In the very first real estate book I ever read, "From Janitor to Multi-Millionaire" by R. Mike Weese, I learned several methods for buying property with no money down, aka creative financing.
There is one method in particular that I just assumed was 100% ethical and legal, but my BIC seems unsure about because she has never heard of it or seen it done before. She wants to ask around before letting me do it. This is totally fine, of course, because if it's not ethical then I don't want to do it.
Here's the example from his book, but skip this for a quick summary next:
Let me give you an example of my early days in real estate. In the city of Brea, California, in the early 1970s, I was able to buy three and four bedroom homes for $50,000. In many instances, these homes would actually appraise for as much as $60,000. I remember doing some cold calling, or canvassing, as they call it nowadays, on homes advertised for sale by owner in the local newspaper. I remember finding one, where the seller told me he had a current appraisal of $60,000. He was willing to sell his home for a net of $50,000 to him. If I were to earn a commission, I would have to add it on top of the $50,000 that he had quoted me. In my negotiations with the seller, I confirmed that his only desire was to walk away with $50,000 from the sale. He acknowledged that was true. I then presented him an offer in the amount of $60,000. I told him to not get excited until he read the second page where I discussed the commission. On the second page I had entered the amount of $10,000 as the commission I would receive for selling his property! He then proceeded to tell me that he thought that my commission was extremely high. I told him that I agreed with him, but that was the only way I was interested in purchasing his property, and it really made no difference to him since he would still get the $50,000 he had required. I then went to the lender to ask him for a 90% loan based on the $60,000 sales price. Remember, we had a current appraisal placing the value at $60,000. The lender had no problem with the appraisal and agreed to make me a loan of $54,000. There were minimal closing costs involved in this transaction. I placed $6,000 into escrow, which represented a 10 percent down payment. At the end of closing, the Escrow Company cut me a check for my commission in the amount of $10,000! I had purchased this property for $6,000 out-of-pocket costs, and received $10,000 back at closing. I was then the proud owner of a new property and had $4,000 in my pocket from the commission that I had received! This is one instance where it pays to be a real estate licensee. A real estate licensee has tremendous flexibility in finding properties that he likes and being able to use his commission toward purchasing the property.
Summary:
Seller has property appraised for $60,000.
Buyer, who is a real estate licensee, discovers seller just wants $50,000 at the end of the deal.
Buyer makes offer for $60,000, where $10,000 goes to commission and $50,000 goes to seller (closing costs were minimal).
Buyer gets loan for $54,000 from bank and puts $6,000 (10% of $60,000) into escrow.
At closing, seller gets $50,000 and buyer gets $10,000.
Buyer put down $6,000, but then gets $10,000 out of his own loan via high commission.
Seller is happy and Buyer walks away with property without spending any money out of pocket AND now has an extra $4,000 cash that he pulled out of the $54,000 loan.
Is this legal and/or ethical?
It seems to me that the there are no issues between the buyer and seller, since they both agreed to it. Any ethical dilemma would be between the buyer/agent and the bank.
In the end, it allows me to purchase more property to buy, hold, and rent. This is good for the community and no harm comes to anyone (seller, buyer, or bank). I think the author of the book was probably not entirely up front about the amount of commission he was earning with the bank, and they probably didn't even notice what was going on. If that's the case, is it his job to point every little thing out to the banker? OR is it just his job to submit a loan application and see if it get approves or not?
This strategy was a significant factor when deciding whether or not to get my real estate license. It was also a HUGE factor when picking a company to work for. I finally found one that wouldn't take a percentage of commission on the deals that were for myself. (This method would NOT work if I had to share 20-75% of my commission with my broker! I'd just be giving them free money out of my own loan.) I'm going to feel awfully silly if this turns out to be a bad idea.
Thanks for reading and helping this newbie out!
