When you are first starting out, you need to be aware of where your money resources may be. This is why Bob Diamond’s program on real estate investing and foreclosures can be so valuable to the investor. If you are going into the real estate flipping or rental business, you are starting a small business. Traditionally, small businesses are started with money from friends and family. This means that you are borrowing from people who know and care about you and trust you. Maybe a few of them get together and put in a small amount of money each, but when it is all added together, you have enough to do a project. Most traditional lenders (banks) will not fund a small business start up venture. This is where the real estate business is different. There are lenders referred to as “hard money lenders.” These are lenders that lend money based on the value of the real estate securing the loan rather than based on the borrower’s credit or income. These lenders will often take your credit and income into consideration, but mainly they are interested in knowing that the collateral will be sufficient to repay the loan if you are unable to repay. When you are starting out and do not have your own credit or money, you need to find someone who is motivated to help you. In my book, there is no interest like self-interest. To get what you want, you have to give your lender something that he wants. If you are borrowing money from friends or family, they may want to see you succeed and will certainly hope to make some kind of a profit. If you are able to offer a return that is significantly above what they can get from a bank, the stock market or other source, they may want to entrust you with their money. You might also want to invest with a partner. There are lots of people with money, but without the time, inclination or training to tackle real estate projects. If you offer to do the work of finding property, overseeing it and managing it to completion, you may be able to find a partner with money or credit who is willing to put up the money or borrow the money in return for part of the project.
To find real estate deals that are financially feasible, you must look for motivated owners of property. Motivated owners are owners that have a piece of property that they are highly motivated to sell or to have someone else take care of either because they cannot pay for it, do not want it, or just cannot deal with it anymore. A prime example of a motivated owner is an owner who is in foreclosure. An owner who is facing foreclosure is facing the imminent forced sale of his property and, if he lives there, his eviction from the property. If you are able to take over the property, which may involve just taking over the payments without payment of any further funds, an owner in foreclosure will be more than happy to see you and will be very flexible.
Right now, I would like to familiarize you with some of the terms and some ways of thinking about benefiting from ownership or control of real estate that you might not have thought of. First, I would like to talk about the term “no money down.” In real estate, “no money down” has a special meaning. It means that the buyer of the property puts a down payment of five percent or less on the property. The buyer still may be paying closing costs. Closing costs include items such as title insurance, transfer taxes, attorney’s fees, bank loan fees and other costs. “No money down” does not mean that you went to settlement, signed the documents and became the owner without laying out any cash to the seller. I will you techniques in this book to minimize your cash out of pocket and your down payment. It is very important that you think creatively about financing your real estate deal. First, you should keep your goal(s) in mind. Your goal is probably either to make a profit or, alternatively, to get the benefits of ownership without outlying a lot of cash up front. By focusing on your goal you will keep from getting sidetracked. Let me tell you about a few interesting scenarios that should encourage you to think creatively. You do not always need to own the property to meet your goal. Ownership and control in real estate are often split up. Think about the relationship between a landlord and tenant. The landlord is typically the owner of the property, but the tenant exercises the day-to-day control over the property. Sometimes a landlord is not the owner, but is instead a tenant of the owner who has re-rented the property to another tenant. The landlord is called a sub-landlord and his tenant is called the “sub-tenant”. There can be a profit because the amount the sub-landlord is renting the property for from the owner is less than the amount he re-rents the property to the other party for. This interesting arrangement can be intentional because the landlord may want to lease the entire property to one person, who then has the right to sublet it to many other people, perhaps at a profit, but without the owner of the property having to worry about dealing with all of the tenants. Other times, this arrangement is a function of the tenant having a lease where he is not prevented from subletting the property to others and he has extra space he does not need, or rents have increased over time such that he is able to make a profit from his lease which is based on old leasing rates. Another interesting technique to think about is that that the current owner may not necessarily benefit from future appreciation in the price of the property. As you probably know, appreciation is the term for the increase in value of real estate over time. If you are in an area where home prices are going up, there are special methods that can allow you to enjoy the benefits of that appreciation without expending a lot of money. Through good times and bad, in most areas of the country real estate has continuously increased in value. Occasionally, there will be some temporary setbacks, but over the long term, real estate always seems to increase in value. One of the special methods to take advantage of an increasing market it the option. An option is the opportunity for a buyer to purchase a property at a certain price at any point over a certain time period. An example of an option would be a lease with an option to purchase. You might rent a house for $800.00 per month with the option to purchase at any time over the next three years for $80,000.00. If the property increases in value above the $80,000.00 option price, you might decide to exercise your option and then immediately resell the property to another buyer who is willing to pay more money for it. If you drew up the contract properly, you might even be able to assign your option to purchase to the new buyer, have him pay you the difference between what he is willing to pay and what your contract price is, thereby taking your profit without ever purchasing the property yourself. There are many techniques to purchasing or benefiting from control over real property when you do not have much money or credit. Keep an open mind and remember to think creatively as I introduce you to some of the concepts and techniques that can help you build wealth, even if you do not have money or credit.
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