Negotiating Zero Interest Financing

Topics: Deal Stories, Financing

Where does it say that a lender is entitled to interest payments? Brokers are quick to point out that the internal revenue code will impute interest to transactions where no interest is specified.  This has nothing to do with the fact that nobody is required to charge interest on a loan.  As a matter of fact, the vast majority of money in America is loaned out at zero interest!

If you don't believe me, take a quick glance into your billfold and tell me how much interest you are receiving on those Federal Reserve Notes you (hopefully) see in there? What about your checking accounts; how much interest are they earning? What about those free credit cards that you pay off prior to the interest being charged? How about money paid out as Option consideration? How much interest do family members pay each other for loans? How much does the IRS pay in interest on money that has been withheld from paychecks for the following year's taxes?

Don't be brain-washed into automatically paying interest on loans that are offered by sellers who offer to provide financing on their home sales.  Bear in mind that the seller is much more interested in selling to someone who will make the mortgage payments promptly when due than on the specific amount of interest being paid in.

When a person offers to pay off the equity in a short period of time with monthly payments that's often all it takes to motivate the seller to accept zero interest financing.  Let me give you a couple of examples:


The house was vacant.  All boarded up.  Standing forlorn waiting for a buyer.  The courthouse records revealed that the seller, who lived across country, had bought the property at a foreclosure sale for $23,500 a few years before.  He'd sold it once for $63,000 on a contract, but the buyer had defaulted on the loan, and the seller had gotten it back.

Now, in its dilapidated condition, the house was only worth about $52,000, but he wanted the same amount of money as before.  None of the local brokers were willing to even try to sell it at that price.  It stood there unwanted and unlisted.  I decided to make a telephone call to the owner.

I discovered two things.  One of them was that the disabled unemployed owner was going to retire on Social Security in 10 years.  He wanted a minimum of $500 per month in the interim to tide himself over.  And he had a real emotional fixation on getting $63,000 for the house.  So I paid that price to him.

I offered him two choices.  (1) I'd either prepay one year’s rent to him of $6000 to be used to repair the house, and 108 payments of $527.78 per month commencing in 12 months; or (2), I'd make him 120 payments of $500 per month starting immediately and pay for the repairs out of my own pocket.  He took the latter offer.  (Incidentally, it always pays to offer a choice when negotiating.)

I started running 'fix up for down payment' ads in the local paper and found a young couple who agreed to a 10 year loan at 10% interest only, to balloon at that time under-wrapped the purchase price, selling the property for less than I paid for it.  The purchase money loan was for $53,500.  Each month they paid me $445 which I dutifully passed onto the seller along with $55 of my own money.

Let's look at the math: At the end of 10 years, I will have spent $6600 of my own money in negative cash flow.  The house will be completely free and clear.  The buyers will pay me $53,500 in cash.

When you think of all the ways a person can make money with real estate, loan amortization is often the most overlooked factor because of the time involved with conventional financing.  But with your own financing wrapped around zero interest financing, amortization can generate a profit even when you have to sell for less than you're paying for a property.  It only takes one of these to pop every year or so to pay a lot of your living expenses.


Don and Donna had good credit, but no cash reserves.  Herb was a MOTIVATED burnt out Landlord with a high equity house for sale during a credit crunch.  Dan was a hustler trying to make a buck in tough times.  When Don and Donna approached him, he'd just found out about Herb's plight.  He came up with the following proposition:

He'd buy Herb's house on a Note and Mortgage with $5000 down, taking title subject to $75,000 ZERO INTEREST loan which would wrap around the $50,000 first mortgage.  It would require a monthly payment of $475 plus $100 additional paid to Herb.  Final payment would be due in full in 6 years.

Next, Dan got Don and Donna to put a chattel mortgage on their furniture and car for $5000 from Friendly Finance and give that to him for an Option to purchase Herb's property in five years at a projected fair market price of $95,000.  Terms were all cash.  He gave the $5000 to Herb.  Don and Donna paid $700 per month rent for 5 years of which Dan duly paid Herb $575.

Look at what each accomplished: Herb got his house sold and his management worries terminated.  His cash flow increased by $100 per month for 6 years.  Don and Donna got the home they wanted at a price they could afford with NOTHING DOWN except for the borrowed money they could easily repay.  Dan got $125 per month rent spread plus tax benefits, without any of the work.  PLUS he picked up $20,000 in Capital Gain; PLUS 6 YEARS ZERO INTEREST RATE LOAN AMORTIZATION.

Learn more ways to buy and sell houses with creative financing in Jack Miller's new book CREATIVE FINANCING SOLUTIONS Now available in any eBook reader format or Paperback

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