Hypothetical Zero Down Deals – Part 5 of 6


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Hypothetical Zero Down Deals – Part 5 of 6

Hypothetical Zero Down Deals.  This is part 5 of a 6-part series.  And we explore different types of deals that you can do using the zero down structure hierarchy that I teach to my mentor students.  This was done in a classroom, Zoom classroom, with my group.  And we went into great detail about how to put these types of deals together and all the different ways that you can do it.  I hope you enjoy it.  If you like this video don’t forget to subscribe and click the like button.  I’d appreciate it.

[Joe]     You recognize this stuff, so we’re going to be looking at subject to, multi-mortgage, land contract, lease option, assignable cash deals.  And we want to look at this particular arrangement, this hypothetical deal, and decide, you know, if we can do these deals in these ways.  So, if we’re looking at this particular deal with the asking price of $25K, it needs – it’s in poor condition, needs a lot of repairs, $25K worth of repair.  But after repair it’s going to be worth $85K.  It doesn’t have any mortgage on it right now and it has potential rental income of $800 a month.

Can we do a subject to on a property like this?

[Daniel]     No.

[Joe]     That’s correct.

[Esther]     There’s no mortgage.

[Joe]     No mortgage.  Okay, so, good, so, can’t do a subject to on it.  Could we do a multi-mortgage or a variation of multi-mortgage on this?

[Bill]     No.

[Joe]     Could we get them to give us the deed?

[Valerie]     Yeah, they can.  They don’t owe anything, so you own it outright.

[Joe]     Yeah. So, if they gave us the deed on the property, and then a mortgage on that property, let’s say we pay them, we’re the borrower, they’re the lender, and we make payments to them on this $25K.  So that would technically be a multi-mortgage even though it’s a single mortgage.  There’s no existing mortgage on it.  But it’s still transferring the deed and us paying for the equity with a mortgage.

[Jerry]     You’re creating a mortgage, right?

[Joe]     Exactly.  Creating a new mortgage between us, the buyer, and the seller.  And we’ll owe the seller.  We’re not qualifying for this mortgage, we’re not getting a loan from a bank.  All we’re doing is creating this mortgage and making payments to them.  And, we’re going to try to make the payments without interest.

[Valerie]     Making payments for what they owe?

[Joe]     They don’t owe anything.  They want $25K for the property.

[Valerie]     Oh, okay, so if we pay them such-and-such money per month until we pay out the $25K.

[Joe]     Right.  So how would we determine how much money to pay them per month?

[Esther]     The lease?  How long it’s going to be, and then how many years, right?

[Joe]     Well, you’ve got to back in to it.  We’re going to set the price, because we’re making the rules on the loan, right?

[Esther]     Yeah.

[Joe]     It’s not like we’re going to a bank and they’re making the rules.  We’re making the rules because we’re making an offer.  So, we’re going to back in to the price based on this $800 a month.  So, let’s say we’ve got $800 a month of income on this property, that’s what we think we’re going to be able to get on it once the work is done.  We also know that it’s got $50 a month taxes and $50 a month of insurance.  So $100 a month on that.  So, that leaves us with $700.

And we want to make sure we have positive cash flow.  So, $200 a month positive cash flow.  That means theoretically we could pay them $500 a month toward this $25K.  See how I backed into that and still left myself cash flow, taxes and insurance?

[xx]     And now is that where you land on the – or do you even go a little bit lower?

[Joe]     Well, we try to go lower, but I mean, with Daniel on a property like this we’d get it for $200 a month.  But I’m saying what’s the maximum that we could pay if we wanted to and still make it worthwhile?  We want to build in enough profit to make it worthwhile in this deal.

[Esther]     So the first $50 represents, from the $800, was what? Taxes or something?

[Valerie]     Taxes and insurance.

[Joe]     Yes.  Taxes — $50 for taxes, $50 for insurance and then $200 for cash flow.  So $300.

[Valerie]     So who does the cash flow go to?

[Joe]     You.

[Valerie]     Okay, and then the $500 is what we pay?

[Joe]     And it probably won’t be $200 in cash flow.  It’ll probably, I mean, taxes will go up, you know, repairs will be needed.  Vacancies will happen.  Property management costs will happen.  So, what I’m doing is building in a cushion so that you can get, at least, to break even and you won’t have to be negative cash flow on this property.  So, you’ve got $500, the way you would figure that is you take that $25K and you divide it by 500 and that gives you 50 months, so we divide that by 12, that’s a little over 4 years, 4.2 years.  And that’s – so 50 payments of $500 is what we’d be offering them.  And that would –

[Bill]     Pay the max, right?

[Joe]     That would be the maximum that you’d want to offer them.  It depends, because this property has some equity in it, right?  This property looks like it’s going to be worth $85K but it also needs a lot of repairs.  So you’re going to have to come up with $25K to fix it up.  Or you’re going to have to sell it on a land contract.  If you come up with the $25K that’s your best case scenario because now you’re going to get, you know, the $500 goes towards your $25K every month.  Your taxes and insurance, $200 goes towards the other $25K, so it’s going to take, you know, closer to 7 or 8 years to get your $25K back unless you sell this property and cash out of it.

So it’ll take longer because you have to get your investment money back.  But it’s still going to be a good deal for you.  It’s going to be a really sweet deal because all that money is going toward your principal every month and you’re going to be buying that down every month.  And as soon as that, you know, that 50 months goes by, then the rest of that $25K is going to be paid off pretty quickly.  You’re already going to pay down half of that by that period of time and then the other half will be paid off within probably a year, year-and-a-half.  So, within 5 years this whole thing is paid for and you have an $85K asset that’s bringing you in $800 a month and essentially $700 a month cash flow.  So that’s a really nice return on your money.

Now, let’s say you don’t have the $25K to do the rehab.  What can you do with this particular deal?  You’ve still got the deal, you’ve got the $500 a month going out, you’ve got a property that’s in bad condition that needs $25K worth of repair and somebody wants to buy it from you.  How would you sell it?

[Valerie]     An assignable cash deal?  Wholesale?

[Joe]     You could wholesale it.  But you’re leaving a lot of money on the table by doing that because you’ve got this interest free loan, you know, and you’ve got cash flow.  So there’s a better way.

[Jerry]     The land contract?

[Joe]     Because you just assigned this for five grand, you could probably get five grand out of it and get in and out of it and you’re done.  But since you structured this monthly payment it makes it even more valuable.  Because whoever takes it over is going to do well.  So – who said land contract?

[Jerry]     I did.

[Joe]     Okay.  That’s the answer.  So how would you structure a land contract on this, Jerry?

[Jerry]     Well, I don’t know for sure, but I’m thinking that you would create – I don’t know if you can do this, but you create a new mortgage for the $25K that you need to do the repair and have that in a mortgage –

[Joe]     There’s a difference between a mortgage and land contract.  There’s a difference between a mortgage and land contract.  You don’t do mortgages on land contracts.

[Jerry]     I don’t know how I would do that, then.

[Joe]     A mortgage liens against a deed.  So, a mortgage is – if you’re doing that multi-mortgage plan that we talked about it, where they transfer the deed and you’re the one taking the mortgage out.  Because you’re going to be making payments on that mortgage.  But now that you have the deed, you can sell it on a land contract.  So you’re owning this property with a $25K mortgage that’s paying off at $500 a month and you’re going to sell it on a land contract.  So the question is, how much can you sell it for on a land contract?  How much do you think you can get for this property that’s worth $85K after you put $25K into it?

[Jerry]     After you put $25K in it?  You can get $85K –

[Joe]     And I’m assuming you’re not putting that money into it.  You’re selling it “as is.”

[Jerry]     Okay.  Then – so it’s $60K.

[Valerie]     You sell $90K to get $5,000?

[Joe]     So, if you sell it for – I think that’s the right answer, Jerry.  I mean there’s lot’s – it depends on what the buyer is willing to do.

[Jerry]     Yeah.

[Joe]     But I think $60K is a fair price because basically you’re selling it for full market value at $60K.  And the $25K they have to come up with they’ll have to come up with, and then their value will come up to $85K.  And that’s not unusual when you’re selling it on terms.  It’s probably not going to sell to an investor that way.  It’s probably going to sell to an end user who wants to live there and fix it up and move into it.  And they might be looking at it saying I’m going to do the work on this property.  Which means instead of $25K worth of repairs, they only need $12K worth of repairs because they’re going to do all the labor.

So they’re putting in the sweat equity of the property and they’re seeing, okay, if I put $12K in it over the next few years, I can buy this property.

[Valerie]     So the land contract is the market value?

[Joe]     The land contract – yeah – we’re going to try to sell it for it’s full value minus the cost to repair it.

[Valerie]     So it’s an $85K after repair?

[Joe]     After repair.  So, if you subtract that $25K it takes to repair it, that puts it at $60K.  And you might be able to get more for it.

[Valerie]     Wouldn’t you say like, $65K, so you get $5,000?

[Joe]     Maybe.  Maybe you could get the $85K for it.  It kind of depends on the situation and market, on what’s actually wrong with the property, on how much it’s actually going to cost to repair it.  So, there’s a lot of variables there that you can just try your luck and see if you can find a buyer.  If you can find a buyer at $85K for that property and it needs $25K and you’re transparent with the buyer, say, look, I think it’s going to cost $25K to do that, and he says I’m okay with that, because I can buy a house for myself and I can fix it up the way I want it to be fixed up.  And I might be able to get my materials really cheap.  They might fall off the truck somewhere…I’m going to do all the work myself.  So they might be able to do it much cheaper than that $25K because they have the skills to do it.

[Valerie]     So why do they call it a land contract when there’s a house on there?

[Joe]     We’re selling it on a land contract because we’re not going to give them the deed.  We’re buying it – we have the deed.

[Valerie]     So then you’re going to charge – what’s that thing called – something rent?

[Joe]     Land contract.  They’re going to buy it from us on a land contract even though we bought it, we got the deed through a multi-mortgage and we got a mortgage on there that we’re making payments on.

[Valerie]     So you hold the mortgage and the house and the deed and they take the land?

[Joe]     We have a mortgage.  We’re paying a mortgage.  So we’re not holding a mortgage.  What we’re doing is selling it on a land contract.  That’s not a mortgage.  All that is is an agreement between us and the new buyer to buy it at a specific price, for a specific monthly payment over a certain period of time.

[Valerie]     So land doesn’t mean – land contract doesn’t mean just land.

[Joe]     No.  Correct.  There’s other names for land contract.  Land contract, contract for deed, agreement for deed is what Bill was calling it.  So depending on what state you’re in.  If you’re in a mortgage state it’s called a land contract.  If you’re in a trust deed state like Illinois, then it’s called a contract for deed.  California is a trust deed state, so it’s contract for deed in California.  Indiana’s a mortgage state so it’s a land contract here.

[Valerie]     That makes more sense when you say contract for deed.

[Joe]     I think what Bill was calling it was agreement for deed, is that what he was calling it?  Yeah.  So, that’s actually – there’s clarity in that term.  So it’s just basically, I’m agreeing to, a certain agreement, as soon as I pay it off that’s when the deed is transferred.  So we’ll transfer the deed to them as soon as that’s paid off.

[Valerie]     Can we recap that just briefly, because I’m still kind of not understanding how that’s passing.

[Joe]     There’s multiple parts to this deal.  There’s the purchase part of it, and then there’s the sale part of it.  Because your purchase determines how you can sell it.  How you buy determines the options you have when you try to sell.  So you want to make sure you understand what your exit strategy’s going to be whenever you buy a property.  If you don’t know your exit strategy, then you’re screwing it up.  So make sure you understand that.

The purchase strategy here, the purchase strategy is to buy it for $25K and have the seller sell it to us and deed us the property and put a new mortgage on the property that we make payments on of $500 a month; principal only.  And so we make those payments until it’s paid off.  That’s our purchase.  And that’s separate from our sale.

Now, the sale is a different transactional altogether.  That’s between us and the new buyer.  And they’re going to buy it from us, let’s say, on a land contract for, let’s say $60K.  We might be able to get more we might be able to get less.  Let’s say $60K we’re able to get on it.  So when we sell it on $60K, we want to make sure we get $800 a month income on it.  So we have to figure out what the numbers are going to be to get us to $800 a month.  And preferable maybe even more than.  But let’s say it’s $800 a month.

If we get $800 a month from this buyer, we’re going to look at what does it take to get $800 a month?  What is the math that we have to do in order to get $800 a month?  And it’s going to be based on a 30-year mortgage and we have to figure out, okay, with a 30-year mortgage on $60K what does the interest rate have to be in order to get there?

So I’ll play around with that number a little bit.  Let’s say we’re at 9% interest on $60K on a 30-year mortgage the payment would be $479.  Not enough.  So I need to figure out a way to get that – I’ll have to make that interest rate higher in order to make that happen.  So, let’s say I do a 30-year mortgage with 12% interest at $60K.

And that’s going to be $611.  Now we’re getting a lot closer.  Because we’ve got $100 in taxes and insurance.  So might even go to $14%.  So let’s go with 30 years on 14% interest at $60K.  That puts us at $700 which is about where I want to be.  So I’m going to have to go with 14% interest on this land contract with a 30-year amortized loan and they’re going to pay me $700 plus they’re going to pay the taxes and insurance which is going to be another hundred dollars.  So they’re going to be about $800 a month.  And I’m going to ask them to pay me the taxes and insurance directly because I want to make sure that it gets paid.  I don’t want it to go late, so I’m going to have them pay that directly to me.

So they’re $800 a month comes to me and the reason I did it with interest rate, every $800 they give me, I make $500 of positive cash flow because that $500 goes toward my loan.  I also make the $200 a month positive cash flow, so I’m making $700 a month positive cash flow on this property even though I didn’t put any money into at all.  And they’re paying me market rent for this property and doing their own fix up so I don’t have to be responsible for the condition of their property.

And their mortgage is not dropping very quickly.  It’s going to drop over 30 years.  So over the first – if we do a 5-year balloon payment on this, which we would always do a balloon payment on a land contract, so we do a 5-year balloon payment they have to pay us the balance or refinance it within 5 years.  So they’d refinance it and pay off what they owe us, the balance of that $60K which most of it they’d still owe.  So they probably owe $55K.  But within that period of time also we have paid off our mortgage. So we’re going to have all the money that we made in cash flow plus we’re going to make the sale price of the property.

This would be a really nice deal for us.  And it wouldn’t be terrible for the buyer, either.  It wouldn’t be bad for the seller because it gets you out of a property that you can’t sell.  It’s not bad for the buyer because it gets into a property that they couldn’t have bought otherwise because he doesn’t have the credit to do it.  And he doesn’t need a huge amount of money for the down payment.  We’re going to charge him, you know, the $60k, that means we’re probably going to get $6,000 as a down payment on this property which will apply to his purchase price.  Half in cash and half with promissory note.  So maybe he has to come up with another $150 or $200 a month on the promissory note.  So it increases your cash flow again.

[Jerry]     What would happen if we went 25 years and a 5-year balloon?  Wouldn’t that give us more cash flow per month?

[Joe]     It would give us more cash in our pocket per month.  But it doesn’t really give us more income.  Or, it doesn’t really give us more profit.  And I think that you have to look at the deals and say am I looking – do I want to pay this thing off sooner or do I want the income on the property.  And it depends on your financial situation.

[Jerry]     Well, I’m talking about the buyer.  Instead of giving them, amortizing it for 30 years, we amortize it for 25 years so we get that payment up a little bit higher.  And he’s going to pay it off in 5 years anyhow, and within 4 years we’ll pretty much have this property paid off.

[Joe]     Well, he pays down – he’s paying down the loan more when you do it that way.  And I guess you could do it that way, but I don’t see the real value in making an extra fifty bucks a month on something like that, especially if that $50 is going toward principal.  Because what you’re doing is changing what’s going toward principal when you change that term.  If you, you know, you don’t want him to buy down the note.  You want it to last longer.  That’s how you make money because you’re making money on the interest.

[Jerry]     Okay.

[Joe]     Making money on the interest, you’re making money on the cash flow of the property.

[Jerry]     You think we can get more money for that property if we didn’t insert a balloon payment in it and just left it at fully amortized for 30 years?

[Joe]     No.  I don’t think so.  You might be able to.  Depends on the situation but I don’t think that that’s going to have a big impact because people look at 5 years the same way they look at 30.

[Jerry]     Okay.

[Joe]     You know, I don’t think people look at 5 years and think that that’s coming soon, which is a mistake.  But that’s what they do.  And that’s what they do with a 3-year lease option, too.  They look at that and say that’s – I’ve got plenty of time.  That really goes fast.  But the beauty for us, when you have a 3-year or a 5-year balloon, you don’t have to kick them out at that point.  You can extend their term and that’s one of the things that we probably would do if they needed it.  But also if they don’t pay it then it puts some pressure on them and makes it more likely that we can get more cash from them.

And one of the other things that we can do with this $25K mortgage that we’ve got, we could go to this seller in a year or two years and say, you know, I’ve got an extra $12K right now and I could pay off this note if you’d like me to.  And offer them half of what they’re owed.  Because they might take the cash rather than the terms if we wanted to pay it off and suddenly make $10K on a deal like that.  If you have a little extra cash to spend.  Let’s continue with this one because we’re working through this.  And we did the multi-mortgage now.  Could we sell this on a land contract?

[Jerry]     I think we just decided that we could.

[Valerie]     Yeah, we’re on lease option now.

[Joe]     Well, we sold it on a land contract.  We just did a multi-mortgage where sold on land contract.

[Umberto]     Yeah, I guess the principle is that you never want to buy land contract.  You want to sell land contract, you don’t want to buy land contract, right?

[Joe]     Well, not necessarily.  I mean, I would buy this on a land contract.  Land contract, remember, that’s the middle of the structure, so, and you could buy and sell with a land contract.  When you’re buying with a land contract you want it to be fully amortized and you want to do it nonrecourse.  So, when we buy on land contract we always do fully amortized.  We try to do zero interest and we try to do nonrecourse.  When I sell on a land contract — and I record it.  I record the land contract so that there’s public record of it.  You can’t sell it out from under me.

When I sell on a land contract, I don’t want to record it, I just want the paper to be in my hands so I can tear it up if we agree that it’s going to be okay to tear it up.  I don’t have to go through the title to try to get it cleared up.  I also charge interest and I also have a balloon payment so I don’t fully amortize it when I sell.  So there’s two different ways of doing land contracts.  One protects you more than the other.  And you want to make sure that when you’re buying you’re protecting yourself.  When you’re selling you’re protecting yourself the opposite way.

[Jerry]     Okay.

[Joe]     So, in this situation if you’re buying this $25K property on a land contract, you know, you’d still want to do the zero interest, you want to record it.  You want to have it fully amortized.  And now that you own it on a land contract how are you going to sell it?  So, if you fix it up though, you’re selling on a lease option.  Or, the other possibility is you just turn around and put it on the MLS and sell it.  Now if you fix it up and put a little bit of money into it, fix it up and then sell it and get all your cash back and pay it off.  Then again, you’re also not utilizing that zero interest loan.  But it still would be profitable because you have $50K into it and it’s going to cost you $7,000 or $8,000 to sell it, you know, so you have $25K of profit.  It’s not a bad deal.

And can you sell this one – can you buy it on a lease option?

[Valerie]     No.  You have – because of that repair stuff.

[Joe]     Right.

[Valerie]     You want to use money to make money.  Lease option you want to do it free and clear.

[Joe]     There’s a thing called a sandwich lease which Bill used to do until I talked him out of it.  A sandwich lease is where you lease option it and then you have the right to re-lease it, you can sublease it, and then you find a new lease option buyer for it.  This one I think would be challenging because of the condition.  You’re not going to be able to lease it.  But if it was in decent condition you could just do a sandwich lease on it.  But I hate sandwich leases because it doesn’t give you any control.  And you know, on the lease itself you can’t record it and you’d be much better off with a land contract.  So why not just buy it on land contract?

Does that make sense to you guys?  Do you understand how we did it on this one?  All the reasons why?  All right.

So this is the strategy that you’re going to use when you’re trying to figure out, when people are telling you these numbers you’ve got to go through here and figure out what they can, you know, what kind of offers you can make that are going to make it be profitable to you.  And, you know, you have to look at not just the purchase but also the sale.  Because there’s always an exit strategy.  What is your exit strategy going to be?  And that’s what this part of it is down here.  Are you going to hold it, are you going to flip it on terms, are you going to flip it for cash?

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