Friday, August 13, 2010

"When Cash Isn't King...Then What...!"

We've all heard the term "Cash Is King." And cash certainly open doors in most circumstances. A couple of questions...

What happens when a lot of players have cash? What advantage can we maintain here? Answer: Sometimes there is no obvious advantage and it's just a matter of who came first; who has the best relationship with the "gatekeepers", or perhaps who has the best "proof of funds", and finally, who has the lowest barriers to a closing.

Well, that's all fine and dandy, but once we've got the property, paid all cash, and buried all our equity into one egg (or two), then we're done investing for a while. Unless we can pull our cash back out, we're stuck waiting...and watching those with remaining cash buy up more deals. What to do? This is exactly the question my friend "Joe" [name changed for privacy] asks in the following actual post made in a forum I participated in dated 8/13/2010...

Quote - "Bob" :
"...most of my purchases were all-cash, many which I refinanced later, in order to buy more properties. You might logically think that paying all cash was a big advantage, but it really wasn't at that time. There were so many multiple investors with all cash bidding on the same property (ie.30 offers and 15 being all cash), that "all-cash" just got you in the door but didn't guarantee anything. And in addition, in order to have your offer get serious consideration, you had to waive termite expenses, waive all repairs, buy AS-IS, waive appraisal, etc., etc.

Now I am maxed out and cash poor, looking for loans that are almost impossible to get (keep getting turned down). Before, I was a sheep in wolf's clothing but now I will be forced to get creative to get into any more deals.
Now my friend Bob has to get creative, because all his cash is buried in a couple of deals. Just for giggles, let's imagine that Bob decided not to pay all cash, but do some creative financing at the get-go to make money.

Let's say that instead of paying cash, he found a seller who wanted out of his mortgage payment "yesterday" if you will, and Bob offered to take over his payment today, instead of waiting for a conventional buyer. Let's list some criteria for the creative deal...

  • the house was in the upper/middle price bracket of $500,000 (not some dump).
  • there is less than 10% equity remaining (>$50,000).
  • the seller needs out today, not in 30, 60 or 90 days which a conventional sale/escrow would require.
  • the payment was fixed for 30 years at 5% with no balloons due. ($2,415/mo)
  • the seller gave Joe his title in order to seal the deal and get relief from the debt.
So Joe gives the seller some moving money, takes title, and takes over the loan payments. Now what? How does Joe make money again, you ask.
  • Joe only gave the original seller $2,000 to move.
  • It cost about $200 to close and record the deed and another $300 to clean the house, mow the loan, and treat the pool for a total of $2,500 in overhead costs.
  • Joe advertises the house for sale with seller financing.
  • He asks for $525,000 with no qualifying, and a small down.
  • He finds a buyer with $25,000 for a down payment. This is less than 5% if the purchase price, but several times more than Joe gave to the seller.
  • Joe nets $22,500 in cash from the sale today.
  • Joe now waits for the buyer to refinance the loan and pay off his remaining equity $50,000.
So, again, how much money does Joe have tied up? Did I hear a "zero"? How much money does Joe have in his wallet now? Over $20,000? And how much money does Joe need to do another deal? Less than $3,000?

And who is giving Joe permission to make all this money so easily? Nobody, except Joe.

No banks are telling him "no".

Not even his wife is saying "no" to this deal. Hmmm.

How many deals can Joe do before he runs out of money? If you have an answer, you're the profit prophet of the millennium, because there are not limits --- except Joe's time, energy and desire.

This was called a typical "subject to" transaction.

P.S. If you would like to know how Joe will do this without burying his money in deals, click the following link:

"Make Money With No Credit or Down Payments Today!"

Scroll to the bottom of the page and click on the product image for a free video presentation.


Daniel said...

Hi J, Love your posts and outside the box thinking.
We have a few issues however:
1.Joe has to be able to make the monthly payment on this new purchase.
2.Owner has to agree to deal leaving equity on the table.
3.Joe has to find a buyer pronto who will "overpay" for the privilege of having bad credit or some other mess.And remember the house did not sell by traditional methods the first time around for less money.
4.If Joe finds a buyer---He, the buyer will most likely have bad credit, no job but cash and will NOT be able to Refi in this environment. Soooooo what happens to Joe?
5.Joe continues to make the monthly payments and hopes his buyer, who overpaid for the property for the privilege of buying with bad credit or no job or both, will continue making payments and somehow come up with the funds to pay Joe off.
I'm just sayin. Love ya J.

Jay Palmquist said...

Daniel, enough of these softballs!!! :D

1. Joe will already have a pool of buyers if he follows my directions... He'll find over 40 buyers with something less than $40k ready to spend (in less than six weeks time).

2. The seller doesn't think he's got any equity after Joe's finished "yellow padding" him. See my post on "yellow padding".

3. The house didn't sell for a number of reasons having nothing to do with anything except that the first agent was only charging $500 to list the house on the MLS and the other agent just wanted listing points, and open houses to sell other properties...and neither could reduce the price to compete with all the other "like-priced" homes and still get paid their commissions. The seller is in a HURRY, did I mention? He can't wait for full retail. And after trying to sell it himself for several weeks, and trying to keep the house spotless 24/7, his wife finally objects and says, "I'm not vacuuming these rugs one more time for any more looky-loos. If we don't sell this place immediately, you can find another "live-in" housekeeper, if you get my drift!"

Meanwhile, Joe's buyers don't care what his price is. They only care about the down payment and the payment he wants. This is a critical distinction from the conventional buyer you're thinking about. Joe caters to a completely different mindset than those who've got more options.

...continued next post...>>>

Jay Palmquist said...

<<<...continued from last post...

4. Having bad credit and being a "dead beat" are two different things. One has a solvable hiccup, the other just won't pay his bills...ever. Joe doesn't work with the latter buyers. Also, nobody gives Joe money that also has no way of making payments (on purpose). People just don't do that in our experience.

Buyers may lose their jobs after buying Joe's house and many will. In fact 30% of Joe's buyers bail for any number of reasons.

However, its a matter of reselling to another buyer and collecting yet another down payment. Meantime, Joe has a proprietary system of inducing "dead beat" wanna bees out of his houses that is 110% effective.

Meantime, again, 100% of Joe's buyers can/will get new loans in this environment once Joe helps his buyer demonstrate a verifiable, on-time, 12-month repayment history. This is the critical element of getting clients into their own loans. And of course, if the appraisal would fail for some reason...the buyer can make up the difference, move out, or wait...until the value comes in line. Either way, Joe is in good shape.

5. Dan, I love this one!!!

Joe isn't an idiot! Joe doesn't sell to dead-beats, or those with no jobs...

There are too many other prospects available with cash, jobs, and solvable credit issues to bother with deadbeats and dreamers.

To recap, we're dealing with nice homes here, not run-of-the-mill track houses. We're offering first class properties, with first class terms, to those who are likely to regain their first class credit ratings in the foreseeable future (because they want to).

These buyers are not thinking about "investing" in a home and understand that a their primary residences are liabilities to them. They are thinking about quality of life for their families, and about what they can afford today with the resources they have available.

They are not dreamers who think they can get something for nothing like "Frank & Dodd" mortgage suckers.

The current benefits of home ownership actually outweigh the future costs and so they give us money to buy a house they can afford with the income they currently enjoy; anticipating an improvement in their conventional credit profile so that they can eventually get better rates from a bank than they're getting from Joe, all while remaining in their beautiful home for many years to come.

So, Joe is selling nice homes to buyers with jobs, down payments and solvable credit issues, who understand that the price they're paying is the cost of doing business with one or more conventional obstacles to home ownership to hurdle.