6 Ways to Raise All the Cash You'll Ever Need for Doing Deals
by Richard Roop
Sometimes a seller requires some cash... for all or part of their equity. Don't
assume sellers know what the word "equity" means. I tell them "your equity is
the difference between what you owe and the price I pay you for the house."
Magic Words on the phone: "If I gave you part of your money now and most of it
later, would you be able to move, because I could offer you a higher price if
you can wait for some of your equity. Would you even consider that, if I could
pay you more for the house?"
Do you need cash for purchase deposits, or repairs, or holding costs? How about
cash to give the seller to sweeten the deal and get a bigger equity spread?
Here are a few ideas:
1. Use buyer's purchase deposit or down payment.
If you are following my advice and methods for buying houses, then you're
occupying your houses with either Tenant/buyers or Buyers.
TENANT/BUYER: Rents the house and has the right to buy the house at a preset
price. Most of my houses are occupied by tenant/buyers. They put at least 3%
down, non-refundable purchase deposit on a sales contract. I prefer 5% down. If
they don't have 5%, I get a promissory note and have them pay extra money each
month to build up to 5% as quickly as possible. If they have less than 3% then
they may be able to get into one of my "sweat equity fixer upper" houses. Their
down payment can be partial supplemented by doing required work to the house
before they move in. This is work I would normally hire a contractor to perform
so if I don't have to write a check to fix up the house, the money saved is less
cash I need from my tenant/buyer.
BUYER: Puts down 10-15% down and you close with owner financing, typically via a
wrap. Or the buyer gets a new loan cashing you out completely, or perhaps you
take part of your profit back in a second mortgage.
Every house I buy will be sold to a buyer or occupied by a tenant/buyer. Since I
cannot predict which it will be, I get into deals where it does not matter to me
either way. Most buyers calling on my ads do not have 10% down or the ability to
get a new loan now. It's much easier finding 3-5% down, so why not buy houses
where that will work for you?
Bottom Line: You should be collecting at least 3% down on every house you buy
once it's occupied. If you need cash to do a deal, you have 3% of your "resell"
price to commit for cash to seller, holding costs, closing costs, minor repairs
and maintenance.
2. Private money or hard money loans.
If you pay cash for a house you'll never offer more than 70% of the after
repaired value less the cost of any repairs. You can borrow 65-75% of the value
of a house from a "collateral" lender. The lender will charge you 11% to 16%
interest, and maybe 3 to 10 points. They should only be concerned with the value
of the property that secures their first mortgage. Many private lenders will
offer you interest only loans so all their investment is working for them,
getting them a nice return. If you borrow $75,000 on a $100,000 house, 12%
interest only payments are $750 a month. You should be able to get more than
that each month from your buyer in rental income or from a wraparound mortgage
payment. This formula does not work as well on expensive homes.
If the seller owes $50,000 on a $100,000 house, you can sometimes borrow another
$25,000 on a second mortgage. Take over the first mortgage "subject to" which
will have a better interest rate and no points. This saves you money and allows
you to pay more for the house. You can give part or all of the $25,000 to you
seller. If they have more equity coming to them, you can give them a 3rd
mortgage on this house or a 2nd mortgage on one of your other properties.
3. Deferred down payments.
Take over an existing loan with good terms. Any equity still due to seller can
be offered in the form of a deferred down payment. Basically, you will pay the
seller the balance of their equity (if any) in a single lump sum payment when
you resell or refinance the house down the road. Ideally, there will be no
monthly payments or interest. If the seller insists on interest or monthly
payments, get a lower price to make it worth wild. This is a "no money down"
method. The cash you need for this type of deal comes from your buyer's new
loan, normally 6-36 months in the future.
4. Substitution of collateral.
I am buying a house on Thursday for $153,000. It is worth $165,000-$170,000.
I'll soon advertise it for $179,500 with "flexible owner financing" and enjoy a
$26,500 equity spread.
The seller owes $18,000. He has agreed to take $63,000 in cash ($18,000 of which
will pay off his lien) and $90,000 in second mortgages on several other
properties I own. He wants 6% interest but doesn't need monthly income. So his
interest will accumulate for 5 years. 6% interest, no payments, 5-year balloon
on $90,000.
This allows me to tap into equity tied up in my other properties at a low rate,
and my seller is happy. He would have put his money in the bank at 1-3%. He is
waiting for his mutual funds to come back up so he can get out of them. Good
luck!
Here's the kicker. I am borrowing $130,000 from a "hard money lender" at 10.99%
and paying 8 points. I will net $120,000 in cash from that loan after costs.
That means I collect $57,000 in cash on Thursday when I buy!
In my audio training course I reveal how to get a guaranteed 35% return on any
extra cash you want to invest. That's what I will do with this extra money.
A couple of weeks ago I collected an extra $24,000 in cash using this same type
of method when my tenant/buyer closed on one of my houses.
5. Open an equity line of credit.
Raise cash by borrowing against equity you have in your personal residence or
other investment properties. You can also pledge a number of second mortgages
you hold as the collateral. Set it up as a line of credit. Use the money to do a
deal and pay it back immediately when you sell or occupy the property. You only
pay interest on that portion of the credit line you have tapped into.
Last month I setup a $100,000 credit line pledging $130,000 of equity I have
acquired through taking back installment land contracts, all-inclusive deeds of
trust and second mortgages.
Having this cash readily available allows me to make multiple offers to a
seller:
A. All cash for lowest price. My offer price is 70% (maximum) of after repaired
value less the estimated cost for repairs.
B. No cash for highest price. My offer is $30,000 less than my planned resell
price. The seller gets their equity in the form of a deferred down payment. I
take over existing debt "subject to."
C. Some cash. My offer is somewhere between Offer A and B. The seller gets debt
relief and some cash. The more cash, the lower the price.
Would you pay the seller 5% down if you could get an extra 10-15% off the price?
You have that opportunity if you have established lines of credit to tap into.
This could be a line of credit, a credit card or checking account overdraft
protection. Be careful of having too much cash laying around in an operating
account. You may be inclined to offer more cash on a deal than you need to, just
because you have it.
6. Sell off a house or real estate note for cash.
I have been sitting on one house since February. Ouch! I bought it for $160,000
and I have $10,000 of my money tied up in it, which is unusual. It was on the
market for $197,000. For one reason or another I just could not get it under
contract. That's a fair price and the home is in good shape.
I called a real estate agent I have used to buy listed "fixer upper bank owned
houses." I asked the agent to look at the house and tell me what he would market
it for if I wanted to dump it fast. He recommended $179,500. I gave him the
listing. Within a week I had a contract for $177,000. I decided to slash the
price to get this house out of my hair and recapture the money I have into it.
Plus I can focus on occupying my other, more marketable houses.
If you have cash or profits tied up in real estate or notes, one way to raise
cash is to take some aggressive, proactive steps to liquidate some of those
investments. Then put that money to work on better deals.
Bio:
Full-time investor Richard Roop has been called The Marketing Consultant for Real
Estate Entrepreneurs. He is the President of Bottom Line Results, Inc., a real
estate acquisition company located in Woodland Park, Colorado since 1996. As a
successful marketing consultant since 1984, Richard specializes in providing
innovative business and marketing advice to real estate entrepreneurs. He is the
author of the "How to Sell Your Home in 9 Days" book. Richard Roop's articles
have appeared in various entrepreneurial, real estate and marketing newsletters
across the nation.