Turning Paper Into Gold

So you want to buy some real estate without using any of your own money? Let me show you how you can accomplish this objective.

There are a few prerequisites. First, the property should be free and clear. Next, the seller must be willing to carry back a note that is secured by the property. So, you've found a good prospect? Great! Here's what you do.

Strategy 1
We have found a free and clear single-family residence that is selling for $160,000; the seller wants $32,000 or 20% down. The terms of the note are:
N = 360 Monthly Payments
I = 10% Interest Rate
PV = $160,000 Present Value
PMT = $1,404 Monthly Payment
FV = $0 Future Value

What we do is create a note for the full purchase price of $160,000, due in ten years. The balloon payment at the end of ten years is $145,500.

We explain to the seller that we can give him the $32,000 down payment, but he will have to agree to go without the first 30 months of payments on the note. He agrees to this after we illustrate additional financial benefits that he will realize from our creative financing (as I will explain in a moment).

Next, we are going to sell the first 30 payments to a note investor for $35,367, which will result in a 14% yield to the investor.

You can pocket the $3,367 difference between the amount the investor will pay for the note ($35,367) and the amount you have to pay for the down payment ($32,000).

After the 30 payments are received by the investor (which you as the buyer of the property will be making), the payments will revert back to the property seller. Using your financial calculator, the present value at that time will be $157,042, with 84 payments remaining. (Remember the seller received a $32k down payment, so he actually makes $189,042, over the ten-year financing period, plus ongoing interest on the remaining balance.)

The results are that the seller gets $32,000 cash at closing. You purchase the property with no money down and keep $3,367 at closing.

Make sure that when you sign the purchase agreement the contract states, "this agreement is contingent upon the buyer selling 30 monthly payments of $1,404 for a minimum of $32,000." Furthermore, you should have the note sale close at the same time as your real estate purchase.

Strategy 2

Create two notes on the above property and sell the first. Here's one way of doing it:

Create a first mortgage for $100,000, at 10% interest, amortized over 30 years with a monthly payment of $877. We will sell this mortgage to an investor for $80,000, or at a discounted yield of 13.8%. We will also create a second mortgage for $80,000, at 10% interest, amortized over 30 years, due in 15 years. The monthly payment is $702, and the balloon is $65,331. The seller will keep this 2nd mortgage.

You will give the seller $70,000 down from the sale proceeds of the 1st and keep the remaining $10,000 difference. Your benefit is that you get the property with no money down, all the appreciation, and $10,000 at the close of escrow. Yes, you are paying $10,000 more for the property ($100k + $80k - $10k = $170k), but you will be paying for it over 30 years.

The seller gets a larger down payment of $70k and a monthly payment of $702 for 15 years or $126,360. After 15 years he gets a balloon of $65,331.
So the total amount the seller gets over 15 years is $261,701. Of course, you could give the seller less of a down payment and pocket the difference, depending on your negotiating skills.

There are a multitude of ways to purchase real estate with these types of strategies. Sit down and write out what you want to accomplish. I will help you design strategies to accomplish your goals. Money is not the problem here! If you have a little time and the right situation, these strategies can make you a winner.