Buyers

Wouldn’t it be nice to own a real estate investment with no money out-of-pocket invested in it? How about if you made money to create that investment? You may think these kinds of deals don’t exist anymore due to stricter lending standards, but a little creativity can prove this incorrect.

Use a Trade to Create a No-Money-Down Real Estate Investment.

1.) First, you invest in a property that will resell for a price that is typical of a “step up” for a homeowner.

This means your final sale price will reflect one that is typical for buyers of second or third homes.  Your buyer is already a homeowner and has maybe outgrown their current home or wants to move up in price for whatever reason.  In the Springfield market this home will probably be at least 4 bedrooms, 2,000 square feet, and have no less than a $125,000 asking price, but more likely between $150,000 and $200,000.

2.) Offer This House in Your Marketing as “Available for Trade.”

If you list your properties on the MLS, put these words in the first sentence of the marketing remarks.  Also, list your house on Craigslist about every 3 days.  Mention a trade in the title line.  Your target market is a discouraged seller who has had their home listed for quite some time without many bights and no respectable offers.  These people still look! They spend a lot of free time browsing the MLS and Craigslist, just looking for what is in their price range and teasing their desires as they’re waiting for their home to sell. They have probably not even considered a trade, and when they find that you are willing to do so they will jump at the chance!

3.) Find the Right Buyer.

Even though it’s a trade, I will refer to the other party as the buyer.  You’ll undoubtedly be approached by several candidates and many of them won’t be a good fit. For example, if they’re under water it will be very difficult to structure a deal that’ll work for you both of you. Your buyer will probably own a home that’s in okay shape, but in need of some repair or upgrades.  They will probably own a 2-3 bedroom worth between $50,000 and $100,000.

Because your buyer is discouraged as a seller, they may be willing trade their home at a discount and buy your house at a premium. This maximizes the equity that you have created out of your original investment!

4.) Close the Deal.

The trade may seem complicated.  The easiest way to view it is to think of it as two separate sales.  You’re agreeing to sell your house at a specified price and you’re agreeing to buy another house at a specified price. The loan on your original investment will be paid off, you’ll make back your original investment (down payment) and out of the difference (profit) you’ll agree to place a down payment on the new, smaller home and whatever is left over is cash in your pocket.  You now own a house that you have no “out-of-pocket” money tied up in, and furthermore, you have been paid to create this investment! Now you own an investment in a great price range to rent, rent-to-own, owner finance, or sell to someone else. Any cash flow you receive from this investment will be at an infinite cash-on-cash value, because you have already been paid back your original investment and more!

Confused? Personally, I like to look at the numbers, so let’s put together an example:

  • You buy a house for $100,000.
  • That’s a down payment of $10,000 (cash out of pocket).
  • You do $20,000 worth of improvements.
  • The house is now worth $150,000.

 

  • You trade for a house that is worth $100,000.
  • You agree to pay $90,000.
  • They agree to pay you full asking price!

 

  • Your loan is $110,000  (100k+20k-10k).
  • Your proceeds from closing are $40,000.
  • You pay yourself back $10,000 for your original down payment.

 

  • The bank requires $9,000 down on the purchase of the new, smaller home.
  • You have $21,000 left in your pocket to pay for repairs to the new home plus a profit.

 

All the Benefits of the Trade

Apart from creating a no-money-down investment, there are other benefits of the trade.  It’s a buyer’s market and one way you can gain the upper hand in negotiations is to put together a trade.  Supply is low.  There are a lot of people who need to first sell their home in order to buy, and you’re one of very few that’s offering a trade.  This means they’re very likely to sell at a discount and buy at a premium.  This widens your equity and can put more cash in your pocket immediately at closing.  You’re not only selling for asking price in a tough market, but you’re creating a new way to buy a discounted deal!

To completely understand the benefits of the trade, you need to know the benefits of both parties involved.  Click here to read about the benefits to the buyer which can be far greater than if they sell their home first then look to buy another.

The Condition of the Homes can give you Further Negotiating Strength

Since you have just purchased your property within the last year and have made improvements to it, it is most certainly in better condition than the one you are trading for.  You should have had a pretty recent inspection on it and you know what their inspection will show on your house.  They have lived in their home for several years and most certainly don’t have a recent inspection on the property. It’s very likely that numerous problems will be revealed and they may be nervous about this. This should give you superior bargaining power.

Closing Costs and Agent Fees

You’re doing a two-for-one.  This creates an opportunity to save money on the costs associated with two closings. You will not be paying the agent commissions on the sale of both properties.  It is possible you will only be paying on the difference in price between the two or on the price of the higher property only.  It’s also very likely that there will only be one agent involved since they buyer may not have been actively looking and will contact your agent directly, so your commissions can be reduced to 3-4%.

Since, you’re closings are simultaneous, you will not be paying nearly as much in closing fees as you would if you sold one home then bought another investment property.  It’s like going to a buy-one-get-one-free sale at a shoe store!

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