Be the Bank

Let’s admit it.  Making money in real estate during times of appreciation and free flowing financing does not take skill, negotiation or fluent understanding of the market.  For the last decade, you could have pretty much bought something with your eyes closed and still made money the next year.  Did you notice that “real estate investors” started coming out of the woodwork?  Of course, now we have “foreclosure specialists” and “short sale experts,” but that discussion is for another day.


Today’s market takes skill, knowledge, creative thinking and… hard work…  so, where did those guys go?


Granted there are a lot of factors that play into your real estate investment.  Yes, you need to “buy right,” you need to understand the economy, you need to truly grasp what factors drive the market, etc., etc..


That aside, how can you make money as a true real estate investor today?  Well, one way is to be the bank.


The perception seems to be that the door of conventional financing has slammed shut for many buyers.  It’s not that Buyer’s don’t want to be part of the American dream, they just don’t seem to see a way to do so.  As in investor looking for a little cash flow… what can you do?


If you purchase a property using bank financing and want to sell it, that pesky “due on sale or transfer” clause pops-up and the bank needs to be paid before the new buyer could own the property.  This works incredibly well in many instances, but there could be other options….


Now, let’s say I recently bought a property for $1,150,000 and put $50,000 down.  I put the balance of $1,100,000 in a promissory note whereby the seller is the beneficiary.  The interest rate on this note is 5.5%, payments are interest only or more and all the outstanding principal is due in 20 years after closing the sale.


If the $1,100,000 was bank financed and I wanted to sell the property, I would need to find a buyer who was willing to go through their own means of financing (which is becoming more difficult) or who just happened to have a nice pile of cash sitting around.


Let’s say instead when I bought the property, I used a private note and there wasn’t a “due on sale” clause attached.  Now I when I want to sell, my property will look much more attractive to potential buyers if they don’t have to go through the bank.  This alone sets me apart from the rest of the properties that are for sale.


Moving on… Now, I find a buyer who will pay $1,300,000 with a $200,000 down payment and finance my own property at 7.5%.  First, that $200,000 down payment re-pays my original $50,000 down payment, $40,000 in closing costs AND I even walk out of escrow with a check for $110,000.  The interest rate I charged the buyer was 7.5% interest only payments and the principal balance due in 19.5 years (just before my note to the underlying loan).  My note is collateralized by an all-inclusive deed of trust on the property.


When I negotiated that 2% difference in interest on the balance of $1,100,000, it is now putting $1,833/month in my pocket.  Overtime, this amounts to a $418,000 difference not including compounding and interest.


I would NEVER recommend to just run out and buy something hoping you can make this deal.  There is A LOT OF RISK involved… such as what if your buyer stops making payments?  You are still going to owe your interest payment at 5.5% to the original lien holder whether or not you have income coming in.  That’s $5,042/mo that you’d better be able to cover… and it’s just a single example.


The point is… when you’re out there looking for the stars to align… keep in mind that sometimes the primary attraction is not the real estate itself, but possibly the financing.


True real estate investing is knowing how to invest in all types of markets.  If you’re ready to get started, give Jen a call.  I may have an opportunity waiting for you.


Jen Hudson, GRI

(206) 293-1005

(360) 652-1200

Windermere Real Estate/M2, LLC

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