How To Buy Houses Without Bank Financing

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Topics: Deal Stories, Financing

There are many ways to buy houses without going to the bank to get financing.  Many sellers will be glad to get your offer to buy their house subject to the mortgage or with seller financing… you just need to ASK!  See this example from Jack Miller’s Money Matters Recorded Seminar.

When buying houses, one of my principle objectives is to try to find a way to finance it with the seller carrying back a zero interest loan under which all payments are used to reduce the principal owed.  My rationale for this is that the owner will be repaid much sooner this way.  The reason why this technique doesn’t quite fit this course on increasing cash flow is that I often have to pay very high monthly payments in exchange for the zero interest rate.  On the other hand, I have been able to buy a lot of houses with zero interest where the house produced high cash flow from rents.  Read on:

Picture an executive or professional in a large expensive home that he has owned for many years, and on which there is a relatively low interest rate loan based upon the original price of the house when he bought it.  Now, as a result of an economic slump such as may come to any of us within a few years, he has just been “down-sized”.

He can no longer afford to keep up his payments while at the same time there is not much of a market for his home in the current economy.  He must relocate to find work and he doesn’t want to forfeit his equity by selling out to the vultures who are gathering.  Enter me, the conquering hero:

Let’s say that his payments are $900 per month on a remaining loan balance of $120,000 on a house that is worth $400,000, but for which there are no buyers.  The only offers he has had thus far are for token payments and assumption of his existing loan.  I offer to pay him if full for his $280,000 equity and to take title subject to the existing loan.  There’s only one catch:

I’ll give him just enough money to relocate and find a house he can rent.  I’ll make the $900 payments to a local bank who will be responsible for sending the monthly payment to the lender to protect his credit, but I won’t pay him a dime until I have found a buyer for the house at a price that will net me 10% more than I am paying for the house ($400,000).

We agree to all of the above and I buy his house by giving him $5,000 down (which I could borrow and repay out of my cash flow) and by signing a Note with a Due-On-Sale clause that requires that I pay him off anytime that I can sell the house for $440,000 net after all costs of repairs and marketing.  Now, let’s look at the numbers:

This house will rent in most markets to a stable, qualified tenant for around $2000 per month.  I may experience a few months vacancy while I try to find the right tenant, but I’ll soon be repaid out of cash flow.  I’ll be making $1100 more per month than I’ll be paying while the underlying loan pays down.  As I raise rents over time, my rental “spread” will increase to keep pace with inflation.

By offering the tenant an Option to buy the house in return for more cash, I might even improve on my cash flow and profit while the housing and mortgage markets emerge from their slump.

I get the benefit of seeing a large house with a care-free tenant generate a large amount of cash flow each month, and the certainty that I’ll continue to receive this cash flow until the day when I can take my $40,000 profit and run.

Learn many more creative ways to buy houses without getting bank financing — see Jack Miller’s Money Matters Recorded Seminar.

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