What Is Your Perception of Value?

A key to understanding the power of using �paper� in real estate transactions is to understand that despite what a promissory note might state on its face as the amount of debt owed, it could very well have different perceptions of value to different folks.

When you are negotiating to acquire property for long-term investment or in a �buy and hold� strategy, the financing you are able to obtain is secondary to the negotiation over the property sales price; however the financing allows you to �structure� deals that can make economic sense.

There are really limited reasons to acquire properties that cannot be rented so that the rental revenues will cover all debt service and expenses and leave at the very least a �break even� or positive cash flow transaction for you, the investor. Debt service is the repayment of principal, interest, or principal and interest.

When entering into negotiations with sellers, you must keep in mind this fact: �If my tenant cannot afford it, I cannot afford it.� Structuring seller financing with �flexible� property sellers allows us to pay them their asking price by negotiating their repayment of �debt service.�

Put the sellers equity "off to the sidelines"

Often to make a deal work, a property seller must place part of their equity off to the side or suspend it for a period of time where it will require no interest payments or perhaps no payments at all.

For example, you acquire a nice rental home worth around $200,000 for 10% under its value or a sales price of $180,000. The home will lease and stay leased for about $1,400 per month. You obtain a new institutional first lien mortgage for $160,000 from a mortgage lender that is amortized over 360 months at 6.5% and payable $1,011.31 per month in principal and interest payments.

The sellers are willing to finance $20,000 by agreeing to carry a second lien mortgage & note. After adding in the cost of hazard insurance, property taxes, and management, the home just slightly produces some modest cash flow each month from the rent coming in versus what must be paid solely on the $160,000 first lien mortgage note.

Thus, no payments can be made to for a period of time on the sellers $20,000 second lien mortgage note until rents support the additional debt service. This is a form of putting the sellers $20,000 of equity still due them off to the side until a future point in time.

Please stay tuned for more details.