If you expect to hold title to a property acquired at a bargain price just a few days, weeks or months before “flipping” it to another owner, the last thing you want to do is obtain an expensive bank mortgage.
Whenever possible, please don’t use your own cash to acquire flipper property. Personally, I’ve found I negotiate the best purchase price and terms when I don’t have much ready cash available and am forced to negotiate creatively.
Purchase Bob Bruss reports online.
The same principle applies even if you acquire a fixer-upper house or other property that you plan to immediately fix-up to increase its market value but you want to keep it rather than flip it – conserve your cash!
Here are the easiest ways to avoid the high cost of obtaining a new mortgage at the time of property acquisition:
- Assign your bargain purchase contract to your buyer. That means you won’t actually be taking title. Be sure the purchase contract form you use doesn’t prohibit assignment. This method is sometimes called “double escrow.” It is perfectly legal if you disclose to your buyer that you don’t yet hold title but you have the contractual right to acquire title.
- Take title “subject to” the existing mortgage(s). That means you don’t formally assume the current financing. Of course, you must make the payments or lose the property by foreclosure. Yes, this violates the mortgage due-on-sale clause. But most lenders won’t complain as long as the payments are made on time. This method works especially well if the current financing is in default and you are obtaining the seller’s deed before you cure the default. Most institutional mortgage lenders just want their monthly payments made on time with no hassles.
The worst that could happen (but probably won’t occur), is (1) the current lender might demand a 1 percent loan assumption fee, or (2) you will have to refinance with another mortgage lender.
If you need cash for a down payment to pay the seller, borrow on your unsecured bank credit line, or even on your credit cards (especially when you can use those low-interest-rate credit card checks the credit card companies mail to their best customers almost every month). You will only need the cash for a few months until you can “flip” the property, so it won’t be too expensive.
Another, but more expensive, cash source is to borrow from an equity lender. These lenders usually loan private-party money on the equity in the property rather than on your credit rating or good looks. However, their interest rates are not cheap. But if you will only be using the money for a few months while you fix-up your flipper property, the money won’t be too costly. After these equity lenders get to know you, they will often lend on appraisals based on the fixed-up market value of the property rather than on its current market value as a run-down “el dumpo.”
- Option or lease-option the property you want to acquire. This is a great way to control the property while you fix it up. Just be sure you will be able to get the deed from the owner when you’re ready to exercise your purchase option. Some lease-option buyers insist their sellers deposit the deed into escrow so all they have to do is walk in, pay the option purchase price money owed to the seller to exercise the option, and get the deed to the property.
EXAMPLE: I recently read in Ron LeGrand’s superb new book, “How to be a Quick Turn Real Estate Millionaire,” (which earned an off-the-chart 12 on my real estate book review column scale of 1-to-10!) about Marco Kozlowski. Just in his mid-30s, he paid $100 for an option from a wealthy seller to acquire at $4,000,000 an Orlando house, which had been listed for sale with a Realtor for four years at $8.6 million. Marco then hired a professional auction company that, 43 days later, auctioned the house for $5.6 million cash. For you math flunkies, that’s a “quick flip” $1.6 million gross profit. Gosh, I wonder what the annual yield on Marco’s $100 option money was? As my good friend Jimmy Napier would say, “It’s good enough!” Marco also auctioned the seller’s yacht for $4.3 million and various furnishings for almost $1 million. According to LeGrand, in his first year of flipping houses, Marco acquired 119 deeds on flipper houses in the Orlando area.
- Seller financing. The property seller is often the best source of acquisition financing for flipper properties. This can often be the situation where you give the seller a short-term second mortgage for at least two or three years (always try to negotiate the longest possible term for seller financing).
EXAMPLE: I recall once giving the seller of a bargain fix-up house I bought a 12-month promissory note and deed for trust (mortgage) for my down payment. That year was the fastest year of my life! Fortunately, I got that house fixed up and resold in the 11th month. However, if I had not either sold or refinanced it, I could have lost that house when my balloon payment came due to the seller. That’s why I suggest you insist the seller financing term be for at least two or three years, but without a prepayment penalty for early loan payoff.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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