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Hey, it's Joe Crump. This next comment/question is from Anthony Jones. Anthony says,
"I'm having trouble getting started with my low credit scores and my lack of money. Everything
is, 'Join this, join that'. I don't have any money to join anything right now, let alone
know what to join. I'm thinking that it might be best if I were to concentrate on interest
only mortgages on rental homes. That way I can build my reputation while I learn more
about other methods while I earn 'join money'. I already have one rental home. It doesn't
make me money but it's my first. I'd like most of my business to be based on rental
properties, but first I need to clear my credit." Well, Anthony, don't worry about clearing
your credit; that's not important. What you need to worry about is putting deals together.
If you put deals together, you're going to make money, and if you put deals together
the way I'm teaching without credit and without down payment, you're going to be a lot better
off. Let me just give you an example of a zero
down structure so that you can kind of understand what I'm talking about here.
"Subject-To": this is a pretty easy structure to understand. Let's say I'm going to take
the property subject to the existing loan, and what this means is, let's say we've got
a property, and I'm going to use a value of $100,000 because it's a round figure, so let's
say I've got a property that's worth $100,000 and it's got a mortgage on it of $90,000 and
they have to pay $750 a month for this mortgage. If they go to a real estate agent and try
to sell that property, it's probably going to cost them money to sell that property,
because they're going to have to pay the real estate agent, they're going to have to come
down in their price, etc. At best, they're going to break even. At worst, they won't
ever sell it at that price. It also is going to take them a long time to move it, whereas
you can take that property almost immediately if not right then and there, depending on
your situation. What you can do for them is take that property
over subject to the existing loan. You're not going to give them any money. You're not
going to give them any of their equity. They don't have any equity. That $10,000 - there
isn't real equity because they would lose that in negotiating when selling that property
and paying a real estate agent to sell it. They also know that when you break that down
for them, and if they need to move that property quickly, they're going to be more motivated
to make this happen. What they're going to do is deed you the property.
You take the deed to the property. Now you're the owner of the property. You have to pay
off this loan, and this loan is not in your name and you didn't have to qualify for the
loan. They're still on the hook for the loan. If you don't make the payments on it, their
credits going to be damaged, so you're going to want to do the best you can for them, but
you're also going to make them aware of the fact of what you're doing, how you're doing
it, what their risks are. You give them the disclosures that I give
you in my safety net method program which is part of the push button method package
that I've got (that's at PushButtonMethod.com if you're interested). You make them aware
of what their risks are and most of the time, they're going to be willing to take that risk
if they have enough motivation to make that happen.
We do Subject-To's all the time. Getting the deed to the property makes you the absolute
owner of that property. You have a lien on that property by a bank that has to be paid
off (that $90,000) but if I went tomorrow and sold that property on a lease with an
option to buy to a new investor for $900 a month, and now I've got $150 a month in cash
flow, and in one year when the lease option is exercised, I'll make $20,000 for that property,
and, I'm going to charge them money up front for a lease option fee.
So let's look at this. If we sell it for $110,000, we charge them a $5,000 lease option fee.
Now they still owe me $105,000. They're going to make payments of $900 a month and I have
to make payments of $750 a month so I'm going to be making $150 a month on this property.
They are responsible for taking care of the property, any maintenance issues or any of
those types of things, which we'll write into the contract that the new buyer is responsible
for those things. So I've made $5,000 up front, I'm making $150
a month over the year period, I'm getting tax depreciation off of my income on that
property, so on that $90,000 purchase price, I'm able to deduct that, and you have to break
it down over 27.5 years, and then you have to deduct that amount, so $90,000 divided
by 27.5 and whatever that figure is, which is about $3,000 or $3,500 or somewhere in
that, which you can deduct from your taxable income.
So, if you made $10,000 that year, you can deduct that $3,500 from it and now you've
only made $6,500 that year in taxable income, which means in reality that if you're paying
in a 35% tax bracket, you're saving about $1,200-$1,500 for doing nothing, just by owning
that $100,000 worth of property, so you're getting a tax benefit and making 1000 bucks.
You're also going to make $15,000 when that person exercises the option. So then what
happens if they don't exercise the option? - then you can go out and sell it to another
lease option buyer and do the same thing over again and make another $5,000 and if the value
has appreciated since then, you can raise the price and you can sell it for even more.
Now why did I sell it for 110 when the value is only 100? It's because you're selling it
on terms and typically you can get an 8% to 10% premium, depending on the type of price.
The higher the price, the less premium you're going to get, but on this price range of property
you're going to get about 10% premium by selling that property on terms, so it's great all
the way around. So what's the worst case scenario on a deal
like this? Let's say that the buyer who buys that property from you walks away from the
deal, and you can't find another investor. That means you have to make these payments,
right? No - it means you have to decide whether or not you're going to make the payments.
If you make the payments, you're going to protect your seller, and you're trying to
protect your seller; you're trying to do your best by them, but you've also made them aware
that this might happen, and if it does, what's going to happen to them, that their credit's
going to be trashed and their property's going to go into foreclosure but it's not going
to damage you. But, you're going to try to protect them,
so you're going to try to go out and find another buyer for that property. That buyer
is going to give you another $5,000. So if it takes you 3-7 months to get that thing
rented, you're still not going to lose any money. Actually, having somebody default and
having to get rid of them and get another person in there with another lease option
fee is one of the best things that can happen to you. You don't want that to happen to the
buyers, but it's not a bad thing to happen to you financially.
So your risk is very low in a deal like this, and these are deals you can do all day long.
There's lots of them out there. So anyway, don't be discouraged by the fact that you
have bad credit or by the fact that you don't have money for down payments or you don't
have investors to work with. Do deals like this. Do the right type of marketing. Get
those people to come to you, and all you have to do is make the offer, and they'll accept
them. Good luck!