This is an example of what I call sub equity, meaning the house is worth $130,000 and the person owes $70,000. In theory there’s $60,000 of equity in that property. Again, the seller wants $100,000. We’re going to keep the scenarios fairly consistent.
That transaction is again a way to do a no cash out of your pocket transaction. You would go to a private lender – or even possibly a traditional lender if you had it pre-approved – and you would borrow $70,000, $75,000 or $80,000. You would offer that to the seller.
Let’s say $75,000 to make the math easy. You would offer them $75,000. They would obviously take $70,000 of that to pay off their first mortgage and they would have $5,000 left over in cash. The other $25,000 would come in the form of a “subordinated seller note”. Again, the seller is essentially foregoing $25,000 and will get that over time.
Structuring Seller Notes
The way I structure all of my seller notes is very simple. The example of $25,000 would be $250 over 100 months. If you multiply that out it’s $25,000. So the seller is getting the $25,000. They’re getting the $75,000 at closing and the $25,000 over 100 months.
The power of this offer is to try and figure out what the interest rate is on this $25,000? If I owe you $25,000 and over time as you accumulate all the payments I also pay you $25,000, what is the interest rate? Zero.
Zero Interest
You now have created a $25,000 note with zero interest. Every single dollar that you pay that person is pure principal. You need to understand and think about that. That is the power of this offer. You have created, almost out of thin air, $25,000 with zero interest.
I challenge anybody to go a bank, a private lender, a mortgage or credit card company and create $25,000 out of thin air with no interest. You can do it in real estate and you can do it over and over again. I guarantee you that these deals are everywhere. There are motivated sellers out there and these deals are there.
So that’s what I call the sub equity. I guarantee you these deals are out there. You’ve got to find them. They’re not in the MLS – I’ll guarantee you that. They’re not on the pre-foreclosure websites where you pay a monthly fee to get their leads and all that stuff. They’re not there.
This is hard work. You have to create marketing, go meet with the seller and develop rapport. You’ve got to find out the WOWWW formula and then structure that offer. If it’s done right you will close some of these. You certainly will not close all of them.
A lot of sellers will not understand what you’re proposing and they’ll move away. Those sellers in that case probably are truly not motivated in the way you need them to be.
If they are truly motivated and they have no other options, they’ve had the property up for sale for 12 months with no offer through the traditional sale process, they’re motivated. They need something done and they’ll take these offers. This is tremendous money.
