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5 / Creative Financing through Institutional Lenders 69 FIGURE 5.1 Middleman Double-Closing Technique Escrow Agent Sammy Seller Ira Investor Deed Deed Matthew Middleman Warning: Keep in mind that you should disclose to the lender up front that you are not putting up any cash in the deal. Do not, I repeat, do not pay the seller cash at closing and take it back under the table in exchange for a note. This practice is loan fraud, punishable by up to 30 years in federal prison. See 18 U.S.C. Sec. 1014. Case Study #1: Tag Team Investing I stumbled across a property that was bank-owned and offered by auction to the public. Like many foreclosures, the property was in need of repair (approximately $10,000 worth, in this case). The mar-
70 FINANCING SECRETS OF A MILLIONAIRE REAL ESTATE INVESTOR ket value of the property in its existing condition was about $180,000. The bank was willing to accept a bid of $134,000, which was 74 percent of its value. I brought in a middleman to submit the bid of $134,000 to the bank. The terms of the offer were all cash, which the lender would receive, as explained in a moment. The middleman then signed a contract to sell the property to me for $180,000. The terms of the sale from the middleman to me were $9,000 cash and a $27,000 promissory note (no payments, interest only, due in five years). The $27,000 note was to be secured by a second mortgage on the property, because I intended to borrow 80 percent of the purchase price ($144,000) and secure the new loan with a new first mortgage on the property. After the double closing, I owned the property subject to a new first mortgage of $144,000 to an institutional lender and a second mortgage of $27,000 to the middleman investor. The bank that owned the property received their $134,000 in cash, and the middleman investor walked away with about $9,000 in cash. I was out of pocket about $11,000, which was the down payment ($9,000), plus closing costs ($2,000). I later sold the property for $185,000, at which time the middleman investor agreed to accept a 50 percent discount on the $27,000 note. I used proceeds from the sale to pay the middleman. In the meantime, the payments on the $144,000 first mortgage note were less than I was able to rent the property for. Case Study #2: Tag Team Investing A client of mine (we’ll call him Chuck) used the middleman method to buy a $1.6 million house with no money down. The property was banked-owned as the result of a foreclosure. Chuck set up a simple living trust for himself with his buddy as trustee. The trust signed a contract (executed by Chuck’s buddy, the trustee) to buy the house from the bank for $950,000. Chuck then signed a contract to buy the house from the trust for $1.6 million, the property’s appraised
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This publication is designed to pro
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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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9 / Owner Financing 121 Simply tell
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9 / Owner Financing 123 FIGURE 9.2
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9 / Owner Financing 125 Problems wi
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9 / Owner Financing 127 one willing
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9 / Owner Financing 129 This is a b
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9 / Owner Financing 131 FIGURE 9.4
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9 / Owner Financing 133 of each mon
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APPENDIXA Interest Payments Chart 1
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APPENDIXB State-by-State Foreclosur
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APPENDIXC Sample Forms Uniform Resi
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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 183 applied towards the pu
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GLOSSARY 185 security instrument A
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RE SOURCES Suggested Reading Altern
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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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