How to Buy Free and Clear Real Estate (Part 2)

Here are five ways to structure deals with owners of free and clear properties:

1. Straight owner financing

This is the most traditional way of approaching the owner of a free and clear property. You simply give the seller a small down payment (ideally less than 10%), and the seller finances the property carrying back a first mortgage. For example, on a $200,000 house you might give the seller $20,000 down, and the seller carries back the other $180,000.

2. Big money cash close

Using this technique you bring in a new first mortgage of 60% or less of the purchase price, and the owner carries back the balance of the purchase price as a second mortgage. The best part about this technique is that it gets cash into the sellers hand and still gets you in with no money down.

An example is a $175,000 house I bought with one of my students in Washington. We got a new first mortgage for $87,500, and the seller carried back the other $87,500 as a second.

Because the seller got a good price and a fast sale, we got something in return: A low interest rate on the seller second. We are paying less than 4% on the second. This makes a 100% financed property still cash flow nicely.

3. Seller refi – lease option

This technique calls for the seller to refinance out a large chunk of their equity from the property, and then for you to buy the house on a lease option from the seller. The seller gets 70-80% of their equity up front, and you–the investor–agree to cover the payment.

Then, at some point down the road, you will resell the property and cash out the seller of both the new loan and the equity they have. The two biggest advantages you get (besides doing this nothing down) are that first, you don’t have to qualify or pay for the new first mortgage; second, you don’t have to sign on the new loan.

4. Straight lease option

This technique gets the seller the maximum monthly cash flow from the property. You simply guarantee the seller a NET monthly payment and agree on a purchase up front that you have the exclusive option to purchase the property.

The seller stays on title, so they have more protection in this deal. (If you don’t pay, they can evict versus foreclosing on you.) As for you the investor, you get the benefit of getting in with no money down.

5. Short term owner carry – refi cash out

This works great for properties that need a bit of fix up, where you plan to rehab the property and then sell the house to a retail cash buyer. Since the house will need work, you need to negotiate a good cash price going into the property.

You buy the property from the seller with the seller carrying back the entire purchase price as first mortgage. This loan has a short term balloon note due (e.g. 12 months). You invest some time and money into fixing up the property as your down payment.

You can even put the money into an escrow account to make the seller feel more comfortable that you are really going to do the work, and then just get that money paid out to the contractors you hire as they complete the work.

Then you resell the property to a cash buyer. Your buyer’s new loan will cash out the seller first and pay you your profit.  One added bonus is that you can even use this technique if you don’t want to retail out by simply REFINANCING the property yourself in 6 to 12 months after you purchased it.

Since by that point the title has seasoned enough to let you borrow based on the APPRAISED value NOT the purchase price, you should be able to get back the money you invested, and you should even be able to pull out a chunk of your equity from the property too.

There you have five techniques to structure money-making deals with owners of free and clear properties. Good luck to you in putting them to work!

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By CREOnline Contributor

A content contributor to the original