Advanced Purchase Techniques

Ask not IF it can happen, but HOW it can happen

This is one of our guiding principles at Echo Summit. It is easy to say ‘no’ to an apparently complicated deal or situation. This is what most people do. This is also what helps set Echo Summit…and most of our clients apart. The tips below are proven strategies for acquiring, refinancing and even leasing properties.

• Obtain >100% LTV Financing$100k property
  • If seller carries 50% second on the property ($50k), a bank would never give a 50% primary because this would be a 100% LTV loan. Instead, offer the seller a $50k second mortgage on another property, then the bank will look at that as almost cash. Now, ask the bank for a 70% loan, for total financing of $120k. Sweeten it for the bank by promising to use the extra $20k for improvements to the property.
• Assumability
  • Assumables are usually qualifying, so there is no guarantee from the lender anyway.
  • If current interest rate is far below the one on the existing mortgage, the quid pro quo for the seller is usually a higher selling price for the house… IF it appraises at that new high amount.
• Capitalize on Low-APR Mortgage with a Wraparound
  • Maintain payments on mortgage, but offer a new mortgage to the buyer, that wraps a second mortgage around the first one. Owner quit claims title to new buyer. Problem is the due-on-sale clause on most deeds of trust. If new owner changes insurance, the new insurance company will send info to original lender, thus alerting them to the fact that ownership has chanced hands. Lender could consider this alienation of title and execute DOS.
  • Wraps can be dangerous to the seller, since they have given up ownership of the property, but still have liability for the mortgage. Owner could be in trouble if buyer does not pay, or if the bank executes a due on sale.
• Minimize PMI
  • 80/10/10 or 80/15/5, where 80=first mortgage, 10=second mortgage (purchase money second), 10=down
  • Tax Advantage Mortgage Insurance (TAMI) = lender increases interest rates in lieu of charging PMI. Usually does not work out as favorably as an 80/10/10
• Maximize Debt-to-Income with Owner Financing
  • Owner financing allows the investor to accumulate many properties, as the loan will not show up on credit reports or against qualification ratios (e.g. debt-to-income), but the investor can claim the income from the properties.
• Negative Points
  • In order to minimize settlement costs, lender might quote I tradeoff between negative points and increase in interest rates: 8%/0 points, 7.5%/3 points, 8.75%/-2.5 points
  • When negative points are retained by the mortgage Broker, they are called a “yield spread spectrum”
• Maximize Immediate Cash-flow (Minimize Constant Rate)
  • Interest-only loan, or negative interest loan. This will create huge cash-flow problems in later years, though. No equity buildup, though you still have appreciation effects.
• Reduce Term of Loan (Maximize Constant Rate)
  • Wipes out cash flow
• 2nd Mortgage Crank
  • After purchasing a property using an 80/10/10, refi the 2nd for 100+%LTV to free up the down payment cash. Rule of thumb: if you purchase 20-25% below market, there should be enough leeway to refinance the property at the end of the first year to free up the initial capital, as well as achieve a significant equity gain. Can further guarantee this by fixing up/rehabbing
• Balloon Down Payment for OWC
  • For a 30k down, offer $6k at time of sale, 12k six months later, and the final 12k a year later. You could fix the property up and sell it before down pmt is even due.
• Full-price offer / zero down
  • Feeds off the principal that the more cash involved in a deal, the lower the price. For an OWC, offer full price, but with zero down or other favorable financing terms. Offer 145k all cash, or 165k with no cash down.
• Bring in investor to finance deal
  • Take a portion of appreciation in exchange for finding the deal
• If owner has equity in run-down property: assume existing note, have seller carry back 2nd, and trade fix-up labor/materials for down payment
• Divide down payment into multiple years
• Flexible payments during rehab period
• Create your own wrap scenarios by making sure the original note has provisions for no Due on Sale, etc
• Seller financing, make sure:
  • Long-term payoff, Low interest rates, No Due on Sale, No prepayment penalty, No late fee, No other restrictive Ts&Cs, Ideally unqualified assumable
• Large down payment/high equity situation: Seller financing/subordination
  • Gets them top $ for their down payment, costs you nothing
  • Assume sellers existing loan, offer seller third mortgage (subordinate to existing financing), and take out second yourself (pay down out of loan proceeds). Works best if each is roughly 30%. Work in additional provisions, such as moratorium on payments.
• Lease Option with equity buildup
  • Offer the Seller/Landlord a 5-year lease with option to purchase (at agreed upon price). A portion of lease (10-20%) goes towards eventual payment, as well as the option $ given to the Seller. Investor could then sell this option contract if things work out well for appreciation/rents/etc. Investor would have to be certain that future option price is under market. Build in a 1-year “rolling option” (for extra $) that allows you to extend the option one more year, just in case.
  • For the Seller
    • Guaranteed 100% rent for 5 years with no headaches and hassles. Home will be treated well. Continued paydown of Principal. Tax-free option $ to use as they please for 5 years. If option is exercised, it just becomes a part of the Purchasers down payment. Likely purchase at appreciated rate.
  • For the Investor
    • Lock up and control property with no cash. Mitigate risks of catastrophic property failure by living with it for 5 years first. No responsibility for paying taxes, etc. Pocket the rent spread in future years. Build instant equity through % of rent going to eventual property purchase (through THEIR post-tax dollars). Experience ‘virtual ownership’ before fully committing. Purchase with instant equity.
• For normal buy-and-hold
  • Negotiate the lowest purchase price possible
  • Include seller-paid closing costs on behalf of buyer
  • Seller-carry second financing with long, long amortization period (40 years), and an X-year balloon
  • Immediately crank the second (if not seller-carry) for 100% LTV to free up cash
• Purchasing ‘Subject To’ the existing loan. When taking subject to:
  • Get power of attorney so you can deal with his lender for payoff info, or in case you did something wrong with the original deed and can not get ahold of the Seller
  • Get Sellers last payment book/statement and send in change of address form
  • Have seller sign a Due on Sale Acknowledgement (Flipping Properties-Appendix) about the fact that you are not assuming the loan and it will remain on his credit until you pay it off
    • If a prop is in foreclosure, it is easy to talk them into some cash, and the promise to pay off their loan.
    • If the loan is current, you could hurt his credit by not paying off the loan. Some options:
      • Tell him your honest intentions
      • Insert a clause in purchase contract that reads “Purchaser agrees to satisfy sellers loan with _________ bank loan #______ on or before _______, and further agrees to make timely monthly payments required by said lender, including tax and insurance escrows as they become due. The clause shall survive closing of title.”
      • Offer second mortgage on the prop, for $10. Gives them the right to foreclose on the home if you default.
      • Third party escrow collection company. Could also set up a direct deposit to lender. Paytrust.com
      • Land contract. Puts buyer in weaker position, though.
    • If you plan on flipping, make sure and ask lender for Reissue Rate or Hold Open Policy