Epic Real Estate Investing - How to Create a 3 Option LOI for a Property w/a Mortgage | 241

Episode Date: December 19, 2016

Epic Real Estate Investing shares even more creative ways to structure the terms of your deals to achieve maximum return on investment. Discover exactly how to use the 3 option letter of intent even when the seller has a mortgage and how the price point should shift based upon the terms of the deal. Learn more creative ways to set the terms for a deal that will provide you cash flow and equity. ______   The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? • E.ducation • P.roperties • I.ncome • C.oaching   Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Hello, and welcome. Welcome to Epic Real Estate Investing, the place where I show people how to escape the rat race using real estate. And if you're just getting started and or you're looking for new and creative ways of making money in real estate, I've put together a free course just for you. including a checklist on how to find motivated sellers, property owners that are willing and able to sell you their property at a discount. So to access that free course, go to free real estate investing course.com. The whole words, all those words,

free real estate investing course.com. A lot of people go to free real estate investing.com and they say it's not there. Yes, it is there. You just got to put course at the end. Free real estate investing course.com. I know. The longer we're in this whole internet world, the more and more difficult it is to get good domain names and short and easy to remember ones.

But it's pretty descriptive. There's no special spellings there. Just free real estate investing course.com. All right. If you haven't signed up for the Epic Intensive, it's coming up the end of January. I really want you to be there. Seats are filling up. A lot of demand for this one.

We're going to go over multiple ways of escaping the rat race. That's going to be the primary focus. And just confirmed mentor of mine, who I consider probably my most chair. that's had the more impact on my business than any other single individual has just confirmed that he's going to share the stage with me on day one. And he's going to show you how he was able to teach me. He's going to show you the exact same thing he taught me to create and start this small little real estate empire without any money or any credit by just using what God gave you

and being able to manifest that into money, into cash flow, into real estate, into fix and flip checks into wholesale checks into lease option payments and those monthly mortgage payments and getting all that stuff coming into you and fulfilling you financially. And he's going to be there. And so I'm so honored and blessed and grateful. So I would want you to be there. I don't want you to miss it. I know what the impact he had on my life.

I want him to have the same impact on yours. All righty. So go to epicintensive.com. Epicintensive.com. All righty. So got a great show for you day that. My three-option letter of intent that I use here in my business, a lot of my students are now all 100% absorbed it and incorporated it and are implementing it inside of their own

business. They're all getting deals where they weren't getting deals before just from this three-option letter of intent. And I've just loved to hear all the great stories. But one of the more common questions comes up now is how to use the three-option letter of intent for properties that have a mortgage, for properties that have a debt on those? And so, great question. And to me, it's a really simple answer.

but now I'm starting to hear this more and more, and apparently it's not so simple. So I'm taking that information knowledge for granted. So I want to share that. I want to answer that question today. And the reason, let's back up. I use the three-opt letter of intent as a prospecting tool, as an offer or as a follow-up offer when, say, the purchase agreement, the original all-cash purchase agreement was rejected and just kind of send them three more options to like, you know, maybe spark something over there,

maybe to get their wheels turning so they'll call me back and we can put a deal together. That's how I typically use it. And in that three option layer of intent that I use, the assumption is there is no debt. I'm making the assumption that the property is owned free and clear. And I do that on purpose. I do it totally on purpose because I know they're going to see those three options. They're going to like one of them, but then they're going to start scratching their head, wondering about the debt that they have on their property.

They're going to call me. This is customary. This is how it goes down. They call me and say, hey, I like option number two. But I have this debt. How are we going to get rid of that? How can we make this work with I got this debt in place? And boom, now I've opened up the conversation and we can start having that creative,

creative strategic conversation to actually get them out of their situation with or without that debt. All right. So that's why the first phase of that three option letter of intent, the way we use it, it's just assuming that there's no mortgage. But when there is a mortgage, then what do you do? How do you create a three option letter of intent when there is a mortgage? And if there's ever a real estate question ever in the history of real estate questions that deserve the answer, it depends.

It is this one because it does depend. And there is not even close, not even remotely one close to one answer that would universally answer that question, not even close. And here's why. When there's debt on the property, it could be different amounts. it's at different rates. It is for different terms. And there may be that debt might be divided up into two payments or two debt.

So you got a first mortgage and a second mortgage or a first second and a third mortgage or a first and a second in an equity line of credit. Or you've got a first, a second and a judgment or a first and second and a tax lien. Or you've got all kinds of stuff, all different combinations that are going to have to come into play there for you to be able to do that. So that's why it depends. That's why they're just not a solid training that shows you how to address every single scenario. But I've been thinking about this on how I can answer this, and I think I've got it. Okay, so I'm going to share this with you.

This is pretty number intensive, but I'm going to try and keep it more theory-based, more principle-based so you can follow along. But I will use some real numbers, and I'll try to use nice, easy, round numbers. So let's say we have a house, and the after-repair value, after repair, this is when it's all fixed up, is $150,000. All right? But in its current condition, fair market value is $100,000. So that's what we're going to roll with.

$100,000, and we see the future. If we were to repair it, we can get $150 for it. So there's $50,000 of potential profit there. But right now, fair market value is it's $100,000. We'll keep a nice round number, 100 grand. Now the owner owes the bank $75,000 on that $100,000 property. Okay. So that's $25,000 of equity that's in place.

And they want to sell. And for one reason or another, they haven't been able to, but they like your three-option letter of intent. And they want to know how they're going to make that work. All right. So the owner owes $75,000. And it's a four and a half percent, 30-year fixed payment or a 30-year fixed loan on this property. Well, there's 25 years left on the loan.

So we've got four and a half percent. They had a 30-year fixed. And they've already been paying down five years. So there's 25 years left on the loan. And that mortgage, principal and interest, taxes and insurance payments, $400, or excuse me, $500 a month. Okay. So we're just working with a $500 a month payment. And there's, like I said, there's $25,000 of equity there.

And the market rent is $1,000. Now, there's all those numbers that come into play. And those are going to be different with every single deal you come across. They're going to be totally different. So to make this really simple, all we're really, focusing on is the equity. How much equity did they have? And how can we access that equity and make that equity ours? So that's your primary focus when you're looking at a property with a mortgage and you want to present a three-option letter of intent. And that's if one of those options is not

paying off the mortgage. Okay, so this one's got, you know, fair market values 100,000. The owner owes $75,000. So if you don't have $75,000 to pay that off to get that $25,000, of equity, then you've got to present a subject to offer, right? Okay. And that's taking ownership of the property subject to the existing financing, meaning if you're just tuning in for the very first time, you have no idea what a subject to is. It means you're taking ownership of the property subject to the existing financing. So the property is going to go into your name, the buyer, but the debt, the financing on the property is going to stay in the current owner's name. That's called a subject to transaction. And that's a whole other conversation. We've covered that several times in

the past, but we're talking about the three-option letter of intent in this type of scenario. All right? So, three-option letter of intent. It's exactly what it sounds like. It is a letter of intent to purchase. It is not a contract. It is not an agreement. It's just saying, hey, I am prepared to purchase your property in one of the three ways.

I am prepared to purchase your property in one of three ways. Let's, I'll give you three different options. You tell me which one you like best, and then we'll go put it on a formal purchase agreement. That's what the letter of intent is going to do for you. So option one, all we're focused on is equity. In this property, we have $25,000 of equity, right? So we are going to, how do we get access for that? So we could just pay them cash for their equity, right?

We can say, okay, you got $25,000 of equity. I'll give you half of that. I'll give you $12,500 for your equity and keep $12,500 for me. So you're buying their equity at a discount. And then, so that's option one, $12,500. $500 of cash for your equity paid at closing. And the second turn would be we will pay all the closing costs and we'll take over payments and maintenance of the property. So that's option one.

I'm just going to give you some cash at a discount for your property and then I'll take over. I'll pay all the closing costs. I'll take over the payments and I'll take over the maintenance. So that could be option one. I'm just going to a straight exchange of cash for your equity. All right? And then you're going to take over the rest of the property subject to. option number two so let's say okay i'll give you a little less cash for your equity paid at closing so i'm

going to give you $5,000 of cash for your equity paid at closing we'll pay all the closing costs and take over payments just like we said before in option one but then i'll give you 10 000 so i'm going to give you the opportunity to make a little bit more money here but that $10,000 i'm going to pay it as follows i'm going to do interest only monthly payments at 5% with the total balance due in three years when property is sold okay so the whole point there is, if you weren't following along and you didn't write all those numbers down, that's not, it's okay, that's not the point. The point is I'm going to reduce, in an option two, I'm going to reduce a little bit more.

I'm going to reduce the amount of money that I'm going to give you at closing, but I'm going to give you more on the back end. And then you can create whatever payment terms you want with that back end number. So it's $5,000 cash for your equity paid at closing. I'm going to go ahead and I'm going to pay all the closing costs for you, Mr. Seller, and I'm going to take over all of your payments. I'm going to take over a maintenance of the property. I'm going to take real good care of it.

And then I'll give you the balance, $10,000. I'll give you that in interest-only monthly payments at 5%. And then in three years, I'll go ahead and pay you the full balance or when the property is sold, whichever comes sooner. So you're just creating terms. Okay, you're just creating terms for that second amount. So that's option two. Option three, I'm just going to give you $1,000 cash for your equity paid at closing.

So you make it really easy for me to acquire now. And then the intent is I'll make it worth your while on the back end and give you even more money than I can give you an option one or two. Okay. I hope you're falling along. I wish I could hear you in your car or on the treadmill right now. But I'm going to assume it, and I'm going to assume that you have a rewind button. So if you need to go back and listen to this, you can. So option number three, I'm just going to give you $1,000 for your $25,000 of equity.

So $1,000 cash for your equity paid at closing. I'll go ahead and I'll pay all the closing costs. Like in the previous two options, I'm going to pay all the closing costs. I'm going to take over the payments and the maintenance of this property. And you can go on about your way and go on with your life and go do whatever else it is you have to do. But I'll take care of this thing for you. behind. Okay. So $1,000 cash for you paid at closing. I'll take over the closing costs, the payments, maintenance, and I'll give you $19,000. So I'm essentially giving you $20,000 for your

$25,000 of equity. Now, that's a good trade, but it's not like a smoking hot deal and it's not certainly far from guaranteed and certainly far from being risk free. But this is how we'll do that. If I only have to come out with $1,000 out of my pocket, this is I want to pay you the $19,000 that's left. So I'll go and say 50 monthly payments of $380 to commence six months after the close of escrow. Again, the terms there, not important, just the fact that they are terms. Remember, when we purchase properties, we do it in one of two ways. It's either by my price and your terms, Mr. and Mrs. Seller, or your price, Mr. and Ms. Seller, and my terms.

So the more money I'm going to give you, the more strict I've got to be on my terms. Got it? So, and then if I'm going to give you less money, then, you know, you can be less strict on your terms. Got it? So we, with option three, we give, I'm just going to give you a small little amount of money up front. But I'm going to give you a big chunk on the back end. You know, I think I kind of said that wrong.

You're following along with me, though. You get it. My price, your terms, your price. I just did it again. My price, your terms, or your price and my terms. Okay. And those balance each other out. So the more money you give up front, the more terms I need on the back end to go ahead and pay all of, to the pay the remaining balance.

Right. So, but if you want all cash, that's a lot less. If those are your terms, then I'm going to come way down on my price. So $1,000 cash for your equity paid at closing. I'm going to pay all the closing cost taken over the payments. $19,000 paid as follows, 50 monthly payments of $380 to commence six months after the close of escrow. The point being there is you can write those terms in any way that you want. Okay, they're just terms.

So a good exercise, or before I go there with the exercise, because I'm going to give you some homework, what you're really doing with a property that has debt on it, and if you want to create a seller finance situation, you want to put together a three-option letter of intent, what you're going to do is all you're going to be focused on is how do I purchase this equity? Okay, so do I give you, do I purchase that equity just the way you purchase any property? Do I purchase that with a big discount and give you your terms of all cash? Or do we start negotiating a little bit and I give you more money, but now we've got to work with my terms to make it easier. That's all you're focused on.

There's no real big difference here. Rather than buying the property with this three option letter of intent, you're focused on buying equity. And then you're just going to take over the property subject to the existing financing. Okay. Cool. So like I said, what I'm going through here, the numbers that I shared with you aren't the most important part of this scenario. The important part is you understand the concept of buying

equity. And it's the same as buying a house. You're just buying equity. And you're using price in terms to create a scenario for you that meets your minimum deal standards and makes it a good deal for you. Okay. So let's do a, here's your homework. When you come up with 10 ways, and this is all this is, 10 ways to pay someone $100,000. 10 different ways that you could pay someone $100,000. And what this exercise does is it just helps you practice craft. terms. And I just put 10 random ones together for you real quick. So $100,000, one way to pay someone $100,000 is to give them $100,000 all cash. Okay? Very simple. I'm starting off slow, starting off simple and basic and easy and understand. We're going to move on. So if you want to

pay them $100,000, you can just write them a check or just give them all cash for $100,000. If, here's another way, second way, you can give them $100,000 and then divide it up into 200 equal monthly payments. Still giving them $100,000. You're just playing with the terms now, right? So 200 equal monthly payments. Or we could do, I could pay you $100,000 and I'll give you interest only payments for 10 years, and then I'll pay you the balance in 10 years. Okay.

Same thing. They're still getting $100,000. You're still paying $100,000. You're offering to pay interest for the right to not give them any money down right now, to make payments low for you, to give you the opportunity to build up the rest of your portfolio, give you the opportunity to build up this specific property. and then your balance is the balance that you're going to pay them the full $100,000 in 10 years. So that's the third way.

Here's another way. I'll give you half now. And then I'll, so I'll give you $50,000 of cash right now at the close. And I'll give you $50,000 paid in 100 equal monthly payments. So I'll give you half now, half in payments. That's another way. Or I'll give you a quarter now, $25,000. I'll give you another quarter in six months.

And then I'll take the remaining balance. balance and amortize that over 30 years at 6%. Okay, so you got a quarter, a quarter, and then terms. So you get starting to follow me, you can divide this up in so many different ways. Here's another way. I'll give you $10,000 now and then $90,000 at $6% amortized over 30 years, but I'll give you a balloon payment due in 10 years. So it's just another way to pay someone $100,000.

And this is a really good exercise for you to take on and come up with as many ways as you possibly can of paying someone $100,000. How about I'll give you $5,000. I'm just going to give you $5,000 at close. I'll give you $5,000 cash more in six months. And then $90,000 due in one year or when the property is sold. See, just another term. You can define this however you want, however you want to pay them.

There's no limit to this. You're only limited by your own creativity. So I give you $5,000 now, $5,000 of six months. And then in 12 months, I'll give you the rest. Or when the property is sold, whichever comes first. Okay? Number eight, I'll give you just a, I'm just going to give you $1,000 right now.

Then I'm going to give you 50% of the profit not to exceed $99,000 when the property is sold. Look at that. So you just give them $1,000 right now. You're taking this property over subject to $90,000. And I'll give you 50% of the profit as long as it doesn't exceed $99,000 when I do sell the property. How easily could you get into a property that way? I mean, it just depends. on the seller's situation, but if you got in for a thousand bucks and then the rest of the payment

that you owe for the property is dependent on, you know, say you're a fix and flip when you sell the property. And if there's enough equity in there, that might make sense for you. And you can give them up to $100,000 or $99,000 because you give them one closing and then $99 of the profit. Got it? Just different ways of crafting terms. Number nine, $10,000 cash at close.

$90,000 to your son's tuition when he turns 18. See, there's just another way to pay someone $100,000. Now, if he's 17 and a half years old, that might not be a good deal. But if his son is three years old, four years old, that might be a great deal. And that might be what's really most important to the seller is that his son goes to school. And you find all these things out as you're building rapport when you're talking to the seller, you get to know them. Because all of these types of things do come out and you get to learn all this kind of stuff. So that's just another way.

It's another way to pay someone $100,000. And then here's number 10. I'm going to trade my free and clear rental property for a $100,000 credit on yours. Got it? So you can trade, you can pay tuition, you can buy, you can pay relocation costs, you can pay for moving vans, you can pay to actually do the moving, have someone come in and do the moving. I mean, you can do balloon payments, you can split the profit with them.

There's just, there's no limit to this. All right. So that's a good homework assignment for each and every one of you. And that's how you put together this three option letter of intent when there's a mortgage in place. All right. So I think it's going to be, let's see. Yeah, it's going to be Christmas by the next time I talk to you. So I wish each and every one of you a very Merry Christmas.

It's been an epic year. And 2017 is going to be no less epic. Not if I can help it. And I want that for each and every one of you. So stay close, stick around, and we'll make sure that that all happens for you. All right. You meet me halfway. I'll meet you.

And we'll keep doing this each and every week. All right. God bless to your success. I'm Matt Terrio, living in the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening.

We'll see you next time here at Epic Real Estate Investing with Matt Terrio. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.