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Hypothetical Zero Down Deals – Part 4 of 6
Hey, Joe Crump. Hypothetical Zero Down Structures. This is part 4 of a 6-part series where we actually, we’re going to start getting into the actual types of deals where we’re talking numbers on properties rather than just talking about the structures themselves. So, I hope you enjoy it. If you do, hit the subscribe button, hit the like button, and enjoy the class.
[Joe] Okay, so we talked about doing this one as a multi-mortgage. Could we do this as a land contract?
[Daniel] Oh, yeah. Yeah, that’d be great.
[Joe] Yeah, great land contract. Could we do this as an assignable cash deal? I missed lease option. Could we do this as a lease option? Could we do this as a For Rent deal?
[Daniel] Not with that much work. No. No.
[Joe] So what would you do instead of a For Rent, because – you understand why we can’t do it as a For Rent deal, right? Because it’s not habitable. Or at least it looks like it’s not habitable, with $30K worth of work. So, if it’s not habitable you can’t do the For Rent Method. But you can do a land contract. So if you do it as a land contract, you can do it essentially the same structure as a lease option, except you’re doing it as a land contract and people are going to you know, going to be buying the property.
[Daniel] Yeah, and with that situation you can either stay in the deal or get out of the deal. You can either set it up for the buyer to have a land contract with their people, or you can do a land contract with the people, and then turn around and do a land contract. So, you can stay in or get out.
[Joe] And the way you structure the land contract is going to be different whether you are the buyer or the seller. If you’re the seller of a land contract, the term of the land contract is probably going to have a balloon payment, usually three to five years. So, basically what a balloon payment is, is they make payments, you know, as though it’s a 30-year mortgage but on year 3, at the end of year 3 the entire loan becomes due and they have to go refinance it. And it cashes the seller out. It also gives you an opportunity to get rid of them if they’re not paying properly.
So a 3-year balloon payment is what you’d want to do if you were selling the property. If you’re buying the property you don’t want a balloon. Balloons, as for an investor, balloons are for clowns.
[Daniel] I was waiting for that.
[Joe] You do not do a balloon payment when you’re buying a property. Otherwise you run into something that Daniel and I are running into because we bought a property with a balloon. And it’s coming due in May. And we have to come up with this cash and that’s why we’re selling this house because we need to come up with a quarter of a million dollars.
[Daniel] Oh, but it was such a good deal.
[Joe] It was a good deal. So we’re clowns, but we’re happy clowns. You know, we also know where that money’s coming from. We know how that – if you don’t know where that balloon’s coming from, and I see investors do this all the time, they take a 3-year balloon and they don’t know where that money’s coming from. And they know they’ve got to sell that property to some other investor, and they put themselves at too much risk.
[Bill] Joe, let’s just be real for a second, because I’ve done this. So, this year, 2023, you buy let’s say four properties subject to and all four properties have a balloon mortgage on it. Let’s say that it’s, we’ll say that it’s two-year balloons, or five-year balloons. So what’s going to happen is, is in 2028 instead of buying new properties you’re going to have to raise the money for those – because they’re all in one year – in 2028 you’re going to have spend a lot of your time raising money to buy those balloons off instead of buying new properties. Just think about that.
[Joe] Yeah, and if you’d set it up properly in the first place, all you had to do was say to these people I’m just going to pay it off as soon as I can. When I buy a subject to I tell them, they say, well how soon are you going to pay it off? I’m going to pay it off as soon as I can. You know, it’ll depend on the market, how much it goes up, and how soon I get it sold.
[Daniel] As soon as it makes sense. I thought you always said as soon as it makes sense for me to do that.
[Joe] As soon as it makes sense financially for me to do it. And you know, it may take me until the end of the – I may just wait and pay it off over time. And I’ve had people come to me 15 years after I’ve bought a subject to from them and say when are you going to pay this off? And I say, you know, it just hasn’t made sense yet. I’m going to continue to make payments on it. They say, well, can you pay it off sooner? I say, you know, I can’t. That wasn’t our agreement and this is the payment that I’m going to keep making and, you know, by the way, I’ve made all my payments on time, haven’t I? I’ve done exactly what I promised I would do. And by the way, your credit is a lot better than it was when I took it over, isn’t it? They go, yeah, yes it is. And I don’t get complaints.
[Bill] Esther’s got her hand up.
[Esther] So, are you going to write in the contract I’ll pay it off when it makes more sense?
[Joe] It says that you’re talking it over subject to the existing loan. Which is not paid off until it’s paid off.
[Joe] There’s not balloon. The existing loan doesn’t have, you know – you don’t take over mortgages that have balloons. Which is what Daniel and I did with that storage place. We took over an existing – we bought it subject to, and it had a balloon on it.
[Daniel] Yeah, well, they kept re—they had like, a one-year line of credit and every year they have to re-up. So, I mean, yeah, but I mean, we knew what we were doing though whenever we got into it. We knew that ahead of time. And we know it was going to go off. So, don’t so it. Even if it’s a really good deal and you’re going to make a million dollars, don’t do it.
[Bill] He’s going to show you a subject to disclosure form later, I talked about it earlier. It will explain the subject to. You will be very comfortable with – even if you just took that disclosure and went over that step-by-step with the person on the phone, you would be –
[Esther] Okay. Great. Thank you, Bill – thank you Daniel.
[Daniel] Isn’t that on the Automarketer, too, the disclosure for the subject to stuff, somewhere?
[Joe] No. It’s on the member site on the contract zip file.
[Bill] It’s actually really cool. It’s what you should use as a script when you’re doing subject to, is go over each point with them because they’re going to have to sign it at the closing anyway, so might as well just get it out of the way and go over it with them.
[Joe] We created this because one of my students, she was out there buying properties. She bought 300 properties in a year. And she was buying them with a land contract. And I kept telling her get these subject to. Don’t do a land contract. You get them subject to because it gives you more control. Because she was – they all had mortgages on them. And she said, well, it’s so easy to explain a land contract because it’s all written down for them and makes it easy.
So I sat down and I wrote the contract, a subject to contract, that she could use and just had all the bullet points. So all she had to do was, you know, give them that disclosure and it worked it all out for them. That way it was easier for her to get the deed and she was able to switch over and do it that way. I mean, she bought so many subject to’s, and I ended up buying subject to’s from her. I gave her assignment fees on a bunch of properties that she bought. And that’s, they’re still in my portfolio. All right.
So, those are the – let’s see, lease option, we could have done that. On a lease option on this one, it’s pretty clear what you’d do, right? Anybody – what you would do on a lease option? You just do the For Rent Method, right?
[Daniel] Well, other than the work.
[Joe] Other than the work, right.
[Bill] Yeah, you couldn’t do this on a lease option.
[Joe] Right, right, right, right, right. We already talked about this. Brain’s going…
Okay. Assignable cash deal. Could you do assignable cash deal on this one?
[Daniel] Yes this is –
[Bill] We should probably let everybody else –
[Joe] Yeah, everybody would do this as a wholesale deal, right? That’s the norm. And that’s the one that makes you the least money. All these other things that we talked about make you more money than a wholesale deal. Somebody was asking me, should I be doing wholesale deals, the other day. And I said, well, yeah, you can do wholesale deals, but these other things make you more money and give you more opportunities.
[Bill] A good rule of thumb here is if you take this $128K and the $30K and add them up and divide them into the $210K it puts at 72% on the value ratio. That’s about what the wholesale is, 75% is the rule.
[Joe] So you add $5,000 to it, maybe $10,000. Yeah. And if they looked at this house a little bit closer they’d find out that it’s got more than $30K worth of work that needs to be done. So they may not want to pay that. But the likelihood is you can find a wholesaler to take over these properties because most people don’t know how to buy properties under market value.
[Bill] So, Joe, we should just touch upon that for one second, okay? So, if you did this on an assignable cash deal you would write a purchase and sales contract, right, we’ll say for 45 days or 60 days if they’ll let you do it. If you bring it to the market and a bunch of people are saying well, it needs $50K worth of work instead of $30K, doesn’t mean you can’t go back to your seller and say hey, I brought this house to the market and I’ve got this guy said that, and this guy said that, and this guy said that, and we really can’t pay that – the number, the real number’s $109K. I’ve got a couple guys I could talk to about that, would you consider that? I mean, there’s nothing that says you can’t do that. That’s not retrading or anything. That’s just, they didn’t tell you that the $30K worth of work was misestimated, right, whether you did it or they did it – it doesn’t matter. So, I mean, don’t go back and say to them I only want to pay $109K and they think you’re just trying to make a bigger fat deal.
Go back with details, like, this guy said that, that guy said this, this person said that. So, you know, it’s factual – it’s true, right?