Ken Gain, MAI, SRS, CCIM, CRE,-- Host of CreativeRealEstateTalk.com

I bet that a lot of you think that I have lost my mind by asking such a stupid question! But the truth is that this is what most Sellers want to do! Before you call the looney bin to have me admitted, take a minute and look closely at this photo of a $50 bill. Notice the writing at the top which describes this bill as a “Federal Reserve Note”. That’s right, cash is nothing more than an Unsecured, Non-Interest Bearing Promissory Note! The question then is, “Why do Sellers want Cash?” The answer is because cash can be exchanged for things they do want, and I will explore this basic motivation, which is the basis of every transaction, in future Blog posts. We are now enjoying some of the lowest mortgage interest rates in our life time, so it should be easy for all Buyers to get loans and pay cash for the property they want. But the truth is that, in the spirit of “lock the barn because the horses have been stolen”, Lenders now have very strict lending standards and as a result many Buyers cannot get a loan! Fortunately there is an easy solution to this dilemma! The solution is to do what folks did before banks were invented and sell property using Seller Financing. Buyers love Seller Financing! The fact that they deal directly with Sellers rather than a bank reduces closing costs, protects privacy of the transaction, and allows for flexible underwriting as well as creative structuring meeting the needs of both Buyers and Sellers. Also because no third party approval is required, closings are faster. If you have any doubt about Buyers loving Seller Financing, try this test: Prepare two ads on the same property with identical wording in the text of the ad, and then on one ad use whatever headline you like and on the other one use the headline “Seller Financing” or “Owner Will Finance” and see which ad gets the most phone calls. For Sellers who are looking to convert their real estate equity into an investment in a known asset with an interest rate higher than CD’s or bonds, Seller Financing is an attractive alternative. However, in most cases, the Sellers need all or a substantial portion of the equity in the property they are selling to purchase another property. Assuming a typical down payment of 10%, a 6% selling commission, and a 1% closing cost, leaves only 3% of the selling price as net cash to the Sellers and many times that amount is insufficient to meet their needs. Fortunately, there is an answer to this dilemma. Use “CA$H NOW SELLER FINANCING”. With this technique, a property can be made more marketable by the Sellers providing Seller Financing, which Buyers love, while at the same time getting the Sellers the cash they need. The solution involves a simultaneous sale of the Seller Financed Deed of Trust to a Note Investor at the closing table; thus, the Sellers are only financing the sale for the minute or two that it takes to close the second escrow in which all or a portion of their Note is purchased by the Note Investor for cash. To learn how to use CA$H NOW SELLER FINANCING, go to CreativeRealEstateTalk and download my FREE eBooklet on this topic. HOW SELLER FINANCING WORKS The Down Payment: An important element of a Seller Financed transaction is the down payment. Due to the fact that the Buyers in many such transactions have less than perfect credit, the down payment is far more important than it is in conventional financing. With larger down payments, the Seller Financed Note is more secure and as result can be sold for a higher price. The goal in every Seller Financed transaction should be to try for a down payment of at least 10%. But remember, the advantage of Seller Financing is that it can be very flexible and creative. Therefore, the down payment can be in any form, can consist of anything of use or value to the Sellers, or can be anything of use or value to the licensee (as all or part of the commission). Financing Documents: The difference between the selling price and the down payment consists of the Seller Financing. The Sellers are entitled to the same legal protection as any Lender and therefore the unpaid portion of the purchase price will be represented by a Promissory Note outlining the amount owed, the terms of repayment, and the interest on the unpaid balance. This Promissory Note is then secured by a Deed of Trust pledging the property being purchased as security for the Note. However, security does not have to be limited to only the property being purchased. If the down payment is low or if the Buyers have weak credit, it is possible to secure the Seller Financed Note by other property owned by the Buyers or perhaps their relatives. Collection Escrow Instructions: The final financing document is the Escrow Collection Instructions to the bank or escrow company that will act as neutral agent for both Buyers and Sellers. This enables them to collect the payments from the Buyers, remit them to the Sellers, calculate the interest and unpaid principal balance, and provide the required annual reporting to the Internal Revenue Service. Also, the escrow company holds the reconveyance documents to remove the Deed of Trust from title after the Note is paid. Seller Financing is an incredibly flexible, financing tool and is one of the most important Pillars of Creative Real Estate. It can be used to finance the sale of all types of real estate and can be used to finance the sale of real estate that is subject to an existing loan. To learn to master this important technique, I strongly recommend the book “Owner Will Carry”. You can order this book at Owner Will Carry. Because of the importance of Seller Financing in Creative Real Estate, my next several Blogs will be on this topic.

What, you may ask “do Toyotas have to do with houses”. Actually they have nothing in common, but the relationship between them is a graphic way of demonstrating the impact of value appreciation and price increases due to inflation. This analogy is one that I first heard from my friend David Campbell of Hassle Free Cash Flow Investing. I liked David’s analogy so much that I have adopted it. Prior to becoming a real estate investor, David was a teacher, and like many good teachers, is better at explaining complex concepts than us long-time Real Estate Junkies. So lets begin the analogy with a description of the current market. In my home town of Anchorage, Alaska, you can buy a modest but decent house for about $250,000. Since the cost of a new Toyota is about $25,000, we can say that “a house is worth 10 Toyotas”. Assuming a 90% mortgage loan to purchase the house means that the down payment is one Toyota. Now, lets fast forward 10 to 15 years and assume that the same house now sells for $500,000. If in the same time period, the price of Toyotas has increased to $40,000, the house is now worth 12.5 Toyotas. That is an example of value appreciation. However, if the price of Toyotas has risen to $50,000, the house is still worth only 10 Toyotas. That is an example of price increases due to inflation. But, here is where things get interesting, and is one of the reasons that I believe Now is the Opportunity of a Lifetime to Buy Real Estate. Remember that you can finance 90% of the purchase price of the house with a 30 year fixed interest, low interest rate mortgage. That means you can live in the house, while waiting for the price to double, at a cost less than rent, or you can rent it for enough to let the tenants pay the mortgage for you. Now lets look at what happened to your one Toyota investment (down payment) under both scenarios. Value Appreciation: If you sell the house for $500,000 and you payoff the $225,000 mortgage ($250,000 – $25,000 down payment) you will have $275,000. (For sake of simplicity I have assumed that mortgage amortization over 10 to 15 years offsets sales cost). With your $275,000 you can now almost buy 7 Toyotas ($275,000/$40,000 = 6.875) This means that your initial investment of one Toyota down has grown by 587%! Price Increases Due to Inflation: Even if the price of your house is still worth only 10 Toyotas, with your $275,000 you can now buy 5.5 Toyotas at $50,000 each. So, even if there is no real value appreciation, your initial investment of one Toyota down, has still grown by 450%! I HOPE THAT THIS ANALOGY WILL HELP CONVINCE MORE FOLKS, THAT NOW IS THE TIME TO BUY REAL ESTATE!

As Baron Rothschild once observed, “The time to buy is when there is blood in the streets”. To say there is blood in the streets may be a bit of an exaggeration in describing today’s housing market, but the recent release of the Case-Shiller Home Price Index report that nationwide home prices have hit a new low is Bad News for Sellers but is Great News for Buyers.

Of the 20 major metropolitan areas included in the index, only Washington, D.C. and Seattle avoided the downward trend. And while there is price appreciation being experienced in Alaska, North Dakota and several other markets, not included in the index, the overall news for home prices is poor, with the national index now being down to it’s 2002 level.

The reduction in home prices when combined with the current low interest rates now makes home affordability near its all time high according to the Home Affordability Index published by the National Association of Realtors. This is truly outstanding good news for potential homebuyers!

With such good news for potential homebuyers, why aren’t home sales setting new records? If any other product were on sale with such great prices and terms, stores would not be able to keep their shelves stocked! Unfortunately, potential homebuyers may be missing the opportunity of a lifetime for three reasons:

1. The belief that buying opportunities may get better—which is a huge mistake because no one can accurately predict the bottom of the market. And as I point out in my Price/Interest Dilemma, a small increase in interest rates can add substantially more to the cost of ownership than a decrease in prices.
2. The emotional reaction to want to “follow the crowd” which is almost always the wrong thing to do and was the reason for Baron Rothschild’s wise observation. I guess it’s the human desire to want to belong that influences people to follow the crowd even when the the crowd is doing the wrong thing. When home prices were growing at a clearly unsustainable pace, buyers willingly kept bidding up prices, but now that prices are down from 30% to 50% they don’t even want to make offers. I ask, “Just how likely is it the prices and interest rates will continue to fall?”
3. The failure of real estate professionals to spread the good news that “Now is a Great Time to Buy a Home!” I think this is due to too many real estate professionals “following the crowd” and not explaining the facts.

I refuse to make the mistake of “following the crowd” rather than analyzing the facts, and hereby declare that “Now is the opportunity of a lifetime to buy real estate!”

I believe that now is the opportunity of a life time for buying real estate for three reasons:

1. Most folks are very pessimistic about real estate right now and therefore it is a strong Buyers Market without a lot of competition. Therefore properties can be purchased for significantly less than replacement cost!
2. Interest rates are still near their lowest level in the last 50 years! Often a small change in interest rates can increase the cost of ownership much more than a change in price. For more on this see Price/Interest Dilemma.
3. In spite of the attempt of the government to downplay the facts—we are beginning to experience significant inflation and real estate has traditionally been a great hedge against inflation. And if the U.S. Dollar loses its status as the world reserve currency, inflation will be extreme! Rather than attempt to explain the impact of reserve currency in my own words, I have received permission from my friend, David Campbell of Hassle Free Cash Flow Investing, to quote from his recent blog on this topic. David’s clear explanation follows:

“In the spirit of no investor left behind, let's establish what a world reserve currency is. A world reserve currency allows international bankers and governments to invoice trade and denominate foreign debt securities in a common currency. The reason most business people in the world speak at least some English is because English and American dollars are the common language of world commerce. In simple terms, when Iran sells oil to Egypt, Egypt buys its oil using US Dollars. Even though the official currency of Egypt is the Egyptian pound and the official currency of Iran is the rial, the two countries conduct business in US dollars because they trust the value of the US dollar more than they trust the value of the other's native currency. Both countries must have a stockpile of US dollars sitting around so they can send them back and forth to conduct trade with each other. A world reserve currency is selected by the banking community for the strength and stability of the economy in which the currency is used. Prior to WWI, the British pound sterling, the French franc and the German mark were used interchangeably in the world's reserve currency market. A currency becomes less stable when the economy of the country issuing the currency becomes less dominant and bankers begin to abandon it for a currency issued by a more stable economy. After WWI, the German economy was weak and the American economy was strong so the German mark was replaced by the US dollar. After WWII, the British and French economies were weak and therefore the pound and franc were abandoned in favor of the US dollar. The victors of WWII formally discouraged the world from using the currency of Germany and Japan in international trade as an additional means of suppressing their formal rivals. After two consecutive world wars had ravaged the economies of Europe and Asia the United States dollar was in the right place at the right time to be adopted as the world's reserve currency. Fortunately for America, it has been used as the primary unit of currency in international trade ever since. Having the ability to print the world's currency is one of the major reasons why the United States enjoyed such unbridled prosperity since WWII. On August 15, 1971, the United States unilaterally terminated the convertibility of the US dollar to gold when its president, Richard Nixon, gave an executive order without the approval of Congress or the American people. This August will celebrate the fortieth anniversary of the most elaborate Ponzi scheme ever perpetuated. This means for the last forty years, America has been printing "counterfeit money" because our money is not backed by anything. Foreign countries have been sending things of tangible value such as food, energy, and labor to America where they receive a limitless supply of a counterfeit currency that is manufactured with the click of a mouse. America imports consumer goods and exports dollars and the world is tired of this unfair imbalance. If the world stopped accepting the US dollar as the world reserve currency, the Ponzi scheme would come to screeching halt and the last forty years of American prosperity would be exposed for what it is: worldwide theft. The Ponzi scheme has lasted this long because the whole world is in on the game. If you are a very large, old world nation, you are encouraged to print your own worthless currency and trade it for our worthless currency. If you are a small nation, America will send you a river of American dollars to buy your loyalty. If your country is neither big nor small and you are an emerging market with natural resources America wants, America will flex the muscle of its military to convince you to keep your mouth shut. Brazil, Russia, India, and China (called BRIC) is the largest entity on the global stage. They are tired of the United States stealing from them by trading with a counterfeit currency and they have formed an economic coalition to find a solution. China is America's largest lender and trading partner and they are worried America is about to default on its bar tab. China manufactures all of the iPads in the world and then trades them for counterfeit American dollars. If you were China, wouldn't you be worried? BRIC is leading a charge to abandon the US dollar as the world's reserve currency. What does that mean for you? If BRIC chooses a reserve currency other than the US dollar, the rest of the world will probably follow. If the US dollar is not used as a medium of trade between other countries, those dollars will have no value to those countries and the dollars will be sent back to the US economy to buy anything they can. Imagine if the whole world suddenly decides to exchange their dollars for food, energy, labor, and real estate. When the whole world clamors to turn in their US dollars for something of tangible value, a massive influx of worthless dollars will flood the US economy causing tsunami like inflation. America is too deeply in debt to return to a sound money policy where dollars are backed by gold or anything else of intrinsic value. It is only a matter of time before the world abandons the US dollar as a reserve currency (probably replacing the US dollar with a new currency backed by BRIC). In the big scheme of world history, the US dollar has been the world's dominant reserve currency for a very short time. It would be foolish and arrogant to think the US dollar would have world dominance forever. I've been preaching about the inflation tsunami for the past two years and it is now upon us. The window of opportunity to prepare is about to run out. If you are looking to protect and enhance your quality of life, you need to understand and accept inflation as a fact of life and make financial decisions accordingly.” I totally agree with David’s analysis, and believe that the best way to protect you and your family’s financial future is to buy as much real estate as you can afford! That’s what I am doing!

In Part 1 of The Easy Way to Get Low Down, Low Interest Loans, I explained that there are many homes today that have little or no equity that are subject to low interest loans that can be assumed, and offered the opinion that the risk of a Lender invoking the “Due on Sale” clause is very low. In Part 2, I discussed the use of “0 Balance Wrap Arounds” to reduce risk to Sellers and provided a link to a full disclosure form to reduce risk to Real Estate Licensees. In this part, I will discuss why it may make sense to buy such homes even if they have negative equity. As I have previously discussed, Buyers often make the mistake of concentrating only on price, when the financing terms can may be more important than price. For example see the discussion of the Price/Interest Dilemma. It is also important to recognize that with an assumption it is not necessary to pay all of the costs involved in acquiring a new loan and it is often possible to assume the loan without reimbursing the Seller for tax and insurance reserves. Since these two items will typically add 3 to 5% to the total purchase cost, a higher nominal purchase price is warranted. In addition, it is often possible that a motivated Seller with negative equity will include appliances, drapes, blinds and furniture that would normally involve an extra cost in a typical transaction with new financing. For a Buyer with weak credit or who otherwise doesn’t qualify for a new loan, paying more for a property and assuming a loan greater than the appraised value is often a better choice than continuing to rent. As mentioned in an earlier post, I once paid $15,000 more than Market Value to acquire a property I wanted because I did not qualify for financing. It is also important to recognize that an appraiser is estimating Market Value and that a component of the definition of Market Value is:

“The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

Therefore if a typical sale involves a 10% down payment and a Buyer paying loan fees and funding reserves, those terms would represent Market Value, and making a lower down payment without paying loan fees or reserves justifies a price greater than Market Value. While the above scenarios may be attractive to Buyers, they will have little interest to Real Estate Licensees because there is no money to pay a commission. In such cases, the Buyer could pay a commission which could be in cash, exchange of other assets owned by the Buyer or a Note from the Buyer. Or a motivated Seller, needing to relocate and desiring to preserve credit rating to allow a purchase in a new location, may also be willing to add cash, trade other assets or give a commission Note. The important concept is that creative Buyers, Sellers and Real Estate Licensees who are willing to think Outside of the Box, can make real estate transactions that more conventional thinkers consider impossible!