« January 2009 | Main | March 2009 »

February 14, 2009

Creative Financing By Tim Chaffin

If you have tried to acquire financing with banks within the last year or have read news articles related to financing, then you know that it’s become a challenge to obtain a real estate loan. You need stellar credit scores and at least 20 percent down, and must also be able to cover closing costs. When I began real estate investing back in 1985, interest rates were more than 12 percent. No money down and owner financing were the hot topics. Now that the traditional lenders have all but closed their doors, we have to go back to the drawing board on financing real estate deals.

One of the most frequent questions I get from students is, “How do I buy real estate with little or none of my own money?” While this is a complex question, it’s also a simple one. First and foremost, you must find a motivated seller. Sellers who are not motivated are not likely to be interested in helping with the financing. After you have determined that you are working with a motivated seller, there are many options for owner-financing techniques. Listed below is a list of some of the financing methods that may fit your situation.

1) Lease option. Rent the property with an option to buy at a future date, usually 36 to 60 months. Part of your rent would be applied to the principle balance and, when you decide to buy the property, you simply obtain conventional financing and pay the seller the balance of the purchase price. Wealth Intelligence Academy Inc. has a three-day advanced training class on this topic that explains how to master this buying technique.

2) Carry back. Owner would hold back some of the purchase price to offset the amount of money you may need for the down payment to get a conventional loan. This is accomplished by creating a note. This ‘carry back’ could be paid in full in a term mutually agreed upon. At that point, you would refinance with conventional financing and pay off the carry-back amount. Some of the negotiable terms of the note may include the due date and interest rate.

3) Short-term balloon financing. Make payments directly to the seller for an agreed upon term, then obtain financing to pay off the balance. A balloon refers to the balance being due at one time. There is no financing until you have to pay the balloon payment. While this is similar to a lease option, you are buying the property from the start as opposed to just having an option.

4) Contract for deed. Commonly used when the seller does not have an existing mortgage. You get the deed to the house and use the real estate as the collateral, just like you would when using a bank, except the seller is the bank. This can be combined with the balloon payment if the seller is anxious about having a mortgage for longer than five years.

5) Land contract. Commonly used when the seller doesn’t have a mortgage. You would make payments to the seller, and you own the property at the end of the term. A land contract is similar to a contract for deed, but you do not get the deed until the last payment is made.

6) Wrap-around mortgage. Leave the existing loan in place and obtain a new mortgage for the difference paying both mortgages.

7) Borrow equity. Use equity in another property you own with a promissory note as a second or collateral.

8) Create a second and move positions. Create a first mortgage and ask the seller to take second position so you can obtain a first mortgage to pay them the difference. This works best if they have no mortgage on the property.

9) Create a note and then sell it for cash. This technique works best if there is no mortgage on the property. Most note buyers want to see 12 payments before they will buy the note.

10) Borrow broker’s commission. If the property is listed for sale with a real estate broker, then the property must sell in order for the broker to get paid. Sometimes they will let you “borrow” their commission to expedite the sale. Term, interest, and payments are all negotiable.

11) Partner. Use a relative, friend, co-worker, or another investor. Find the deal and show them how you can make a profit by using their money for the down payment and split the deal with them. The negotiations do not have to be 50-50, but whatever you can negotiate. You find the deal, they supply the money.

12) Sweat equity. The owner may allow you to make repairs to the property in lieu of a down payment. You would receive a credit toward the purchase price for the work you do.

13) Equity split. This technique is similar to sweat equity. You could do the work and then sell the property and split the profit.

14) Hard money. This is a loan based on the asset, not the borrower’s ability to pay the loan. These are typically short term—three to eighteen months with high interest rates and points. Today, most hard money lenders require borrowers to have a minimum credit score to ensure that you will be able to refinance the loan.

15) Private money. This option is similar to hard money in the respect that a third party, rather than a bank, is lending the money. This can be just like a partnership, except you are paying them a percent return instead of giving them a percentage of the deal. You also do not have to make any payments during the term. Rather, you add it onto the balance of the mortgage to be paid when you refinance out in an agreed-upon time frame or when you sell the property.

16) Substitution. You can use something other than cash or real estate as your down payment, such as an automobile, furniture, or other assets of value.

17) IRA. Use your retirement account to buy and sell, buy and hold, or wholesale. There are guidelines for doing this and all the money has to go back into the IRA. No dipping.

As with any real estate transaction, you should consult with your attorney when structuring deals in this manner as real estate laws vary from state to state. These are just some creative ways of getting the deal and making it a win-win for you and the seller.

February 13, 2009

Making offers: CASH or TERMS?

When it comes to making offers on real estate, success comes from knowing not only what the seller wants, but also what they need. Before making your offer, you first need to take some preliminary steps: know the property’s value, the neighborhood and market cycle it is in, your financial resources, and your strategy for the property after you acquire it. From there, it is essential that you build a rapport with the seller and find out their needs. When you have all the information, you can formulate an offer that works for all parties involved.

As investors, we buy properties one of two ways: cash or terms. If we use cash, the property has to be sold at a significant discount on the current market value. Remember, we create profit when we buy the property, and we receive the yield when we sell it. To the seller, a cash deal means that we agree on a price, and regardless of where we get the cash, the seller receives the agreed upon amount. A terms arrangement usually means the seller is participating in some aspect of our financing. Knowing the seller’s needs will help you determine what terms the seller is likely to accept.

We first need to be sure we are working with a motivated seller. If the seller is not motivated, there is no reason that they would be interested in accepting a significant cash discount or terms arrangement. If you are working on a terms arrangement, it is imperative that the seller trusts you. When you find a motivated seller, find some common ground and begin to build a rapport. This will enable you to begin to discover what the seller wants, what they truly need, and where they may have flexibility. This is the knowledge you will use to create an offer the seller is likely to accept.

Through conversations, find out if the seller needs the money from the sale up front or not. For example, if the seller lives in the house you are trying to buy, he or she may need the proceeds for the down payment to purchase a new home. If so, the seller will be looking for a cash offer and his or her situation, debt, and time frame will determine how motivated they are to consider your below-market cash amount. If the seller is going to buy another home whether the one he is in sells now or not, if the property is vacant, or if it is a rental, he may not need all the money from the sale up front and a terms arrangement might be agreeable.

Creative financing comes into play when you are using terms to acquire property. There are numerous ways to structure an offer using a combination of alternatives to cash, such as promissory notes, deferred payments, reduced real estate commissions, lease with purchase option, land contracts, simultaneously selling off part of the property, cross-collateralizing, sweat equity, trading services or products, loan assumptions, wrap-around mortgages, or subordinated mortgages.

Negotiating the terms is a matter of understanding the seller’s needs, combining them with what makes the deal work for you, and presenting the information in a way the seller perceives the value and the benefit to him as well. Keep in mind, a seller’s perception is his reality—he must be able to see how the terms meet his needs.

Many investors use a Letter of Intent (LOI) to outline the major points of a purchase under which the buyer and seller may enter into negotiations. It is intended as a starting point, not as a binding contract. Make sure your form or letter is written in a way that clearly makes this point, and have your attorney review it. A LOI basically says, “I’d like to purchase your property for this amount under these terms. Would you like to talk?” Using a LOI allows you to gauge a seller’s interest. It is an easy form of communication and response, and it does not have to be prepared by an attorney. However, it does not take the property off the market, and the seller may use it to counter another offer from another buyer. It may also delay entering into a formal purchase and sale contract, although including an agreement to enter into a formal contract within a certain number of days may help minimize that disadvantage.

The formal agreement for Offer and Acceptance or Purchase and Agreement will create the binding agreement with specific terms and contingency clauses after the buyer and seller both execute the contract. General practices, forms, and requirements vary from state to state, so be sure to consult with the appropriate Power Team members in the area in which you invest. Making offers and receiving counteroffers may be necessary before coming to a final agreement. Keep in mind that if an offer is rejected and a counteroffer is presented, that deal is still up for grabs to another buyer until there is an acceptance. Make sure everything is spelled out in writing along the way. In real estate, if an agreement is not in writing, then it does not exist!

February 12, 2009


Is the fear of hearing the word no getting in the way of your real estate investing success? Now, be really honest with yourself in answering that question. Don’t be afraid to admit that you don’t like to be told no. When the answer to one of his or her offers is no, it can really take the wind out of a new investor’s sails. It’s easy to say, “Don’t take it personally,” but people are told no, they tend to ask themselves what they did wrong. The truth is, maybe you did do something “wrong,” or at least, maybe there were things you could have done differently that would have given you a better chance of hearing yes.

Let’s talk about “no.” The more you know about “no,” the more you’ll hear the word “yes.” First of all, it’s important to understand that no doesn’t always mean no (at least not forever). It could mean:

• No, not at this time, but maybe later.
• No, I don’t understand everything. A confused mind will always say no.
• No, I don’t like you. Now that hurts, but sometimes it is the reason you hear no.
• No, I don’t trust you, which is a common reason people say no.
• No, you don’t understand what I really need.
• No, you haven’t listened to what I said.
• No, I don’t think you really care about me.
• No, give me some more reasons why I should say yes.

And the list goes on. The more offers you make, the easier it will be for you to hear no without taking it personally. However, you need to realize that there are a lot of things you can do to turn a no into a yes.

Did you realize that in almost any business dealing directly with the public, 15 percent of your success is based on your knowledge of the business and 85 percent is based on your people skills? Now don’t let that scare you. People skills are not necessarily a natural trait and can be learned by most everyone if they put a little effort into it. And those people skills will help you in all aspects of your life.

People do business with people they like and trust. They also like to do business with people that are similar to themselves. These are not necessarily conscious thoughts in a person’s mind, since 95 percent of the decision-making process takes place in the
subconscious mind. A big part of a person’s buying or selling decision is based on emotion and not on logic. The more you deal with people on an emotional level, the more you will be successful. You need to build rapport with people and get to know them as quickly as possible.

One of the most important things we can do to connect with people is to sincerely listen to them. A lot of us think that we are good listeners, but few people really are. Listening is a skill that can be learned, but, there are many challenges:

• All sorts of sights, sounds, and distractions are around us: it takes real concentration to shut out these distractions.
• Thinking more about our next response to what is being said, rather than trying to understand what is being spoken. All investors fight this one at times.
• Interrupting a person while they are still speaking. This tells them that you think you are more important than they are.
• Jumping to conclusions before you know all the facts.
• Pre-judging someone based on their looks, their attitude, and the condition of their home and so on.
• Letting your mind wander to other problems of the day. This can be controlled, but it takes work.

You can learn to be a better listener. What is your goal as a listener? When dealing with motivated sellers, you are trying to find out why they are motivated and what problem they need solved to ease their pain. If you actively listen, they will eventually tell you what their problem is and how it can be solved. If you can solve a seller’s problem, you will be more likely to get a yes to your offer.

Here are some things you can do to become a better listener:

• Focus on what your potential client is saying. Give them your undivided attention.
• Make eye contact with them. Don’t stare, but good eye contact is key to a good conversation. It also helps you build trust.
• You need to have a sincere interest in the person and what they are saying. You need to care about them. If you are only thinking about the deal, they will be able to see that you are not sincere and your chances of a yes on the deal goes down dramatically.
• Resist the urge to interrupt. Let them finish what they are saying before you respond, even if what they are saying is wrong or you don’t agree. You’ll have your chance to talk soon enough.
• Keep the conversation going by asking open-ended questions until you get to their root problem.
• A good way to let them know you are really listening is to repeat what they just told you and ask them if that is what they meant. For example, you could say, “Now if I understand correctly, you said that your husband just ran off with his secretary and you don’t care what you get for the house as long as he doesn’t get a dime! Is that what you mean?”
• Pause before replying to a question or comment. Again, it shows that you are thinking about what they said and trying to understand.
• When you do reply, use the person’s name. Don’t over use their name in the conservation, but people love to hear their own name, and it lets them know you care.
• Use humor (clean humor) if you can. It creates a positive environment. Laughter is the shortest distance between two people.
• Practice, practice, practice being an active listener. Remember, when you talk, you hear what you already know. When you listen, you learn something new.

Entire books have been written about the art of listening. As a rule of thumb, listen twice as much as you talk. You can talk all night trying to convince someone that you are good, trustworthy, friendly, kind, and know all there is about real estate and still not be successful in connecting with them. If you can get them talking (and you really listen), you can build good rapport in a matter of minutes. If you give someone your undivided attention when they are speaking to you, you will quickly win their trust and they will like you.

Just think of the people you know in your life. Most of us know someone who can make friends with strangers in a matter of minutes. If you watch that person closely, you’ll probably find that they listen intently to what the other person is saying: they learn about the other person and let them be the star of the show. As Stephen Covey reminds us in The 7 Habits of Highly Effective People, “seek first to understand, then to be understood.”

In building rapport with someone, you should know that your words are the least important part of your interaction. Establishing rapport with someone is based on:

• Your visual body language—55%
• The tone of your voice —38%
• Your verbal words—7%

So what you say isn’t the most important factor. However, what you say does need to show you are knowledgeable and competent, but how you say it is most important in developing a higher level of trust

There is an entire science on how to interact with people, but basically people feel more comfortable around people who are somewhat like themselves. So as you are actively listening to people you need to notice their rate of speech, their tone, their gestures, etc. Adjust your speaking to be similar to the person you are talking to. You have to be careful in this area, but just be aware that if you normally talk at 150 words per minute with gusts up to 300, you will not easily build rapport with someone who only talks at 75 words per minute. Slow down a little and you will be amazed at how much better you will communicate. Use your common sense in the area and you will do okay.

The more people you talk to, the better your listening skills will become. A good way to overcome bad listening habits is to practice active listening. Here is what you can do. Go through the paper and write down the contact information for 20 For Sale By Owner properties. Call each of these sellers and make an appointment to go see their home. Don’t worry about these being good deals or not. These are your practice people. It doesn’t matter what happens.

Go meet with them and just focus all you energy on getting to know them by actively listening to what they have to say. Keep asking questions until you feel you really know them. You will be surprised at how easy it is to really listen when you focus on it. And if you do find a motivated seller during this practice, go ahead and make them an offer! If you really listened, you have a much better chance of getting a yes.

By David L. Boyd

February 11, 2009

Business Passion

Do That Which You Love, and the Money Will Soon Follow
By: Matt Fagerness

As a trainer and Mentor for Wealth Intelligence Academy, I am constantly exposed to real estate investors who are searching to find their niche in the business. They believe that doing so will catapult them to the success of which they have always dreamed. I’ve been down that road myself, as a student and as an investor, seeking that ideal business match for who I am. Naturally, I pursued similar types of investing opportunities, including wholesaling, lease options, foreclosures, and cash-flowing rentals. While I experienced some degree of success in each of these areas, I did not find each to be equally appealing to me.

I am not saying that any of these investing strategies are flawed, or should be given anything other than your full consideration. What I am saying is that an often undervalued part of starting a new business is the identification of what really drives the business owner. Real estate is a proven commodity, and one in which huge profits can be made through investing. That being said, what is your passion? What is it that you really love to do? The answer to that question will likely be different for everyone, and will also guide you in discovering your ultimate and ideal business purpose.

For example, you may love every aspect of the real estate business, from the phone calls, to the numbers and due diligence, to the contract work, negotiations, and even management of tenants, sellers, buyers, and other clients. We come to this business of real estate investing from many different walks of life, and it is natural that real estate, however lucrative, still does not represent something you are truly passionate about. You may like real estate, but perhaps you’ve always dreamed of being a novelist or of opening your own coffee shop. In this example, real estate is a solid business, but the coffee shop is your business passion. If this type of scenario rings true for you, you are not alone, and should not become discouraged. There are good ways to build your business without becoming a slave to it, allowing you to, as they say, “have your cake and eat it too.”

There are several ways to approach the business of real estate investing if the day-to-day operations of the business do not align with your passions and interests. First, you can go against the grain and work the real estate business as if it were the best and only opportunity you will ever encounter as an entrepreneur. Many new investors take this route, and while it can be effective, I don’t recommend it for those who long to be truly happy doing what they do. Due to the education you are receiving, you certainly have the necessary tools to approach the business this way, though I believe there is more to a good business than just making money.

The second approach, and the one that I really favor, is to learn enough about the business to manage it, and have other people take care of the day-to-day tasks on your behalf. We refer to this as outsourcing, and there are many forms in which this tool can be implemented, including the utilization of your professional Power Team. As I have said, real estate is a proven investment commodity, so why not use the education you have to build a good real estate business infrastructure that can generate both profits and residual income?

The second part of this formula is the use of the revenue generated by your real estate business to pursue other ventures that are more closely aligned with your true passions. I have worked with students who loved art, the outdoors, and even writing. Wherever your passions lie, there are also business opportunities, and the pursuit of a business related to your passions and interests will surely be one that is enjoyable for you. The business model should have some merit, but using proceeds from one business to feed another is not at all uncommon. This is a way to capitalize on your real estate training, even if you are not committed to working your real estate business on a full-time basis.

The world of real estate investing is highly diversified, which I think caters to the new investor. Whether you are a dedicated “numbers person,” or someone who simply loves working with other people, there is a place for you to shine in real estate, which should be an encouragement to each and every one of you. But it does not just stop there. The majority of other investors I know have other business interests, and their abilities and passions shape these other businesses to a great extent.

My message to you is clear: despite the lucrative nature of real estate, don’t just chase the path that appears to have the biggest pot of gold waiting for you at the end. This may seem like the logical thing to do, especially when you are just getting started, but the way to achieve long-term success is to follow a path that you truly enjoy. Not only will this optimize your real estate investments, but other business opportunities are likely to open up to you when you follow your passions and interests, not just profits. I wish you the very best in success.