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Hypothetical Zero Down Deals – Part 2 of 6
Hey, it’s Joe Crump. This is part 2 of the Hypothetical Zero Down Structures that I’m doing. It’s a class that we did with my mentor students where we got into some really great detail about how to structure and make offers on zero down deals. I hope you like it. If you like this video, make sure to subscribe, click the “like” button, I appreciate it. Thanks.
The second one is the multi-mortgage. It’s very similar to subject to, but it’s – if that person has equity that they want. Let’s say they have a $200K property and they have $120K mortgage. And they’re willing to sell it for $190K. But they don’t want to give away that $70K of equity that they’ve got in the deal. So, what you can do is a multi-mortgage.
They deed you the property and you take over the payments on their – what’d I say – $110K mortgage and then you have a second mortgage that’s made out to you as the borrower, as the lender, and then you make payments to them on the second mortgage. And that’s a multi-mortgage. So, you can give them their purchase price as long as the numbers make sense to you.
In some ways this can actually be better for you than a subject to because on the second mortgage you can make it a zero-interest loan, which means that every payment that you make goes 100% toward principal. You know, in this scenario that I just gave you on a $110K property, if you’ve got a first mortgage of $110K and you’re making payments on that, probably $800 or $900 of that is going toward interest on that loan, you know?
But on your multi-mortgage if you’ve got $70K there and you break that up where it’s, you know, $500 a month, that $500 – all of it – goes toward paying down that $70K. So that second mortgage pays off a lot faster. We’re talking about 8 to 10 years paying off instead of 30 years. So, in a third of the time that second mortgage will pay off and it’ll build your equity so much faster in a deal.
So taking it on a multi-mortgage, if they have equity like that, is not a bad thing at all if you can get zero-interest loans. Zero-interest loans are the absolute best thing that you can do in real estate. Zero interest is the difference between 10 years and 30 years.
[Bill] And by the way, when you say this is how I do it, that’s what triggers it. You say this is how I do it. I’ll give you $70K and I’m going to pay you this much per month. This is how I do it. You don’t give them much choice there because you need still the cash flow. You’re not asking them how much will you take, you tell them this is what I can do. This is how it works. And you just give them the program.
[Joe] So, that’s a multi-mortgage. It’s transferring the deed so you still have the deed, which means more control. When you have the deed you have more control than if you don’t have the deed. So you have the deed but you also have a second mortgage which your name is on that mortgage. So, you’re not qualified for it, there’s nobody checking your credit, but you’re making payments and your name is on it and if you don’t pay it they can come after you. What you’re going to do is set it up in a corporation, probably, an LLC. So that’s multi-mortgage. Does anybody have a question about multi-mortgage?
The next level in the hierarchy is a land contract or contract for deed, or – what’d you call it Bill? Bond for deed?
[Bill] Agreement for deed.
[Joe] Agreement for deed. Agreement for deed.
[Bill] Yeah, that’s like contract for deed. It’s just different ways of saying it.
[Joe] Right. And all that is is – and we talked about this earlier – it’s just a sheet of paper that says here’s the purchase price, here’s the payment, here’s the interest rate, here’s the term. And here’s what happens if they don’t make the payment. It does not transfer the deed until that agreement is met, until that agreement is paid off. And once it’s paid off then you transfer the deed. Then you have to have the seller transfer the deed. So, land contract is a nice way to do it, especially if they have the property free and clear.
So, we do this on little cheap properties. So if we have a property that – what’s the most recent one we did – Daniel – that we did a zero interest land contract?
[Daniel] I don’t’ know, we’ve done so many. You know, I mean, it was something like $300 a month.
[Joe] Right. So, like, a $25K property that we bought for $300 a month, principal only, you know, we’re making payments to the seller, principal only. So it’s going to pay off in 7, 8 years. And then on a property like that we’ll probably put $20K into the property on a fix up and then it’ll be worth $80K or $90K, typically. And we’ve done a bunch of those little properties like that.
And they pay off so quickly. And the cash flow is great and – but every dollar that’s being paid out on that mortgage is money in the bank because it all goes – a hundred percent goes towards the principal payment on that properly and pays it down over time. So, that’s one way to do it.
The other use of the land contract is if the property, if you find somebody, if you want to do a flip property instead of doing the For Rent Method, the property’s in terrible condition, you can just do it as a land contract because you can sell a land contract and you know, if you go in front of a judge and the furnace is out the judge isn’t going to go to the seller of the land contract and say you’ve got to go fix that furnace. Where they will do that if you’re a landlord.
[Bill] So, the best way to look at this land contract or agreement for deed or whatever you call it, is, so when you do a loan like subject to or multi-mortgage or owner financing, to get the loan you also get the deed. So you put the deed in your name and then you get a loan. And this land contract, you’re getting the loan without the deed. So that’s the best way to look at it. It’s like getting a loan, but you’re not getting the deed until you satisfy the loan. And that’s how they work. So you could put whatever you want in those agreements, like, the seller wants you to like, pay Thursday afternoon at 2:00, you can put that in there and it will work. They’re very flexible. Very flexible.
[Joe] The land contract is also the middle of the hierarchy. This is the point in the hierarchy where as a buyer or a seller it could still work. You know, as an investor I would still do a land contract. I won’t buy on a lease option. I’ll buy subject to, I’ll buy multi-mortgage, I’ll buy land contract, but I won’t buy lease option. And, you know, on zero down you don’t have assignable cash deal either, but, we buy those if we have to have cash to do those.
[Bill] Now, pay attention to what he’s saying. He will do a lease option and then wholesale it to somebody. That’s the For Rent Method, right? You actually do get the lease and the option, and he’s going to, like, not wholesale it, but he’s going to sell it to somebody else.
[Daniel] Assign it.
[Bill] Assign it. Yeah. He’s not staying in those deals. So, when he says buy he means keeping the properties in his portfolio, right?
[Joe] Right. And when I sell on a land contract, I don’t like selling my own properties, my own portfolio properties on a land contract because they eventually pay off. I don’t want them paying off. I want to have them forever. That’s why I do a lease option. Because they either pay them off, and, you know, move on, which happens rarely, or, they give them back to me and my value’s have gone up and I get to keep going. Also, with the land contract, if I’m selling on a land contract, I don’t get the depreciation. If I’m selling on a lease option, me as the seller, gets the depreciation on the property for my taxes from the IRS depreciation. So I get tax benefits by doing it that way.
[Bill] The main thing between the two of them, they’re very similar, I mean, they’re different documents, but, the land contract you’re getting principal reduction on your payments. The lease option you’re not. That’s the main difference between those two strategies. So a land contract you’re giving principal reduction, or getting principal reduction, a lease option you’re not. I mean, there’s other variance to it, but that’s the easiest way to think of it is when you want to give somebody, or you want to get principal reduction, use the land contract.
When you don’t, there’s no other way to do the deal, like, if you’re buying, if you’re signing a lease option and doing the For Rent Method, and you’re giving the payments to the seller, you’re not in the deal so you don’t care about getting principal reduction. You’re not staying in the deal, it doesn’t matter to you. The owner’s going to get it when you do a lease option. Because you’re not going get that principal reduction, so just pass it on to the seller and walk away. Get your money and walk away.
[Joe] So that’s the land contract. The next one is lease option, which is what we’ve been talking about all morning. That’s just where you lease the property and you have an option to buy within a certain period of time for a certain price. And typically in three years is what we do. Give them enough time to get their credit in shape so that they can actually exercise the option if they choose to. Although, people on average move every two to five years in this country. So, the likelihood that the house is going to be right for them in three years is very low. That’s one of the reasons why people don’t exercise their option. They go buy something else if they qualify.
And it’s also difficult sometimes for people to get their credit in shape or their income in shape so that they can actually buy the property. So you’re going to try to help them do that if they really want a lease option. Or at lease show them what they need to do to make it happen.
And then the last one is the assignable cash deal. And this is wholesaling. I think this is a better term for it, that’s why I call it assignable cash deal because it explains exactly what you’re doing. And these are zero down structure hierarchy strategies. So assignable cash deal, it doesn’t require any of your money, you just get a purchase agreement that says you’re allowed to buy it for a certain price and that purchase contract is assignable to a new buyer and then you can assign your right to buy for a fee or your profit and you take that profit from the deal.
So, let’s say you have an assignable cash deal for $50K and you turn around and sell it for $60K, and it’s worth $100K. So, you get paid $10K by the person who’s buying it who then comes in with $50K and pays off the seller.
[Bill] And those are mostly done with a purchase and sales contract.
[Bill] And the options tend to go longer with a purchase and sales contract. If I’m going to do anything longer than 45 days I use an option agreement. If I think I can do it within 45 days I use a purchase and sales agreement. It’s just preference.
[Joe] Each one of these structures has its own set of paperwork. And you’re going to use different paperwork for each one of them. Each one of them is going to have their own disclosure, and you want to make sure you use disclosures on all your deals. Make sure everybody understands what’s going on and signs that they understand. That way when they come back to you and say, hey, you didn’t tell me about this, you say, yeah, actually I did. It’s right here in this disclosure. You signed your initials next to it – see? Do you remember us talking about that? And then it shuts it up.
All right. So, this is the zero down structure hierarchy. If you understand this hierarchy, and by the way, the seller options document that I gave you, it’s in the contract zip file on the member site. It’s also on the Automarketer, it’s the document that I tell you that you need to record into your phone and listen to over and over again. It has a description of all these strategies because it’s really the options that you have for your sellers.
[Bill] Are you good now, Ayesha? Does it make more sense?
[Ayesha] Yeah, it’s perfect sense. Thank you, guys.
[Joe] Does anybody have any questions about these structures before we start getting into the hypothetical deals?
[Esther] Yeah, quick question. Where again is it in the Automarketer? Is it like, is it a menu or something, or — ?
[Joe] You know where the seller questionnaire is on each lead?
[Esther] I can find it.
[Joe] Okay, each lead has a seller questionnaire, or each property has a seller questionnaire. And in that there’s [a place] where you can click on that says seller options. And it’ll open up a window with all the seller options in it. It’s also in the Power Dialer. There’s a script section in the Power Dialer once you open up the Power Dialer, and it’s there. And it’s also in the member site on the contract zip file. You can download it. It’s just a Word document and you can print it out.
[Esther] Okay. Thank you.
[Bill] Esther, he’s going to go over the Automarketer tomorrow, so if you remember that question, he’ll show you.
[Esther] Okay, thank you.