What does "Other peoples money" really mean?

Question

I am starting to wonder about this - if I were to pick up a $125k piece of property, say, this month, is there anyway to go $0 out of pocket?  Or is there always going to be something that costs me?  Such as $5k for inspection, other closing costs, etc. ??

Stephen McKee · Answer

Hey Jason,

Have you been having any problems with exceleration clauses? What form of wrap around mtg do you use if any?

Jason Hanson · Answer

My goal is to always use 100% OPM. You can do these with subject-to, lease options, using private money and using HELOC's from your primary residence.

As far as closing costs I get the seller to pay all closing costs the majority of the time with my sub-2's. Everything is negotiable in real estate so try and get the seller to pay as much as they can.

I don't deal with foreclosures/REO's for this very purpose. Why in the world would I want to have to get a bank loan, or a large money loan when there are so many people out there who would love someone to come in and take over their monthly payments and give them relief from their mortgage payment.

Greg Hanson · Answer

Hi Folks,

Hoping to answer a couple probably rhetorical ?'s but You would want to 
get a loan that gives you time instead of requiring pmnts. You mentioned Hard Money . That is the best way to do everything w/o putting any cash
out as you know. Also w/ Private Money you can include all closing costs,
re-hab costs, 6 mo. pmnts etc.  in the loan. I have bought many properties this way , actually maybe 50 or so? We are trying to control
the property long enough to force the appreciation and then re-fi or sell.
My minimum on a deal went from $10k to 30 until the sub-prime problems
it was actually at $200k. Not bragging here just saying there are deals out 
there you just have to look for them. The biggest hurdle I've found is 
convincing yourself and everyone else you come into contact w/ that they
exist. You can always find someone to tell you it's too hard to find, or they
don't exist or whatever. I can give you address's and numbers to prove
they do exist. That is why I am writing a couple e-books now w/ titles like
how to get 'free dirt' and 'how to know before you buy how much you are making' and j'how to buy building materials for 5-20% of retail' along w/ a few others. There are a lot of deals waiting to be had for those that can
see what they're looking at. There are many more that are not good deals. A good rule of thumb is to 'not make other peoples problems yours'.  Taking over pmnts. is a great idea if there is a 'Lot of Equity' 
involved but most of the time the seller should be helped in figuring out
how to keep that equity instead of taking it from them. That is how REI has gotten a lot of bad publicity. It is called greed. Anyway, there are plenty of Great deals out there that people are willingly giving you that 
are not 'over the line' of ethical purchasing or call it negotiating if you want. I just bought a house w/ a 'free' lot that the sellers knew what they
were doing and didn't care. 2 actually come to think of it. One is worth $200k and the other $300k. I've bought others that had lots or acres worth $30k and more also. Some were completed Foreclosures. As I said there are plenty of great deals out there and there are going to be a lot
more coming up.

Chris George · Answer

This is great information, I was a little confused as to what "subject to" deals looked like.  I could see that this would definatly be a great idea if you have not so stellar credit, am I correct or not?

What kind of money are you looking at out of pocket to get the deal?

Also, 
Once everybody signs all the necessary paperwork, do you now own the property or are you just making payments on it?

These answers would greatly help out.

Jon Holdman · Answer

When you buy a property with a subject to deal, and do it properly, you own the property just the same as with an ordinary contract.  By do it properly, I mean do the closing through a title company with properly filed paper work.  The difference between a subject to and a normal transaction is that the title is transfered "subject to" the existing mortgage.  The deed and title policy will state this exclusion.

So, you both own the property and are making payments on it.

The example in the link is pretty weak, IMHO.  The example property has debt equal to its current value.  As the seller discovered, having a little equity (less than about 8%) isn't really equity due to the costs involved in the transaction.  The subject to buyer rents it out apparently at a rent that just covers the payments.  Never mind the other operating expenses involved with holding a rental.  So, the seller is in a world of hurt if the rental doesn't go very smoothly.  Then, the property appreciates from $160K to $210K in two years.  There may have been two year periods in the past when this happened, but I seriously doubt you're going to see that anywhere anytime soon.

Whether you're doing a fix and flip or a rental, all the normal rules apply.  Do some reading here or somewhere if you don't know what I mean by that.

Out of pocket expenses will depend on the situation.  There is going to be a closing, so there will be some closing costs.  You'll have all the paperwork, legal costs, filing fees, and title insurance.  You won't have loan origination fees or appraisal fees.  If your area has any sort of transfer tax, you'll have that.  If the house needs work to fix it up, you'll have those costs.

Jason Schmidt · Answer

Dan, I love what you are saying, though I only am catching a part of it.  So you mean I can walk into a deal for 5k cash and come out of it with 35k equity or similar?  How on earth do I get into those deals? where do i look?  The thought that this actually is out there, rejuvinates my interest in REI.

Matt DuSold · Answer

I also am trying to understand this a bit better.  I get the drift but do not feel a full understanding of this concept.  But I would love to understand this.  Sound ideal for a college kid that has about 10K! 8)

Christian Malesic · Answer

Check out this other thread right here on the BP "starting out" forum that talks about one of the ways left to you:

http://forums.biggerpockets.com/viewtopic.php?t=19648&highlight=

Essentially, you get the first property using your money then leverage it + OPM to buy all others (as long as you are doing it right)

Christian Malesic · Answer

It is becoming difficult, if not impossible, to use 100% OPM in this market.  I have done plenty of deals with $0 of my money in, but that was way back before the mortgage crisis (6 months + ago).

What does &quot;Other peoples money&quot; really mean?

What does "Other peoples money" really mean?