Borrowing at zero interest rates from motivated sellers, then paying off the loan with monthly payments can work miracles in terms of rapid loan amortization when dealing with free and clear properties. Unfortunately, most of the time, the houses you buy will already have existing loans on them. As a result, even with zero interest rate seller financing, the buyer will wind up with a blended interest rate which will combine the original interest rate with the zero interest rate to create an average weighted according to the respective loan values.
For instance, if a $100,000 house already had a $45,000 loan on it at 8%, paying a $10,000 down payment and getting the owner to carry back $45,000 at zero interest would create an average 4% interest rate. With an existing loan of $60,000 and a new zero interest rate loan of $30,000; the average interest rate would increase to 2/3rds of the original interest rate, or about 5.3%. Conversely, if the above loans were reversed, it would only be 1/3rd of the original rate, or about 3%.
One way to reduce the overall interest rate to zero even with an existing loan would be to finance the house with a wrap around loan or on a installment contract which called for a zero interest rate. Using the above example, suppose at its inception a little over eight years before the original loan had been for $50,000 with payments of $366.88 each month. Of this, approximately $300 would be allocated to interest and $66.88 to interest.
Let's say that you buy this house at $5000 over fair market value for $100,000 by paying $10,000 down and wrapping the original loan with a $90,000 zero interest rate loan. Your loan would call for principal and interest payments that are twice what the seller is paying on his original loan, or $733.76 per month. To this you would add $150 for taxes and insurance.
Each month the tenant would pay you $950 in rent. Out of this, you'd pay the seller $933.76. He in turn would pay $516.88 to the original institutional lender to be used for principal, interest, taxes, and insurance. Your $10,000 down payment plus your paying the seller twice the amount of his own payments may have been his incentive. Let's see what the result of this arrangement might be:
The seller would be amortizing his $45,000 remaining loan balance over the next 21 years or so. On the other hand, you would be paying down your $90,000 wrap around loan at the rate of $733.76 each month in a little over 10 years; twice as fast as the seller. After about five years, you are going to have paid your loan down to the balance on the original loan, and will have paid the seller in full for his equity. The solution is to offer to pay the seller's equity in full over 4 years. This will motivate him just that much more to accept your zero interest rate terms, and it will enable you to take over his original loan at the 8% rate, or to sell the property at that time.
A much more elegant solution which would provide much greater profits would be to finance a house purchase simply by taking over the existing loan payments, and delaying in paying the owner until you sell the house. Who would make such a deal with you? An owner who had personally guaranteed his loan payments, and who for personal or financial reasons, needed to relocate on short notice because of his job or to find work.
In any distress situation, whether caused by financial problems or personal problems, owners anticipate that they are going to have to sell at a discount to fair market value in order to be able to sell their house quickly. When you offer to buy their home quickly by taking over their loan and paying them full retail market value plus closing costs and fees you have more or less met their needs. Under such a situation, the Quid Pro Quo is that you are able to pay off their equity with a single delayed payment; and without any interest at all.
For instance, suppose an owner who had just lost his job had a $50,000 equity in his home, but was required to make a $1000 per month payment on an existing $100,000 loan balance. By taking over his payment, you would have effectively reduced his financial obligations by $1000 per month. That can mean the difference between bankruptcy and survival. When you also contract to pay his full $50,000 equity in a single payment note on the earlier of your sale of the property, or within 5 years, it protects his hard earned equity. That might seem a lot better to someone than an offer of $10,000 in cash that another opportunistic distressed property buyer might offer him.
Of course, there are variations on a theme. If the same owner needed cash with which to relocate, it could be advanced against the equity with a proportionate discount. For instance, if you offered one dollar of cash today for a two dollar reduction in the amount owed in 5 years, you would be earning a little under 15% on the money advanced. Thus, $10,000 up-front to match the above offer would reduce his equity to $30,000 in five years. Another thing he might be able to do would be to place an equity loan on his property to raise the cash he needed, and to allow you to take over this payment with an appropriate adjustment to his equity to compensate you for the higher payments.
I once bought a house from a person who refinanced his home to pull out a little under half of its value in cash. I took over the loan with a single payment, zero interest rate balloon payment due in full in five y ears. The biggest benefit to making this kind of arrangement is to create cash flow from rents during the period until the final note is due, then to either sell the property to capture any increase in value, or to refinance the balloon note at the end of the time with a private investor, or an institutional loan.
Learn more with Jack Miller's CREATING WEALTH WITH HOUSES eManual
