financing secrets of a millionaire real estate investor.pdf

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9 / Owner Financing 125 Problems with the Land Contract The basic challenge with using a land contract is the uncertainty of the parties’ legal rights. A few states have specific enumerated rules for taking back a property in default of a land contract. For example, Texas law requires a specific notice to the defaulting buyer and a statutory period for the buyer to make up back payments. After that time, the seller can declare the contract in default and evict the buyer like a tenant. Illinois, Pennsylvania, North Dakota, and Ohio also have similar statutes. In most states, however, the parties’ rights are not clearly defined. Some courts treat the transaction as a purchase agreement, while others treat it as a mortgage transaction, requiring the seller (AKA lender) to commence a foreclosure proceeding. Make sure that you have an attorney carefully draft the agreement in your favor, depending on whether you are buying or selling. Using a Purchase Money Note As you are now aware, most lenders sell their loans on the secondary market soon after the loans are made. The secondary market players, like FNMA, will not buy an individual note from a private individual. However, there is an entire market of small, private investors that do buy mortgage notes one at a time. Lending regulations are extremely complex and ever-changing, so I do not recommend you jump into the lending business. However, when the occasion presents itself, you can act as a lender by creating a note, then selling it simultaneously at closing to a third party. When dealing with yield and discount concepts, keep the process simple: Find out what note buyers are looking for, then create a note to fit their criteria. A host of note buyers and a list of their buying criteria can be found on the Internet at and . The purchase price for the note will
126 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR depend on a number of factors, such as the value of the property, your creditworthiness, and whether it is rental property. At closing, you sign a note to the seller that is turned into cash when the note buyer purchases it from the seller. This may require closing in escrow while waiting for the funds from the note buyer. Keep in mind that the note buyer will have fairly stringent loanto-value criteria and will want to purchase the note at a discount off the face amount. For example, if the property is worth $100,000, the note buyer may require that the maximum loan to value ratio is 90 percent, which means the note will be for $90,000. In addition, the note buyer may only pay 90 percent of the face amount of the note, which is $81,000. If the seller is only looking to net $81,000, the transaction will work for everyone. One of the benefits of using a note to purchase property is that you avoid paying conventional loan costs, such as underwriting, points, and document preparation. You also need not worry about being penalized by traditional lending criteria for buying a property at a discounted price. Variation: Create Two Notes, Sell One Another way to skin the proverbial cat is to create two notes secured by two mortgages on the property. Sell the note and mortgage at closing for cash, giving the seller the cash proceeds. Make payments to the note buyer on the mortgage and to the seller on the second mortgage. Another Variation: Sell the Income Stream Note buyers don’t just buy entire notes, they also buy partials. Partials are parts of the income stream, that is, a portion of the total payments due on the note. For example, a $100,000 note at 9 percent will pay down about $12,000 in principal in the first ten years. The total principal and interest payments on the loan over the first ten years, however, will be over $96,000! Suppose that you found some-
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vi CONTENTS Government Loan Program
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viii CONTENTS 8. The Lease Option 9
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CHAPTER1 Introduction to Real Estat
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1 / Introduction to Real Estate Fin
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CHAPTER2 A Legal Primer on Real Est
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2 /A Legal Primer on Real Estate Lo
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GL OSSARY abstract of title A compi
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GLOSSARY 181 improvements. Also use
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GLOSSARY 185 security instrument A
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IN DEX A Acceleration clause, 118 A
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INDEX 191 blended, 73 Federal Reser
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INDEX 193 W Washington Mutual, 22 W
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