100% Financing

By: Barney Zick

One of my students recently told me how he was applying what he learned. This approach gives you 100% financing.. the money comes from a hard money lender! Sound interesting? What you are doing is making it easy for the lender to make up his own mind as to whether or not he wants to play the game.

Here's how it worked.

A Fix-Up Property

An investor liked fixing up properties. He found the type of house he wanted to buy in June of 1996. This house was for sale for $150,000. It had been on the market for six months. The market was soft during this time. When markets are soft, only the cleanest and most ready-for-the-market houses sell.

The house needed a great many cosmetic improvements as well as some minor structural modifications to be a top dollar house. The investor thought it could easily be worth between $190,000 and $220,000 at the end of a year's time, given various factors. These factors included a cash investment of about $10-20,000 in materials, labor and supervision on the part of the investor. Additionally, the market was beginning to come back in June of 1996. And lastly, the house was being purchased at a discount because of all the things that needed to be done.

"Sound interesting?"

The Structure

The investor in question wanted to structure the transaction in such away that he could borrow 100 percent of the option price at the end of eighteen months. The seller would consider an option if

a) his monthly payments were made,

b) he could get a little more for waiting

C) and the improvements would begin immediately.

The seller had set the option price at $158,000. Thus if the house was really worth only $150,000 it needed to only appreciate about four percent to be worth $158,000 at the end of a year and half. Hindsight on this example tells us that appreciation for this particular market was around 12 percent between June of 1996 and December of 1997 so this fact worked well for the buyer.

He liked fixing up houses.

And with luck, the buyer would like to be able to borrow the additional $10,000 that he was putting into the properly. At least this way he would have all his cash back. If he could get any more for his time and effort, so much the better.

The Lender

Lenders have a habit of looking at refinance loan applications with an eye to whatever is lower cost, what you paid for the properly, or current appraisal. This same kind of outlook towards lending usually bubbles over into all sorts of situations where the buyer has possession or use of the properly.

Lease Option

My student is a Creative Real Estate broker. He helped this buyer and seller structure their lease option in the following fashion. Lease payments were $1200 a month. That's annual payment of $14,400. All the lease payments were to be credited to purchase at the time of purchase. As additional option consideration, buyer was required to do $20,000 worth of remodeling, decorating and repairs, with $10,000 of that being his own labor. The selling price was $192,000 rather than $158,000. This of course is the $158,000 plus the $34,000 in additional option considerations. ($14,400 in monthly payments and $20,000 in fix up.) Since $34,000 of the option Consideration would be considered to paid at the time of closing, the balance due at the time of closing was $158,000.

Exercise of Option

At time of exercise of option the real estate contract was drawn for $192,000. It showed $34,000 being paid to the seller as option consideration which the seller acknowledged being received. A loan was requested in the amount of $160,000 which is approximately 80 percent loan to value. The second loan source is also being considered which would give a 90 percent loan to value loan. If the buyer takes the second, he will also have his fix-up cash back. No matter which loan the buyer takes, the buyer will have "financed out" the majority of the purchase price. With a 90 percent loan to value ratio loan they will have no cash in the house whatsoever.

"Was all this done with mirrors?"

What about the lender? Was this all done with mirrors? Absolutely not. A copy of the option agreement was attached with the purchase contract to the loan application. Both lending sources are fully informed and are totally willing to make the loan as described above.