At one time I owned 166 single family houses that I had bought with a minimum down payment by taking title subject to the existing financing. From the first house I bought, I used only seller financing and avoided negative cash flow problems primarily because I couldn’t afford to take anything out of my meager earnings to support it. That means that I had to find ways to buy highly leveraged houses that could support themselves with a little left over for me.
My all time favorite way to buy houses in contrast to lease/Optioning houses, is to “cold canvass” neighborhoods that I want to own long term rental houses in to find a homeowner with a big equity who has to relocate out of town either because of financial distress or personal reasons. When I found such owners, in contrast to others who might have approached them with low offers, I offered to pay full appraised retail value for the seller’s large equity and to take over relatively low payments so long as they were far below prevailing rents for the upscale house.
The catch was that I agreed to pay the sellers just enough money down to enable them to pay the moving company, and nothing more – neither interest nor principal — until I sold the house at a price that would net me at least 10% profit over all my expenses.
Included in my expenses would be vacancies, repairs, taxes, insurance, mortgage payments, marketing, commissions, and settlement costs in addition to the fair market value of my management effort based upon 10% of collected rents. I usually specified that the seller would be paid no later than 5 years hence regardless whether or not I had been able to sell the house.
One day I noticed that I had a lot of balloon Notes coming due in five years, so I changed the maximum holding period to 6 years, then to 7 years. When I tried for 8, I got a lot of resistance, so stopped at 7 years.
The magic in this formula is that I was able to buy much better houses to hold for long term appreciation with very high leverage and positive cash flow that I could use to offset negative cash flow from other houses.
When I hear people mewing about not being able to buy good houses that will cash flow today, I get a little vexed that they haven’t taken the time to invest in themselves by learning how structure a creative seller financing transaction that can solve problems for both seller and buyer; particularly cash flow problems.
What do you do when a seller is willing to meet your price, but wants some cash to solve his problems? Let me tell you about one such person. He was a baggage handler at the airport who wanted to sell his a house that I had sold him a few years back. (It always pays to maintain contact with old customers to whom you’ve sold or financed houses so they’ll call you when they want to sell, or buy another one.)
He wanted $10,000 cash for his house and wanted me to take title subject to the first mortgage loan. The house had appreciated a lot since he had bought it and he didn’t really want to move, but he needed $10,000 to pay some pressing family bills. The problem for me was to find the money to solve his problem. A natural inclination would be to go to the bank and borrow what I needed, but I’ve never done that. I pride myself on the fact that I’ve only signed personally on one loan; my VA loan which I paid off within a year by selling the house. All the hundreds of houses I’ve bought over the decades have been bought by taking title subject to existing loans and with seller financing.
Take a little test for me: Before going any further; how would you raise $10,000 without going to the bank or signing personally on a loan?
In the case at hand, the solution was fairly simple. I called one of my team of professionals, a ‘can-do” mortgage broker who has both private and institutional sources of financing. He arranged a 5.5% home equity loan on the house that the owner signed. I then took title to the house subject to both the first and second liens. The owner then leased the house from me on a net basis for the amount of the first lien payments.
The payments on the home equity loan created negative cash flow each month, but I had a motivated occupant who swiftly forgot that he was a tenant and continued to upgrade the property; and I bought the $10,000 property equity above both loans with nothing down and only a little over $110 per month payments. As far as the seller was concerned, the $10,000 was at no cost, since they never had to make payments on it.
Why would he sell me the house with this financing rather than to sell it on the open market to raise cash. Because he really didn’t want to move into an apartment or another house with higher payments; and have to put his kids into different schools. Being able to stay in the house was what he really wanted, and my purchase allowed him to do that.
