Chapter 18 ELEVEN CREATIVE FINANCING TECHNIQUES THAT MAKE YOUR TRANSACTIONS FLY Flashcards
1
Q
What is the goal of this chapter?
A
To expand creative thinking in real estate investing
Focus on recognizing hidden value and employing creative financing methods.
2
Q
Why is creative thinking important in real estate transactions?
A
It expands opportunities to close deals
Creative thinkers can see beyond conventional methods and structure beneficial deals.
3
Q
What is creative financing?
A
The art of developing a financing package that solves problems blocking the desired goal
Involves flexibility and creativity compared to traditional financing.
4
Q
What is the difference between creative financing and normal financing?
A
The application of the financing tool
Creative financing often involves secondary mortgages or seller participation.
5
Q
What are some common elements in real estate transactions?
A
- Down payment
- Purchase money mortgage
- Seller participation
6
Q
What is the primary goal for both buyers and sellers in a transaction?
A
Both parties want the buyer to buy
This mutual interest can create opportunities for collaboration.
7
Q
What are the 11 creative financing techniques mentioned?
A
- Sliding mortgage
- Double finance
- Glue transaction
- Discounted paper
- Other people’s property
- Shared equity
- Zero-coupon bonds financing
- Split funding
- Future rent
- Management interest
- Three-party blanket
8
Q
What does the sliding mortgage technique involve?
A
Sliding a mortgage from one property to another by substituting collateral
Allows for flexibility in financing by using different assets.
9
Q
What is a key benefit of a sliding mortgage?
A
It allows assuming a favorable existing mortgage while acquiring new financing
Can enable transactions without upfront capital investment.
10
Q
What must be included in a sliding mortgage agreement?
A
- Notice of intention to substitute collateral
- No outstanding late payments
- Evidence of equity in substitute collateral
- Approval of the mortgagee for non-real property assets
11
Q
True or False: Creative financing techniques are only applicable during a seller’s market.
A
False
Creative financing is beneficial in both seller’s markets and slower markets.
12
Q
Fill in the blank: Creative financing gives you _______.
A
[flexibility]
13
Q
What is an example of a scenario using the sliding mortgage technique?
A
A buyer assumes a second mortgage and slides it to another property to facilitate a purchase
This helps in managing cash flow and securing better loan terms.
14
Q
What is one potential pitfall of the sliding mortgage technique?
A
The mortgagee may refuse to move the mortgage to another security
This can complicate or block the transaction.
15
Q
What is essential for a successful real estate transaction according to the text?
A
Clear goals
Goals guide decision-making and adjustments in the transaction process.
16
Q
How can sellers benefit from creative financing?
A
By improving their position through flexible terms and conditions
Sellers can create win-win situations that satisfy both parties’ needs.
17
Q
What is a ‘Glue transaction’ in real estate financing?
A
A technique that combines different financing methods to close the deal
Often used to address specific financial challenges in a transaction.
18
Q
What role does negotiation play in creative financing?
A
Negotiation is crucial for tailoring financing packages to fit specific needs
It allows both buyers and sellers to find mutually beneficial solutions.
19
Q
What is another security in real estate transactions?
A
A way of helping a prospective buyer to take you out of a property when selling
The seller receives cash, fulfilling their goal.
20
Q
What is a future substitution of collateral?
A
An agreement allowing the mortgagor to replace collateral with substitute collateral during the mortgage term
Must meet specific criteria such as appraised value and lack of secondary debt.
21
Q
What are the criteria for substitute collateral in a mortgage?
A
- Located within the State of Florida
- Appraised value equal to 150% of the outstanding principal
- No secondary debt against the property
Borrower agrees not to place any secondary debt against the property.
22
Q
What happens if there is a dispute over the value of the substitute collateral?
A
The mortgagor presents an appraisal by a MAI registered appraiser. If disputed, the mortgagee presents their appraisal
The mortgagee’s appraisal is the deciding factor.
23
Q
What are the benefits to the mortgagee of sliding a mortgage?
A
- Becomes a first mortgage
- More favorable value-to-loan ratio
- Opportunity to renegotiate loan terms
- Attracts buyers to the property
These benefits can enhance the mortgagee’s position.
24
Q
What pitfalls exist in sliding mortgages?
A
The mortgagee risks shifting security from known to unknown properties
Careful consideration can mitigate this risk.
25
What is double finance?
Application of two or more financing techniques to maximize financing and minimize capital investment
## Footnote
Example: using sliding mortgage technique along with refinancing.
26
What are the four steps to avoid pitfalls of double financing?
* Understand personal goals and risk capacity
* Know the property's nature and cash projections
* Have a long-range plan with safeguards
* Learn money management
## Footnote
These steps help in maintaining financial stability.
27
What is a glue transaction?
A financial transaction where one party provides their credit or name while others provide initial cash
## Footnote
Common in joint ventures.
28
What are the seven rules of value that glue people follow?
* Real estate value relates to potential income
* Value increases with income increase
* Buying properties with potential income increases ensures value increases
* Value based on capitalization rate of sustained income
* Each dollar increase in net operating income increases value by the cap rate multiple
* Profit is the equity increase above cash investment
* Learning this math is essential for financial success
## Footnote
These rules guide real estate investment decisions.
29
What does the glue contract involve?
An agreement outlining control and specifics of the deal between the glue person and other parties
## Footnote
Important to establish who controls the deal.
30
What is the first step to take when entering into a deal with others?
Enter into an agreement with the other parties involved.
31
Who should you get to know in a joint venture?
All the other people involved, including spouses.
32
What should you try to understand about your partners in a deal?
Their objectives and goals.
33
What should you do if you feel you want to do a deal?
Let it be known that you expect to be compensated handsomely.
34
What is a critical consideration when dealing with shortfalls in income?
Insist on terms and conditions that deal with any shortfall in income to meet the debt service.
35
True or False: It is advisable to let people use your name in a deal over which you have no control.
False.
36
What should you do if a deal is going sour and partners won’t exit?
Build in an escape provision for yourself.
37
What should you avoid when helping others obtain goals?
Helping with objectives that are against your own principles.
38
What should you not do regarding signing a mortgage?
Don’t sign your name to a mortgage unless you have majority control and interest in the property.
39
What is a 'glue transaction'?
A transaction where partnerships allow for larger property purchases than one could afford alone.
40
What is discounted paper?
Notes or mortgages that are bought or created and used in a transaction at a discount.
41
Fill in the blank: Discounted paper is used to improve the _______ potential of the property.
sales
42
What is the benefit of using discounted paper in a transaction?
To reduce the cash down payment required.
43
In the example with Lou, what did he offer to the seller of the condo?
A third mortgage on the motel as part of the contract.
44
What should Lou keep regarding the mortgage on the motel?
The terms and payback of the mortgage as light as possible.
45
What is the potential downside of not having a realistic mortgage on the motel?
It may reduce Lou's ultimate profit or price in the transaction.
46
What is the significance of the constant rate in mortgage calculations?
It helps determine the yield and discount needed for the mortgage.
47
What happens if a small error occurs in mortgage calculations?
It can be exaggerated and lead to substantially incorrect results.
48
What is the first step to check your calculator’s mortgage calculation?
Calculate the monthly payment on a $150,000 mortgage payable over 30 years at 12 percent.
49
What should you do if your calculator’s result for the mortgage payment is significantly off?
Return the calculator for a refund or use it only for basic operations.
50
What should you do to ensure accurate mortgage calculations?
Use tables in the book to obtain more accurate information.
51
How can you determine your constant rate from a monthly mortgage payment?
Multiply the monthly payment by 12 to get the annual amount, then divide by the mortgage amount.
## Footnote
For example, if your monthly payment is $1,543.13, the annual amount is $18,517.56, and the mortgage amount is $150,000, the constant rate is approximately 0.1234504.
52
What does OPM stand for in real estate investing?
Other People's Money.
## Footnote
This strategy emphasizes investing with minimal personal cash and leveraging funds from others.
53
Define OPP in the context of real estate transactions.
Other People's Property.
## Footnote
This involves using assets that you do not own as security to acquire real estate.
54
What is a key strategy when using OPP?
Ensure you have the deal with the other property worked out in advance and in writing.
## Footnote
This prevents misunderstandings and potential conflicts later.
55
Explain the concept of shared equity in real estate.
It involves selling a property to a tenant who gets a percentage of the equity at the time of a future sale.
## Footnote
Alternatively, a tenant can improve the property for a share in the profits.
56
What is a potential benefit for a tenant in a shared equity deal?
Reduced rent in exchange for property improvements and a share of future profits.
## Footnote
This arrangement can lead to a mutually beneficial outcome for both parties.
57
What should be documented in a shared equity transaction?
A detailed list of improvements and agreements on profit sharing.
## Footnote
Clear documentation helps prevent disputes and misunderstandings.
58
What is a common pitfall in using OPP transactions?
Not having the deal with the other property owner worked out in advance.
## Footnote
This can lead to complications if the property owner changes their mind.
59
What is the role of a second mortgage in real estate transactions?
It can be used to secure additional financing or to facilitate a sale while minimizing initial cash outlay.
## Footnote
This can be beneficial in structuring deals with buyers who have limited cash.
60
Fill in the blank: The concept of investing using _______ emphasizes leveraging funds from others.
Other People's Money.
61
True or False: When structuring a deal, it's best to rely on verbal agreements.
False.
## Footnote
Always have agreements documented in writing to avoid misunderstandings.
62
What should you consider when using OPP in a transaction?
Both the benefits and risks associated with the other property involved.
## Footnote
Clear understanding helps in making informed decisions.
63
What is an example of a barter transaction in real estate?
Offering handyman services in exchange for property.
## Footnote
This type of transaction can involve services instead of cash.
64
What is a potential downside of engaging relatives in OPP transactions?
It can lead to conflicts or strained relationships if the deal does not work out as planned.
## Footnote
It's advisable to offer clear benefits to avoid misunderstandings.
65
What is the benefit of offering a zero cash down deal to tenants?
It can incentivize them to purchase the property they are leasing.
## Footnote
This can lead to a smoother transaction and potentially higher profits.
66
In a shared equity deal, how is profit typically shared?
The tenant receives a percentage of the profit above a predetermined value at the time of sale.
## Footnote
This arrangement aligns the interests of both parties.
67
What is the significance of a balloon payment in a mortgage?
It refers to a large final payment due at the end of a loan term.
## Footnote
This can impact cash flow and refinancing strategies.
68
What should you do if you plan to use OPP in a deal?
Identify individuals who own properties that can be used as part of the transaction.
## Footnote
Having options ready can facilitate smoother negotiations.
69
What does the term 'motivated seller' refer to?
A seller who is eager to sell their property, often at a lower price.
## Footnote
Motivated sellers can provide opportunities for better deals in real estate transactions.
70
What is the worst-case scenario for a tenant in a shared equity deal?
The property would not sell and the tenant would have to move out after the initial lease of three years.
71
What is the primary motivation behind shared equity deals?
Enticing buyers through the nothing-down concept.
72
What do property owners believe about tenants who think they are building equity?
They will be better tenants and the long-range profit will be greater for both parties.
73
What issue can arise when tenants realize they are paying more rent than others in the building?
They may become disgruntled.
74
What is a zero-coupon bond?
A debt obligation that has no payments made for a period of years, then a balloon payment for the accumulated debt and interest.
75
In the example of Ace Corporation, how much interest is accumulated over five years on a zero-coupon bond?
$1,611,051.00.
76
How does zero-coupon financing work in real estate?
It allows for a delayed payment structure where the buyer pays a lump sum at a future date.
77
What was the total amount owed to Frances at the end of 15 years in the zero-coupon financing example?
$300,000.
78
What are the two factors governing compound interest?
* Time * Interest rate
79
What is a major pitfall when dealing with zero-coupon bonds?
Not realizing the actual cash-out value of the bond at any future date.
80
What is split funding?
A psychological approach to payment where the buyer splits the down payment into multiple payments.
81
In the split funding example, how was the $200,000 down payment structured?
An initial payment of $100,000 at closing and $25,000 each year for four years.
82
What is the financial impact on the seller when accepting split funding with an 8 percent interest rate?
A loss of interest of $20,000 before taxes.
83
What is a common negotiation strategy when dealing with a seller's down payment demands?
Agree to the down payment amount but structure the payment over time.
84
What should one consider when accepting a zero-coupon mortgage?
Consult with an accountant regarding tax implications.
85
What is the benefit of split funding for the buyer?
It allows for flexibility in payment timing and can be supported by income from the property.
86
What is an important aspect of negotiating the terms of a split funding deal?
Interest on additional payments is negotiable.
87
What happens to the seller's perspective when a buyer offers a split funding payment?
The seller may focus on the total amount being agreed upon rather than the timing of payments.
88
What is the purpose of a counteroffer in negotiations?
To even out the deal and potentially lead to a compromise that is more favorable
89
What is split funding in the context of real estate transactions?
A method that allows dividing taxable funds over two separate tax years
90
How can split funding benefit a seller at the end of their tax year?
It allows them to spread taxable income over more than one year, potentially lowering their tax rate
91
What should you consider when planning to use installment provisions for tax purposes?
The risk of the mortgagor prepaying the debt, which could push you into a higher tax bracket
92
What are two methods to generate cash from a newly purchased property?
* Selling off portions of the property
* Increasing the value of smaller tracts
93
What is essential to allow for partial sale of collateral in a mortgage?
An agreement from the seller at the beginning that permits releases from the mortgage
94
What language should be included in a mortgage to allow for partial releases?
The mortgagor will have the right to obtain partial releases of the security to the mortgage
95
What is the formula for calculating the release price of land?
125 percent of the per acre loan ratio
96
What is a critical consideration when drafting a mortgage release statement?
Flexibility in the release pattern to suit development needs
97
What are the three critical provisions in land releases?
* The release pattern
* Where advance payments apply
* Penalty if the mortgagee doesn’t give the release
98
Define future rent in terms of real estate transactions.
The obligation or benefit of rent for one or more future periods
99
How can future rent be utilized by a buyer?
As part of the cash down payment or as an option to entice into a transaction
100
What is an example of using prepaid rent as a down payment?
Categorizing part of the down payment as prepaid rent to offset current income
101
What is an example of exchanging rent for a benefit?
Taking a year's rent for roof repair work in exchange for space use
102
Fill in the blank: The release price for land is calculated based on _______.
125 percent of the per acre loan ratio
103
True or False: The mortgagee can deny a release even if the mortgage states otherwise.
True
104
What is a future rent agreement in real estate?
An agreement where future rent is used as part of a real estate transaction, often for securing a note or mortgage.
105
In a real estate transaction, how can prepaid rent be utilized?
Prepaid rent can be used to reduce the down payment or exchanged for other benefits like repairs or merchandise.
106
What is a common method of using future rent in transactions?
Using rent from a property as security for a note or loan.
107
What was the key aspect of Brownie's deal with Roco?
Brownie offered an unsecured note secured by rents above a certain threshold from his apartment building.
108
What unique offer did Oscar make to the seller of a small home?
A lifetime right to rent one of the new apartments for $1 per month after his building plans were completed.
109
What is a major pitfall in future rent deals?
Not having a properly documented lease that meets the agreements of both parties.
110
Why is indexing the value of future rent important?
To ensure that the value of future rent is appropriately accounted for in case of cost-of-living increases.
111
What is a management interest in real estate?
An agreement where one manages a property in exchange for an ownership interest as remuneration.
112
What are two essential conditions to a management interest agreement?
* How terminated
* Golden parachute provisions
113
What is a three-party blanket mortgage?
A mortgage secured by two or more properties, where additional property is added as security.
114
What did Ruth do to secure her mortgage for the apartment in Tulsa?
She borrowed land from her father to add as security for the second mortgage.
115
What are some pitfalls in management interest transactions?
* Getting in over your head
* Not having everything in writing
* Not living up to the spirit of the agreement
116
Fill in the blank: A three-party blanket is used to add ______ to a mortgage.
additional property
117
True or False: The seller in a three-party blanket mortgage is usually the lender.
True
118
What is a key benefit of using a three-party blanket as an investment tool?
It allows a buyer to secure a mortgage with additional property without needing cash.
119
Who typically profits the most in a transaction involving security?
The person who put up the security in the transaction
## Footnote
This concept highlights the importance of understanding the roles of different participants in a deal.
120
What is a question investors should ask themselves before bringing in a partner?
Have I tried everything I could to buy that property without a partner, or do I need someone to share my lack of confidence in that property?
## Footnote
This self-reflective question helps investors assess their confidence and decision-making process.
121
What is the key consideration when bringing in a partner for a property deal?
Whether it is worth the effort
## Footnote
Investors must evaluate the benefits and potential drawbacks of involving a partner in a transaction.
122
True or False: The one who helps someone else put a deal together is often the one who profits the least.
False
## Footnote
In many cases, those who assist in structuring deals can gain significant advantages.
123
Fill in the blank: Like cosigners, the one who helps someone else put a deal together often is the one who ______ the most.
profits
## Footnote
This emphasizes the importance of understanding the dynamics of profit-sharing in partnerships.
