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Hypothetical Zero Down Deals – Part 3 of 6
Hypothetical zero down structure part No. 3. This is where we’re actually going to get into a specific deal rather than just talking about the structures, which is what we did in the first two videos. So, give you a better idea of exactly what to do with these structures as you’re using them as you’re talking to sellers. I hope you like it. Click the subscribe button, click the like button, enjoy the video.
[Joe] Well, let’s start with this deal. What I’d like you to do is start looking at the information on the left hand side. This is going to be the hypothetical deal and on the right hand side we want to look at it and say can we do it with each of these zero down structures? So, on this particular deal can we do this one subject to? So, the asking price is $128K, the value of this property is $210K. It needs $30K worth of work and it’s free and clear. They don’t have a mortgage on it, and it has potential rental income, after it’s been fixed up, of $2,000 a month.
Could we do this as a subject to deal?
[Ayesha] No. There’s no mortgage.
[Joe] So, no mortgage, right? Okay. So that makes sense. So. Could we do this as a multi-mortgage?
[Esther] I don’t think so.
[Joe] You can do a variation on a multi-mortgage. You could do a variation on a multi-mortgage. You could have them deed you the property and then take out a mortgage that you make payments to them. Instead of doing a land contract it would be a mortgage with you having the deed. And it would give you more control. So, if they were willing to sell this for $128K, and take a mortgage on this property and deed you the property, then you could make payments to them over time.
And ideally you’d make payments that are zero interest. So you just figure out $128K over, you know – the way I would do it is figure out what payment I could make and then I would back in to this number. I know that I can make payments on $128K, if I know I’m going to get $2,000 a month of income what I would do is subtract the taxes, so let’s say taxes are $300 a month. So, $2,000 – $300 in taxes, and let’s say my insurance is $100 a month. So I subtract that. And that leaves me with $1,600 a month. And then I want to have cash flow. So, on this particular deal I’d like to get $200 or $300 a month positive cash flow, so let’s say I want $300 positive cash flow.
So I subtract that from the $1,600 and that brings me down to $1,300 a month is the payment that I could make on this property. So I take that $1,300 a month and take $128K and I divide it by 1,300 and that gives me 98 months. I divide that by 12 and that gives me 8.2 years. So, this would be an 8-year mortgage that I’d be making payments of $1,300 a month on. All of that would be going toward principal. It would be such a sweet deal. This would be such a sweet deal, especially if you’re getting it with that much equity in the property to be built in right away. This would be a really nice one.
So, you’ve got the $300 a month positive cash flow, you’ve got your taxes and insurance being paid for, you’ve got $1,300 a month going to the seller paying off that mortgage in 8 years. So you have a really nice, you know, portfolio property. Now, you’re going to have to go in there and do $30K of work. You’ve got to find that money. So that means it’s going to have to come out of your pocket or you’re going to have to borrow it. Or you’re going to have to come up with it somehow in order to do that work.
But once you do that you’re going to have a property that’s worth $210K. So you’re building $70K worth of equity into it for $30K of your pocket, plus you’re buying this property down. You’re going to have it paid off in 8 years and you’re going to get your income back as well because if you’ve got $30K into it, you’re getting $300 a month positive income, that’s 100 months, so you’re going to be getting – it’s going to be paying off the $30K that you put into it in about that same period of time as well.
[Bill] So don’t confuse this, because this is, what he just said is incredibly, incredibly awesome. So you have two profits. You have your equity buy-down at the $1,300 a month plus your cash flow. So, if you, say your cash flow’s – I don’t remember the number – but say it’s $300, you’re really making $1,600 a month off this property because you’re got $1,300 in equity and $300 in cash flow.
[Joe] That’s on top of the $70K worth of equity that you bought into the property.
[Bill] Right. So every month you’re adding – that $1,300 payment is profit to you. It’s just in equity. You get $300 as cash flow. So don’t be greedy and try to get too much cash flow and too much equity. Just kind of balance it out a little bit like he just did.
[Joe] But you’re not pulling this off unless you have $30K to fix up the property, you know, unless you do something a little different. The other option you could do is you could take this property with this type of mortgage and turn around and sell it on a land contract. And let’s say you give whoever you’re buying on a land contract, sell it to them for $190K and let them do the work. Or sell it to them for full price, which you probably could do it if it’s an end user and let them do the work, depending on what’s wrong with the property. And then they could – the problem is, it makes you a slum lord if they don’t do the work.
[Bill] So, there’s two ways that you’ve got to look at this, Joe. I think maybe we’re getting too deep into the weeds, but you could just assign the contract that you already have with your seller, so that means your buyer sees everything you paid and they’re just paying you a fee. But if you have a big spread, you can buy on a land contract, right Joe, and then sell on a land contract, a separate land contract, right?
[Joe] Oh, I was suggesting buying on a – get the deed. Buy it with a mortgage.
[Bill] I got it. I got it.
[Joe] Mortgage from that seller. And then sell it on a land contract to a new buyer. Because it’s still in bad condition. And the buyer that buys it from you, they’re going to pay interest, they’re going to, you know, they’re going to be paying that $2,000 a month or more. Plus they’re going to come up with a down payment.
[Bill] So we’ll do this role play later. The best way in the world to find subject to deals is with one sentence – you should write this down – because this one sentence will find you a lot of subject to deals. And all I ask is would you be willing to sell the house for what you owe on it? Now, obviously if they owe $30K on a $300K house, you may not want to ask that question. But, just ask, would you be willing to sell the house for what you owe on it? If they say yes, you just got yourself a subject to deal and go, baby, go.
If not, you can say to them, okay, let’s go to plan B. And then you start talking about these other choices.
[Joe] Actually, this scenario is, the property that – our problem child property that Daniel and I have, we bought at an auction for $128K. And it was worth – it’s on the market right now for $210K. We put about $30K worth of work into it. So, our profit in it is not going to be amazing and we’re also using a realtor to sell it. So, our goal is to sort of break even and get out of it. We’ve sold it three times now, or two times? Three times. Three times we sold it and it’s fallen through. And it keeps falling through because of inspection issues and some other –
[Bill] It fell through as a lease option or it fell through as a cash sale?
[Joe] Cash sale. Using a realtor. Using a realtor. And lease options, they don’t fall through. We don’t even close until we have the money. But it keeps falling through as a realtor sale because of some inspection problems that we had in the crawl space, which I think we’ve resolved now.
[Daniel] I sure hope so. We’ve put a lot of extra work into it and, yeah. I think it’ll be fine. And we just put a bunch of appliances in it so, I expect that we’re going to get an offer tomorrow. That’d be great. It’s being shown tomorrow to somebody that wants to buy it in cash without a bank, or something, where they’ve got – I don’t know.
[Joe] Every time we put it on the market we sold it within just a week or two. Because it’s one of those places that there’s not very many houses available. It’s a ranch. It’s big. It’s, you know, it’s pretty, it’s, you know, for the neighborhood it’s a luxury house. So it moves quickly. So we think we’ll sell it again. We just don’t want to run into the same problems that we fell into the last two times. So we’ve had the guys over there working their butts off trying to get it into shape.
[Bill] Joe, you’ve to Umberto and Esther with their hands up.
[Umberto] Yeah, if I can ask, just – how difficult is it for these people to give you zero interest? I mean, personally I have to pay interest on everything. If you ask me to give you zero interest I’m like, you’re crazy – what? Why should I give you zero interest?
[Daniel] You don’t ask them. You do the math, you show it to them, what they’re going to get, and that’s it. And actually, I had one guy, oh, my gosh, that one in Glendale, he told me, he was like, oh, well, you know, I’d take $150 a month, you know, if you’d just take it over. So, we got it for $15,000. $150 a month. And then we put like, $30K into it because it was in terrible shape. And then we sold it for, what, $89K or something? Like, yeah. It did really good. I remember the lady bought – she says, oh, the bank ran out of hundreds, and she brought me like, $10,000 in $20s. It took like 30 minutes to count it. I was like, oh, my God, why didn’t you just get a cashier’s check?
And she was like, oh, well, I was in a hurry and, I don’t know – it was fine. She was nice. And then her daughter bought another house from us. So, you know, it’s worked out.
[Joe] And you don’t really need to say zero interest. You say I’m going to make payments to you over 8 years, you know, it’s – 100 payments over 8 years of this amount of money. Is that what you’re –
[Daniel] Exactly. Do the math for them and then they just see the bottom line and they’re like, okay, yeah. That’d be great.
[Bill] Umberto, you’re taking it out of context. Because if you did a good job and explain to them that you’re saving them thousands and thousands of dollars in closing costs they’re going to realize that they should do it your way.
[Joe] They’re also going to save money on taxes. They don’t have the capital gains all at once.
[Bill] And if they collect interest they have to pay income tax on the interest they collect from you.
[Daniel] Which only complicates it, yeah. They have to pay more for their accountant to do it, too.
[Joe] It’s better to pay taxes on money you make, than not have money that you make.
[Daniel] I don’t know, if you can tell people that you’re not going to pay as much taxes, then they’re like, oh, that’d be great. They don’t realize oh, that’s because I’m not getting as much money?
[Bill] So usually this is like the furniture store that says they’ll give you 60 months interest free. Instead of paying $1,000 for the couch you’re paying $1,600 for the couch. It’s the same principle. So they’re making more money by doing this with you, so they shouldn’t split hairs on the interest. And if you explain it correctly it’s not a problem. I say I can give you principal only payments, or like, Joe says, here’s how much the payments are. Because if you don’t explain it to them, and you got to pay for it, you’ll have to explain it to them then. So just make sure before you go to pay for it they understand.
[Umberto] Right. Thank you.
[Bill] And, oh, yeah, by the way, Joe, I’m not going to do this. I think you should do this. Just because Umberto won’t take no interest loans, does that mean that he should not ask? Just because Umberto wouldn’t do subject to, does that mean he shouldn’t ask?
[Joe] Yeah. You’ll never, ever sell a property subject to. You would never do that. That’s insane to do that. It’s insane because you’re the most ethical person in the room. And somebody else could screw you. Whereas if you take it subject to, you know you’re going to watch out for that person and you’re going to protect them. That’s why it makes sense for us to do it and not them.