Perhaps you have heard other real estate “gurus” talk about 25, 50, or even 100 different ways to buy real estate for no money down. In reality, there are only four possible ways to buy real estate–with or without any money down. I’ll try to simplify the “nothing down” philosophy once and for all.
I’ll use simple numbers to explain the “60-Second Real Estate Course.” The real estate market in your area may have a lesser or greater value, but that’s not important. What is important is the concept, not the dollar amount. You can apply these concepts to any property, regardless of the price.
First, let’s define “equity.” Equity is the market value of a property, minus the amount of liens or encumbrances. The most common encumbrance is a loan secured by the property. This loan is called either a “mortgage” or a “trust deed,” depending on the state where you live. (Some states have both.)
There can be more than one loan secured by the property. The first loan made is called the “first” mortgage or trust deed, the second loan is called the “second” and so on. Other liens or encumbrances might be unpaid property taxes, a mechanic’s lien or even an unpaid small claims judgment.
Let’s imagine you are negotiating the purchase of a house for $100,000. There’s a $60,000 loan (mortgage) against the property. When you subtract the $60,000 loan from the $100,000 purchase price, what remains is the seller’s equity: $40,000. This is properly referred to as the seller’s “equitable interest.”
The bank that made the loan owns the balance of the property. Since the bank has an interest in the property–the $60,000 loan–the seller, in essence, has become a partner with the bank.
All that ever happens in any real estate transaction is, the buyer and the seller find a way to give the seller their equitable interest, so the seller can go away happy.There are only four ways to do this.
Pieces
One way sellers can receive their equitable interest is in “pieces.” I say pieces because I don’t want you to think strictly in terms of cash. You can think of the equity as owned in pieces or payments.
If the sellers receive their equity in pieces, and the bank continues to receive its equity in pieces, or payments, the sale can take place. Everyone with an equitable interest in the property is satisfied. Pieces go to the sellers for their equity, and pieces go to the bank, until the equitable interest is fully transferred.
Lump sum
The second way the sellers can receive their equity is in the form of a “lump sum.” This could be a purchase for all cash, or the buyers could obtain a new mortgage and make a cash down payment for the balance of the purchase price.
This is often referred to as a “cash-to-loan” transaction. The bank is paid off when the new loan is made, and the sellers receive a “lump sum” of cash for their portion of the equity.
Different form
The third way the sellers can receive their equity is in a “different form.” The equity can be paid with almost anything that has a perception of value the sellers consider equal to their equity. Instead of cash, they may agree to take a condo in Hawaii, or perhaps a motor home, or maybe some IBM stock. The possibilities are limitless.
A combination of pieces, lump sum, and different form
The fourth and final way the sellers can receive their equity is through a combination of the other three–pieces, lump sum and different form.
Perhaps the buyer assumes the $60,000 loan. The bank is satisfied because it continues to receive its monthly pieces. To the sellers, the buyer offers $10,000 cash, a motor home and a $20,000 note at 10% interest, due in five years.
You can use any combination that the buyer and sellers perceive as an equitable exchange. The possibilities are limited only by the imagination and the negotiating skills of those involved.
I developed the 60-Second Real Estate Course to help eliminate confusion when a deal starts getting complicated. Whenever this happens (and it still does on occasion), I say to myself, “There are only four ways to put this deal together. Which will work best, for both our purposes?”
To do that, I must identify the seller’s needs; I must uncover the seller’s perception of value. If it’s in alignment with mine, we have the potential to put together a deal. All I have to do then is convince the seller that what I have to offer is a fair value in exchange for the property. Remember: There are only four ways to do it.
I’m always looking for notes to buy, especially from banks, and I’m happy to pay a percentage of the deal to anyone who brings me real estate notes. Email me at [email protected]