Mortgages & Creative Financing

How to Buy a Home Without Being an Active Investor

Expertise: Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Personal Development
44 Articles Written

Purchasing a property for yourself is a life-changing investment.

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Most of you reading this are thinking about or have already purchased a personal property. This article is to help show you this can be done as an investor, too, and likely sooner and for less money than if you were to try to simply save money for a home.

The idea behind this article is to break through the barrier of believing that you can’t buy desirable properties on terms without banks from the get-go. Maybe it’s not a common strategy utilized by the general population, but it’s been done since the late 1800s.

Real-Life Example of Buying on Terms

My daughter and son-in-law bought their own property, which we’ll call 11 Lady, in a neighborhood where they already wanted to live. It even has amazing water views! Did I mention there’s a private beach at the end of the road?

This isn’t to brag. This is to clear your mind from any hang-ups with regard to buying creatively on terms. Hopefully it will inspire you. If you can use any of these ideas to buy your own property, then you’ve got a huge win!

They purchased 11 Lady for $520,000 with monthly payments of $2,200 under a lease-purchase agreement. Their payment amounts to less per month than they were paying in rent.

The mortgage was roughly $150,000, and they also have an equity line of credit. This was left out of the agreement though, because they will pay the previous owners a set monthly amount so they can pay off their equity line.

In any and all of your agreements, if there is an equity line, make sure that there’s a cap to how much they can pull from it. Or better yet, include terms that they can no longer pull from the property’s equity since you are taking control of it.

find-deals-CAD

As part of the lease-purchase agreement, about $1,000 of the $2,200 monthly payment goes to principal, because that is what is allocated on the remaining underlying mortgage. It’s a 15-year mortgage, so with such large principal paydowns, it’s almost like an owner-financing deal.

We tied this up for 36 months on a lease purchase, with a down payment of $2,500 before move-in and another $2,500 within six months. That’s $5,000 directly off the principal.

The 36 payments of $1,000 toward principal shaves another $36,000 off the price and will count as a down payment for the mortgage they’ll get in (or before) 36 months to cash out the sellers. These scheduled down payments add up to $41,000 and bring the balance owed down to $479,000.

Related: When Buying on Terms Pays Off Big Time (Almost $200K!)

In Rhode Island, anything over $430,000 is considered a jumbo loan, which requires at least 10 percent down. To get to that 10 percent, my daughter and son-in-law need to accrue another $11,000.

Preferably, they could get under the $430,000 principal and maybe avoid the jumbo loan and just get a more favorable rate. So the real goal, since they are in Rhode Island, is to accumulate another $49,000 over the next year. Depending on the lender they go with, they may get away with just another $11,000 for a better rate at closing.

If they were to go put money down on a $520,000 property today, they would have to put down 20 percent (or at least 10 percent, meaning $52,000, out of pocket. To accumulate that same 10 percent through this method, they only need to come up with $16,000 because of the 36 monthly payments toward principal.

By creating these terms, it’s essentially a down payment scheduled over time toward the purchase price—all thanks to buying on a lease-purchase. If we decided not to buy the property and just to rent, that would have been $2,300 a month going to a landlord with no principal paydown or other benefits.

landlord, rental, homeowner, realtor

This example is to get you thinking creatively about terms instead of automatically thinking that you have to go to a bank to get a loan right away. There is potential to create a more favorable deal that will save you money on a down payment, or if not, at least give you enough time to save up more cash flow while you pay on a property.

In fact, the property you are paying for while saving doesn’t have to be the one you eventually own. You could sell the one you have been paying off (because with a lease purchase, you have equitable interest so you could sell), and use that capital and savings to purchase an entirely different personal property for you and your family.

Related: Offering Terms Will Set Your Property Apart

The Specifics of This Deal Structure

  • Property: 11 Lady
  • Lease purchase price: $520,000
  • Monthly payments: $2,200
  • Principal reduction: $1,000/mo. ($36,000 during the term)
  • Due before move-in: $2,500
  • Due within 6 months: $2,500
  • $520K price – $41K down payments = $479K loan needed on or before the term ends

What do you think of this deal structure? Would you ever buy or sell a home on terms? Why or why not?

Let’s talk in the comment section below. 

 

Chris Prefontaine is the best-selling author of Real Estate On Your Terms. A real estate investor with over 27 years experience in the field, Chris is the founder of Smart Real Estate Coach and host of the Smart Real Estate Coach Podcast. He lives in Newport, Rhode Island with his wife Kim and their family. Chris is a big advocate of constant education. He and his family mentor, coach, consult, and actually partner with students around the country, teaching them to do exactly what their company does. Between their existing associates nationwide and their own deals, Chris and his family are still acquiring 5-10 properties every month and control between $20 to $30 million dollars worth of real estate deals, all done on terms without using their own cash, credit, or signing for loans.

    Mary Mcallister Investor from Asbury Park, New Jersey
    Replied 5 months ago
    Hi, thanks for the informative article. Was your son paying an additional monthly payment to the seller to cover their home equity loan, or was that part of the $2200 monthly payment? Thanks!
    Account Closed Specialist from Middletown, RI
    Replied 5 months ago
    That was part of it. Sometimes if the deal doesn’t work on the monthly because of too high equity loan, the seller can cover or just do an AO.
    Mary Mcallister Investor from Asbury Park, New Jersey
    Replied 5 months ago
    Also, who is paying the taxes and insurance during the lease purchase term? And is your son responsible for all upkeep and maintenance (including big-ticket items like a furnace, roof, etc?)
    Account Closed Specialist from Middletown, RI
    Replied 5 months ago
    Taxes and all maintenance are handled by the buyer in the home and they have their own renters’ insurance but you would cover the home owners’ if not in the PITI monthly payment
    Mary Mcallister Investor from Asbury Park, New Jersey
    Replied 5 months ago
    My apologies: I realize it’s your daughter and son-in-law!
    Amanda Gant from Washington, District of Columbia
    Replied 5 months ago
    I believe this would not work in hot markets such as DC? Correct?
    Account Closed Specialist from Middletown, RI
    Replied 5 months ago
    It works in all markets. In fact, our highest earning Associate is right in Washington DC!
    Katie Rogers from Santa Barbara, California
    Replied 5 months ago
    The trouble I have with these types of anecdotes is the subtext, “Go and do likewise.” It is very difficult to get most sellers to even think about anything other than conventional terms. Neither the seller’s agent nor the buyer’s agent will be any help. In fact, they will likely discourage anything other than conventional terms.
    Account Closed Specialist from Middletown, RI
    Replied 5 months ago
    WOW Katie, you’re talking yourself right out of success. First of all, about 30%-40% of sellers we speak with will do and most certainly already to – terms. Secondly, approx 1/3 of homes in the U.S. are free and clear of any loans – great group to work with. Third, we very very rarely will be doing a deal through a sellers’ agent of buyers’ agent – next to never. We deal directly with sellers and buyers. Hope that helps. You are cutting yourself short. You really should get to our annual QLS Live Event and meet and rub elbows with people doing these deals all over the Country. Between our own deals and our Associates, we’re doing 10+- monthly.
    Katie Rogers from Santa Barbara, California
    Replied 5 months ago
    Great that you are doing so many of these deals. Do you have somebody with an agent’s license on your team? If you do, you effectively have a buyer’s agent. With the denominator of the total number of owner-occupied or rental real estate sales each year, only the tiniest fraction of deals resemble your deals. In my community, it is very, very difficult to find a seller who has not listed with an agent. In addition, investors in my community routinely overpay because they have internalized that this market is an appreciation market, not a cash-flow market. Close to 99% of deals will not pencil out without terms, but sellers usually are not interested, especially when eventually they are likely to get a buyer who is willing to overpay. Even most of your sellers are not interested in terms–it’s worse in this market. Here is an example that closed just last month. It was a terrible fixer occupied by tenants listed at the ARV of $960K. Cost to repair the right way–good quality, not high end, but durable and attractive, would be around $140K, a figure the seller’s agent agreed was probably correct. After many weeks, the agent called me when they reduced the price to $840K. They rejected my offer of terms, and why should they accept—eventually the property closed for $825. The investor who bought the property is relying on appreciation to save his bacon. This situation is very typical of my market. I am not saying to give up. I do the work everyday. I am just saying if the average person reading your post expects the results you report, they will become disappointed and frustrated. Your post is not even talking about investors. Your target audience is owner-occupied buyers who buy a house once or twice in their whole life. Without a dad like you, the likelihood they will ever be able to consummate a deal like the one you described is slim to none. They are also lucky they/you found a seller willing to accept terms in the neighborhood where they already wanted to live. Once you have narrowed your market to a single neighborhood, the probability is even lower. Consider too that your story is not really about buying a house without a bank. Your kids plan to get their own mortgage on the house soon. Kudos to you and your daughter, however, a real barrier exists. If the stars align the barrier may be overcome, but it is not like anyone can do it.
    Harry Looknanan Jr. Rental Property Investor from San Antonio TX
    Replied 5 months ago
    Katie, you presented some very valid points and arguments. I am in agreement that the specific scenario Chris presented is unique in deed. With that said, Chris is using a strategy that works in “His” Market, and I presume may have limited applicability across all Markets, as you pointed out. I have personally seen Chris’s strategy play out really really well-the year was 2009-2012! Banks were not lending, and Seller’s were looking to get out!