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How to Finance Any Real Estate, Any Place, Any Time
STRATEGIES THAT WORK
By James A. Misko
Square One Publishers
Copyright © 2004
James A. Misko
All right reserved.
Exchanging Equity in a Home for Equity
in Income-Producing Property
This strategy is designed to help you buy a champagne home on
a beer income at no increased out-of-pocket costs. It involves
exchanging equity in an old residence for equity in an income-producing
property that generates sufficient revenue both to
make payments on a more expensive home and to repay any
Let's say you already own a house, but you want a better, more
expensive home. Unfortunately, you find that your income is not
sufficient to cover the increased payments. Your credit is good,
however, and you have 30- to 50-percent equity in your current
property-meaning that you still have to pay off a mortgage on
70 to 50 percent of the property.
Go to your banker and borrow the down payment for the
desired house. The monthly mortgage payment on your new
home will be higher than your current mortgage payment, so
figure out how much more money you will need per month to
make the new payment. Then exchange the equity in your current
house for the down payment on an apartment house that generates
enough spendable income to cover the difference between
your presentmonthly mortgage payments and your new house
payments, and repay the bank loan.
You will now have the home that you want. Moreover, you
will have a depreciation allowance on the apartment house-an
amount that you can deduct from your yearly taxable income
based on the perceived loss of value due to the property's increasing
age and resulting wear and tear. This allowance will lower
your ordinary income tax on the revenue received from the property.
A realtor friend of mine had a client who owned a home
appraised at $100,000. He owed $50,000 on the first mortgage,
payable at $450 per month. The client and his family wanted a
larger home in a better area, and really liked a house that was selling
for $200,000. But when they examined their budget, they
found that they couldn't squeeze out enough to make the additional
$600 monthly payment it would take to get the new residence.
They visited the house several times and after a month,
when no one else had bought it, they went to the realtor with open
The client was willing to do anything legal and reasonable to
get that house. The realtor determined that the man's credit was
spotless, verified his income and job security, and discussed with
the sellers the possibility of a contract sale. The realtor then
returned to the client and laid out his plan, which was accepted.
The next day, the client met the realtor at the bank, where they
negotiated a $25,000 loan. The broker presented the $25,000 check
to the sellers as a deposit for the down payment on the house. The
broker agreed to accept his fee from the monthly house payments
that would be made to the seller, who would carry back the note
on the mortgage loan.
Next, the realtor took the $50,000 equity in the $100,000 house
that his clients wanted to vacate, and contacted a builder who had
a twelve-unit apartment house. The realtor used the equity in the
house as a down payment on the apartment building, which-after
expenses and mortgage payments-would show a spendable
income of $1,100 a month. Again, the broker would take his
fee out of the monthly payments his clients would be making to
the builder, who would carry back the note.
The spendable income of $1,100 a month, plus the savings in
nontaxed income from the apartments due to the depreciation
allowance and interest deductions, was enough to let the family
live comfortably in their new $200,000 house. It should be noted,
though, that to keep the spendable cash flowing, the client had to
manage the apartment house himself, perform some of the maintenance,
clean the laundry room, and mow the lawn. That's why
this strategy requires a buyer who is confident in his ability to
perform all the functions necessary to make the arrangement
It goes by many names-owner financing, seller financing, seller
carry-back, vendor take-back mortgage, and mortgage back-but
no matter what you call it, this technique is important for anyone
involved in real estate, from a first-time homebuyer to a savvy real
estate investor. The concept is simple. The seller of the property
agrees to finance part or all of a real estate transaction by lending
money to the buyer. In essence, the property owner assumes the
role of the banker, and carries back the loan in the form of a note.
As in any other sale, a down payment (if any) is negotiated between
the seller and the buyer, and the buyer sends regular payments to
the seller, typically on a monthly basis. About 20 percent of the
houses sold in the United States involve some form of owner
Owner financing is most often used when the buyer has difficulty
qualifying for a conventional loan, such as a bank loan; when
conventional financing is too expensive; or when the existing first
mortgage may be assumed by the buyer, but the difference
between the existing debt and sales price exceeds the resources
of the buyer. In commercial lending, the borrower typically locates
lending programs with rigid preset provisions, and applies for the
most desirable set of terms. But owner financing is truly flexible,
allowing the property owner and buyer to negotiate the down payment,
if any; the interest rate; interest and payment adjustments, if
any; balloon payment dates, if any; any acceleration clause-a provision
giving the seller the right to declare the entire loan balance
immediately due; and other provisions that a buyer would find it difficult
to negotiate with a conventional lender. As long as the buyer
and seller agree, the down payment can be skipped, or low monthly
payments can be made until some future time, when the buyer
is able to increase payment size or pay the loan off in full. Owner
financing even allows for the inclusion of unusual terms in the note.
For example, a payment may be set for the twenty-first of the
month because the purchaser will use a paycheck from the sixteenth
to make the loan payment. Or, if the buyer is a farmer, payments
can be arranged to coincide with yearly crop sales.
Owner financing saves costs for both the property owner and
the property buyer. It benefits the buyer by eliminating nearly all
origination fees, thus saving from 2 to 5 percent of the total loan
price. How does the seller benefit? By spreading the owner's capital
gains over time, rather than giving him the lump sum he would
receive from a conventionally financed mortgage, owner financing
can sometimes prevent the seller from being bumped into a higher
tax bracket, or can create time to take some capital losses as a
means of offsetting gains. This technique further benefits the seller
by providing good interest earnings. Although completely flexible,
owner financing rates are typically higher than conventional
home loan rates, and 4 to 5 percent higher than the rates offered
by money market accounts.
Finally, owner financing benefits both parties by moving much
more quickly than conventional financing, which can take a month
or more. The owner-financed transaction can close as soon as the
seller and buyer can agree on its terms.
While all of these benefits are important, you will probably find
owner financing most appealing because its flexibility makes so
many great investments possible. Within this book, Strategies 1,
40, and 41-to name just a few-show just how versatile this
investment tool can be. As you learn more about it, you'll discover
that owner financing can truly help you finance almost any real
estate, any place, any time.
Trading Property You Don't Want
for Property You Do
Most people today do not have large amounts of cash on hand.
Cash is most often used in day-to-day transactions, and is not
saved for large ones. But just because you don't have the cash
needed for a down payment doesn't mean that you can't buy the
property you want. As long as you have the wherewithal to make
any monthly payments, a very simple solution may be at hand.
Instead of paying cash, you can offer personal possessions, and
can even trade one piece of real property for another in lieu of a
cash down payment. In fact, there's a whole world of people who
specialize in exchanging real estate instead of buying and selling.
All you have to do is offer something of cash value that you don't
want-but that the seller does-in exchange for something you
do. In a way, it's like trading one set of benefits for another.
Let's say that you have found a piece of property you want, but
you don't have the ready cash to swing the transaction. Simply
offer something that you own other than money-something that
you have no use for. At the very worst, the seller will say "no." But
he might say "maybe," "yes," or "let's see if we can work something
Any real estate can be offered, no matter where it is. Any personal
property can be used, as well, including cars; jewelry; real
estate contracts, notes, deeds of trust, or stocks and bonds; or
coupons-prepaid meals, lodging, guided hunting trips, airline
tickets, etc. As long as you own it and the buyer wants it, the deal
will go through.
Years ago, my wife and I kept some horses on a fifty-acre piece of
property in the country. The horses had become a big part of our
lives, but it had started to be a real hassle to drive out once a day
to feed and ride them. The solution, we decided, was to find a
piece of property that was closer to our home and better suited to
My wife searched the real estate columns and found an ideal
place. When we saw it, we found that it had everything we were
looking for. The problem was that the owner wanted a large cash
down payment. We balked. We did not have enough money put
aside for such a property. Nevertheless, we liked it very much and
continued to think about it.
Finally, we decided that if we wanted the property as much as
we thought we did, we should at least make a proposal that we
could live with. We offered our house equity subject to a loan, and
some existing notes and first mortgages on land sales; and we
offered to take out a new first mortgage on the "horse place" to
get the owner some cash.
Although we knew that we had given the deal our best shot,
we felt that the owner would reject the offer. He did not. He said
"maybe." Then, after he had examined what we were offering, he
agreed. We had gotten what we wanted by proposing an exchange
when he had asked for cash. Our efforts were well rewarded.
The truth of the matter is that exchanging works very well.
The only time you really need cash for your real estate is when
you're leaving the real estate field. If you simply wish to move
your equity to other properties for different benefits, an exchange
will often suit you better than a sale, and, if done properly, may
allow you to postpone or avoid paying capital gains tax.
Turning Your Problem Properties Into Cash
Real estate investors often own several properties that are not
helping them reach their goals. But the fact that these properties
don't currently have value for them doesn't mean that they won't
have value for someone else. How can the investor put these
properties to work, and use them to obtain real estate that will
increase the value of his portfolio? That's what this strategy is all
You have in your portfolio several properties that, in various
ways, are not performing as anticipated. Let's say, for example,
that you have several free-and-clear lots of dubious value, and a
small apartment house with negative cash flow. You placed these
properties on the market some time ago, but nobody seems to
There are two good ways to put these equities to work for
you. First, along with the properties, offer any prospective buyer
some solid real estate-backed notes that will provide him with
enough cash flow to offset the negative cash flow on the properties.
Similarly, you can create a note against another one of your
properties, and use that to sweeten the pot.
An alternative strategy is to trade your problem properties for
someone else's problem properties-provided, of course, that you
feel you can turn the new properties around and make them
worthwhile acquisitions, and that the other investor is truly motivated
to dispose of his real estate. Structure your offer to give the
other party a larger note and mortgage than the equities justify,
but ask him to give you cash back. Then use the cash to remedy
the problem property you are acquiring.
A group of local investors had formed a partnership. Their plan
was to gain equity for five years and then sell the properties, taking
capital gains on the profits. So far, they had acquired a duplex,
a four-plex, scattered lots, and some small notes. These small
items, which had a combined equity of $100,000, were gaining little
in value. Moreover, the two buildings had a negative cash flow.
The partnership became aware of a condominium project that
was being built by a local developer. The condo venture was in the
depths of a depression. The owner had been involved in lawsuits
for a year on the project, and had been paying the lender 18-percent
interest. He had made no sales in more than a year, and had
no money to proceed with construction. There was really nothing
wrong with the project except the ownership. The owner knew it,
and was highly motivated to rid himself of the property, which
had a remaining equity of $300,000.
The partnership proposed to take over the condominium project.
In exchange for his property, the developer would get the
partnership's scattered holdings, as well as a note that would be
$150,000 greater than the difference between the two equities. He
would then give some of the cash back at closing. The figures
looked like this:
The partnership's scattered holdings: $100,000
The condominium project: $300,000
The difference in equity between the two sets of holdings: $200,000
The note and mortgage given to the condo owner: $350,000
The cash given to the partnership: $100,000
The condo owner gave up the $100,000 cash for two reasons. First,
he had received a note and mortgage for $150,000 more than his
equity in return for the cash, so in a sense, he had bought the note
at a discount. Second, he had rid himself of his problem property,
which, after all, was his chief reason for making the trade.
Turning Your Dwindling Stocks
Into Real Estate Equities
If you're like most investors, you've had the experience of purchasing
stocks at a high price, and watching them fall in value.
Now, the stocks are worth much less than their purchase price,
and you want to be rid of them. But, understandably, you're reluctant
to sell them for their present value.
Is there a way to trade those disappointing stocks for real
property? Sure there is! Remember that those stocks still have a
cash value-just not the value you hoped they would have. The
trick is to find a property owner who is highly motivated to sell.
Find him, and you'll be able to make a deal.
You have a portfolio of stocks, all of which have declined in value.
You want to get out of the stock market and into the real estate
market, but you hate the idea of taking a loss on all those stocks.
Look for a property owner who has holdings that you want
and is highly motivated to sell-even if it means accepting less
than the real estate's appraised price. If he's looking for cash but
finding no cash market for his holdings, he's your man.
Now offer your stock to the owner of the real estate at its original
purchase price, rather than its current value. If you have correctly
determined the property owner's motivation, he will accept
the offer, knowing that the stocks can be sold for quick cash.
Early in his investing days, an insurance broker had purchased
bank stocks because they allowed him to get started with only
small amounts of money. Naturally, he believed that the stocks
would grow in value. But the stocks had risen from $20 or $30 a
share to $40 and $45 a share, only to fall to $10 to $12 dollars a
share when high interest rates forced banks to sacrifice much of
their profits. He felt that real estate would be a much more secure
investment, but needed to sell the stocks in order to get cash for
his new venture. Unfortunately, his ego would not allow him to
take that kind of loss.
Excerpted from How to Finance Any Real Estate, Any Place, Any Time
by James A. Misko
Copyright © 2004 by James A. Misko.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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