloyalty and resentment. So working harder is the blue-collar way to increase income.

When a business (or executive manager of a business) needs to increase income there are tiers they go through. Some are hard decisions but need to be made. Now while the business example might not fit with you, but you’ll get the idea. The steps to increase income are:

Reduce Office Expenses (i.e. supplies, unnecessary amenities, etc.)
Raise prices
Layoff employees

The biggest option you should incorporate is the reduce expenses. Do you have the premium digital cable package? If so, do you watch all those channels? When’s the last time you watched a movie on HBO or Showtime? See if you can reduce it without bumping out of a bundle deal. If it is cheaper to keep it for two or three more months, move on to something else? Have a media bundle with your cell phone? How often do you use it? Just sit down with everything and look at ways to reduce expenses. How often do you eat out? A family of four can cost over $100 depending on where you go. If you eat out twice a week, every week, that’s over $10,000 per year! Do you smoke? Not only would you get a discount on your health and life insurances, at a national average of $7.00 per pack, and if you’re a pack a day smoker that’s $2,555 per year…that you BURN! And that doesn’t even include any applicable sales taxes.

Sit down as a family, if the kids are old enough, and come up with an agreement. Make 1 night a week the eat out night, and stick to it. Also, a suggestion for out-of-control spending within your household, come up with a good number $50-$100 per month that will be used on “wants.” And take turns each month on who gets to buy their want. Not only will this help reign in spending, it will also teach your children about self-control where money is concerned. For example, my son wants to go to the Aquarium, I want a new iPod, and my wife wants a new microwave. While $50 per month won’t buy one alone, each month the money rotates into someone’s pocket, our son is saving for a trip to the Aquarium of the Americas in New Orleans, LA, my wife is saving for a microwave and I have to decide if I want an iPhone or an iPod nano.

Be creative and you’ll never realize how much you CAN live without.

Second Mortgage Tips and Tricks

aaron — Thu, 28 May 2009 13:07:54 +0000

Second mortgages can be enticing because you can get a large sum of money. However, there are some common bank tricks you should be aware of. Take a quick look over these second mortgage quick-tips. You will be in a better position to negotiate the best second mortgage.

Watching these hidden items and factors will help your second mortgage:

The APR. Don’t take the rate you see. Contact at least one bank, one credit union, and one dedicated mortgage lender about your Second mortgage.
Try to avoid default penalties. These are applied when you miss a payment or are late. We all think it won’t happen to us, but a clerical error can become very costly. The interest rate on your second mortgage could increase dramatically.
If things change, you don’t want to pay a hefty prepayment penalty to get your second mortgage off the books. Flexibility is important, so avoid locking yourself in.
Beware of second mortgages that are bundled in with voluntary insurance policies. While this coverage may be useful, you may or may not need it bundled into your second mortgage. Furthermore, you may already have adequate coverage outside of the mortgage.
Know about any balloon payments in the deal. Some second mortgages start with low, easy-to-afford payments (at the cost of a huge payment at the end). Read the contract carefully to see if this is why a particular second mortgage is so attractive.

Now, before you apply for a second mortgage, prepare for and budget for the costs. In addition to committing to a monthly payment, you might have some up-front costs to get your second mortgage processed.

Appraisal fees for your second mortgage
Points
Application costs for the Second mortgage, which may not be refundable if you’re declined!
Other closing costs. For example, they may do a title search for your second mortgage, along with other processes. Just ask for a printed list of these miscellaneous fees.

As with anything, sometimes you get what you pay for. I recommend using a reputable lender that you can trust for your Second mortgage, and one who will simply disclose all the costs. If you find a deal that sounds too good to be true, you’re probably missing something in the fine print.