In the previously discussed methods we concentrated on
ways to borrow against assets. In
this case we are going to talk about selling assets. I'm not talking about the obvious selling the car or
furniture. I'm talking about the
most bought and sold item in the U.S. economy:
Historically, there is no investment that is more
secure than real estate. Banks know
it; private investors know it; so both endeavor to put as much of their capital
into real estate holdings as possible. Many
lenders would just as soon buy an existing mortgage as make a loan that creates
a new one. The main
reason for this is that if they buy a mortgage that has been being paid on for
at least a year or so, they have some assurance that the borrower is going to
pay. Whereas, on any new loan they
make, they really don't have that assurance.
What this means to you is that if your financial situation is such that
you have money owed to you, you have immediate access to cash.
If you find a great buy or need money right away,
you can go down to your local bank and sell the money that is owed you.
Something you need to realize is that when a
bank buys a mortgage, it will usually want a discount of anywhere from 5% to 20%
of the face value of the note. In
other words, if you are owed $35,000, and the bank wanted a 10% discount, they
would offer you $31,500. ie. $35,000 $3,500=$31,500. The person that owed you the money would now owe it to the
bank. [Although, the example I give
uses the bank as the purchaser of the mortgage, the fact is, there
are many private investors that often buy mortgages. However, try the
bank first. 99% of the time, that's where you will get the better deal.
If for some reason the bank won't purchase your note, look in the
newspapers for an ad something like this: "We buy notes...". Although,
in most cases a private investor will want a larger discount on the note than
would the bank, for the right investment property, it may still make a great
deal of sense.] See the Richard's Group.
Although, at first glance, the thought of
discounting the note $3,500 may not seem like such a great idea, the reality of
the business world is that it
is sometimes necessary to take a small loss now, in order to reap
big profits later...
say that during your search for a good real estate buy, you come across a
property where the sellers are in dire financial straits and in need of a quick
sale. Often this is due to
foreclosure being imminent. Although,
there are many reasons for this occurring, the end result is that it creates a
good opportunity for you...
Let's assume that the property is worth $80,000 dollars
and they owe $50,000 against it. The
owners of this property have $30,000 in equity and definitely don't want to just
give it away. However, in most
cases they realize that if they are in a distress situation and need a quick
sale, they will not get all that it is worth.
And in the case of foreclosure, (see foreclosure),
they either have to take what they can get or at the end of the foreclosure
proceedings, they will have nothing!
This situation allows you to structure a transaction that
is beneficial, not only, to you, but to the sellers as well.
Under the circumstances described above, very often, the sellers would be
satisfied to receive $10,000 for their equity.
This is probably enough to allow them to move, possibly buy a different
home, and just as importantly, it allows them to protect their credit by
eliminating the possibility of having a foreclosure show up on their credit
Now, how do you buy it?
Your first task is to raise some cash.
Let's assume that you have a mortgage due you in the amount of $35,000 as
in the example above. You simply go
down to the local bank and tell them you want to sell the note.
After doing some calculations pertaining to the desired yield on their
investment (what they pay you for the note), they will determine how much they
want to discount it and make you an offer.
Let's say that for whatever reason, they insist on a 20% discount.
In other words they won't give you one penny more than $28,000 for that
$35,000 mortgage. It would still
make sense, even though it would cost you $7,000 right off the bat.
If you buy the above mentioned property by paying
$10,000 cash for the equity and then assume the loan, your financial situation
would look like this: you paid $10,000 cash; assumed a $50,000 loan so you
essentially, paid $60,000 dollars for an $80,000 piece of property.
So, even though, it cost you $7,000 to raise the down payment, you more
than made up for it by acquiring $20,000 in equity. If you were, so inclined,
you could now turn around and sell that property and realize a very quick
profit. Plus, you still have
$18,000 cash left over from the sale of your note.
What to do with it? Why not
put it in an interest bearing account until you find the next good buy?
There are always good buys available, but you have got to keep looking.
We will discuss how to find them later.