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Originally Posted by Thremp
I'm interested in the financing portion. You mentioned in a previous thread that typically banks want 30% down but are indifferent to where it comes from. From this you would typically try to get the owner to take a 20% second mortgage on the property. What type of give/take do you do with him to get him to accept these terms? How is this done? Could you elaborate the process a little more using an example property. Do you just ask him, "Hey man, would you mind taking a 20% second mortgage so I can buy this thing?"
I just ask the owner "Are you willing to carry a note for a portion of the purchase price," or "What kind of terms do you need?" Sometimes sellers need to get the whole purchase price in cash. But lots of times they don't. This is particularly true if you've got an older landlord that is selling off his properties to retire. He doesn't need all the money in cash and he's not going to 1031 the proceeds into another property.
There is an old adage in REI - I'll pay any price for a property if I can choose the terms (and vice versa). So your give/take negotiations w/ the seller should reflect the relationship b/t price and terms. Like if a seller indicated that they would consider carrying a note, I would offer them whatever super-low PP I decide and ask them to carry 30% at 0% interest.
Now, naturally, that offer is ridiculous and will be rejected out of hand. Here is another adage - When negotiating, the first person to mention a number loses. By making a ridiculously low offer, I can get the seller to counter without having really tipped my hand for the price/terms I want. I reveal nothing, and now psychologically his 'turn'.
Anyway, say he comes back at his full asking price and agrees to carry 10%. Well, thats progress. And I'd keep going just like that. I'd write out all the numbers on the property and tell him, "look, if i were to pay this price my cap rate would be X. Unfortunately that cap rate is just too low for me to feel comfortable taking the risk. However, I would be willing to pay your price if you carried 30% of the purchase price as a note at 0% interest".
Well, now its his turn again. So now say that he comes off his price by 5% and agrees to carry 15% as a note at 9%. I'd say to him "Well, if i pay you 9% interest and have to put up 15% of my money, my cash on cash return won't be where I need it in order to make this deal worth my time. I can put up 15% and pay 9% on your note if you can give me the property for $X."
Etc.
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Can you recommend some texts in each of the above areas or otherwise helpful resources to get a more in depth knowledge of the subject matter?
I recommend that new investors start with very general books that they get for free from the local library. If you're not sure where to start, check out the work of John Reed. Reed's website,
www.johntreed.com has a recommended books page. I DO NOT recommend that you spend hundreds and thousands of dollars on bootcamps, mentoring programs, audiobook courses, etc. That is a waste of money for anyone first starting out.
The best way to learn about REI is by joining a local REI club. Most REI clubs have a library where you can get the use of a lot of free information. Plus, you can meet people that can give you a realistic perspective on REI and its discontents.