All Forum Posts by: Derek Dombeck

I let every seller know within the 1st 5 minutes I'm talking to them, that I have multiple ways I can help them. This is usually over the phone and it sets me apart from my competition. Here's my pitch.....Marcello, I buy houses in several different ways. All cash is not a problem, but it's usually my lowest offer. If that doesn't work for you, we can look at making payments to you over time, or if you still have debt we could take over your payments. Sometimes we lease properties and put an Option in place to buy it later. This works well if you are going to have a big income tax payment due after selling. I tell you this Marcello so you can see we have multiple ways to help you.....

Doing it this way also puts the seller at ease as you start asking questions about the debt they have because they now understand why you are asking. I never use the words "seller financing" either, unless I'm buying from an investor. I've found those words confuse civilians. 

Once they answer my questions, I construct an offer that fits their needs and mine.

Since I don't know if it is their primary residence, I'm going to assume that it is for this example.

I would offer them $150,000 with $600 per month payments until paid in full instead of $109,000 at 5% interest. That is zero percent interest for a reason. You are paying more to make up for some interest. Why would the seller do this??? If they collect interest on a personal residence, they will pay ordinary income tax rates on the interest portion of each payment and capital gains on the rest of the payment if they are over the IRS Code Section 121 exemption. (In this example they would not pay any capital gains.)

Let's assume they lose 30% to income taxes over the life of the loan. How much is that?

$109,000 @ 5% amortized for 30 years is a payment of $585 per month. Total principal and interest payments over 30 years is $210,650 and $101,650 of that is interest. If they pay $34,000 of that to Uncle Sam they will net $167,650. 

Paying them $600 for 250 months puts $150,000 in their pocket tax free and even though its less overall money, they have it all in about 9 less years.

Keep in mind, you could offer more and still be saving yourself money.

Now you have raised your tax basis in your rental property which gives you more depreciation and can help when you resell someday. 

I would also negotiate a discounted payoff if you pay them off early, especially within the 1st few years when you may have negative equity.

Finally, if you hear someone talk about a minimum amount of interest that MUST be charged according to the IRS, that's true. But there are exceptions. You can find them in IRS code section 1274, I believe. 

I think its a possibility. It just depends how you document the transaction. If you are making monthly installment payments for their " preferred equity " and it looks like a loan, its really a loan........

I would look at giving them an Option for the equity which allows them the right to purchase the property back and in that Option, give yourself an ample amount of time to buy their Option back and make sure they CAN'T exercise the Option during that period of time. 

But again, if you are making consistent monthly payments of equal dollar amounts to them, it still looks like a loan.

This is called mortgage fraud. Don't do it. It may take more work, but find a lender that will accept the deal.

Every lender is going to be different with their costs but these are ours. 12% interest only payments plus 3 origination points which we can roll into the loan depending upon the total loan amount. We cap our loans at 65% of the After Repair Value. If you can purchase and rehab the property within that 65% range, you could do the deal without bringing cash to the table. Beyond that, we have a $295 doc prep fee.

Some lenders may also have appraisal fees and several others. As I said, we are all different. 

Learning how to talk to people is key. I spent years perfecting my skills by studying books and recording my phone calls with buyers and sellers, so I could go back to them and analyze what I said and how I said it. Then, I payed attention to how the other party reacted to my words, tone of my voice, body language, and I took notes. 

To this day, my belief is if you want to be a real estate investor to make money, you will likely fail. BUT, if you want to solve people's real estate problems and let the money come as a by product of helping them, you will be extremely successful.

No unless you had all of the notes and mortgages cross collateralized 

Learn creative deal structures and negotiation techniques.  Knowledge will circumvent your credit challenges. I've never had a seller financing deal where the seller asked  about my credit.  

You certainly could Master lease rental properties without credit as well. Go check out cashflowdepot.com 

Its the best source I know of for economically learning creative deal structures from some of the best teachers in the U S.

Its also security for you in the aspect of asset protection. If someone wants to file a lawsuit against you and they see that you don't have much equity in the property, it may deter them. Your lender will give you a mortgage interest statement at the end of the year so you can deduct the costs on your taxes. Obviously, the lender has to pay income taxes on their profits. LLC is fine

His private loan should be documented with a note and a mortgage to secure him in the event something goes wrong with the deal or you die, for example. Otherwise his money is at serious risk. You should also provide lenders title insurance and list him as a mortgagee on your property insurance policy.  If you do all of this properly, the transfer of money will be legit no matter how you look at it.