Real Estate Investing -  Nothing Down Written by Robert Allen

(out of Robert Allen’s book - Nothing Down)

THE SELLER

Among the nine major sources of down payment funds for property acquisition, the seller is no doubt the most important. If the buyer has done his selection job well he will be dealing with a person who is anxious to sell and therefore flexible with financing arrangements. The seller will need to take on a role that might be new for him - that of lender. But if the buyer is sensitive to the needs of the seller, he will foster trust and see to it that both parties win. (Lending can, after all be a lucrative business with its own slate of benefits, even for property sellers.)

This section reviews eight nothing down techniques involving seller financing.

Technique No. I The Ultimate Paper Out

An investor in Milwaukee was able to acquire a $48,000 triplex from a banker who not only arranged for a new low-interest first mortgage, but also carried back virtually all the remaining equity in the form of second at below-market rates. Another investor in West Palm Beach, Florida, picked up a single family home for$66,500 by putting on a new first and having the anxious seller carry back all the rest of his equity ($36,500) for five years, no payments, no interest. Both of these investors were using the technique known as - “The Ultimate Paper Out”. Here is how it works.

When we are talking about buying or selling a piece of real estate, we are really talking about the problem of defining and dealing with the seller’s equity. Equity as a concept is straightforward enough. Everyone knows that it represents that portion of the value of a property that is not encumbered, that belongs lock, stock, and barrel to the owner. But equity is a fluid concept. It can be specified only in relation to that mysterious and shifting quantity called the “fair market value.” The owner has dreams about an equity of such and such - usually an optimistically high number. But the truth of the matter is that market forces determine his equity by determining how much his property is really worth at any moment in time. The members of the market club - you and I - gang up on the poor old seller and say collectively, “You have a nice little place, but we’ve taken a vote around town, and the best we could come up with is a price of such and such.” At that moment in time, the seller’s equity is defined, and the problem becomes how to transfer to him value equal to the equity involved.

The majority of sellers, of course, will want to hold out for a selling price at the high end of the scale. They want their equity to be overweight. No one can blame them for that but among the army of sellers in the marketplace at any given time, there are always a few - perhaps five percent or less - who say to themselves, “We like our equity and want to preserve it and derive benefit from it, but we are very anxious to sell. So anxious in fact, that we might give up some of that equity in order to get rid of the property quickly.” Alternately, these don’t-want sellers might be thinking - I don’t really feel like discounting my equity for a quick sale, but I would be willing to wait until later for a part or all of my equity to be converted to cash.”

And that is the issue when it comes to “papering out” a deal. After the seller and the buyer have determined what equity is involved, the next step is to decide how soon the equity is to be converted. It all boils down to a matter of patience. The seller with infinite patience (and infinite desperation) will say, “Here’s my equity, take it all and just get me out of this place.” In a case like that the selling price is equal to the liens. But such cases are rare.

The next best situation is the case in which the seller says, “Here’s my equity, pay me for it when you can. Let’s work out the schedule.” That is the technique referred to as - The Ultimate Paper Out”. All of the seller’s equity is converted to paper before it is converted to cash. When the buyer takes over the property, he gives the seller paper for his equity and obligates himself to redeem the paper according to mutually agreeable terms.

Not all sellers will agree to an “Ultimate Paper Out” But creative buyers should always ask. You never know exactly what the seller is thinking or how anxious he really is to sell. Perhaps only one seller in twenty will be willing to enter into a nothing down deal and of these, perhaps only one in ten will agree to an “Ultimate Paper Out” That means that Technique No. I will show up in only one out of every 200 creative deals. But it does happen from time to time - much to the surprise and delight of the creative buyer.

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