Getting a Discount by Paying ALL CASH!
Making an ALL CASH, fast-close offer is very attractive to motivated sellers. If they are truly motivated, they want to get rid of the property fast, for a variety of reasons mentioned in our last blog post.
The question for real estate investors is how to make an ALL CASH offer and be able to close on it. In reality, few real estate investors, who are individual, actually have all the cash needed to make an ALL CASH offer. Large REITs and hedge funds that borrow enormous amounts of money at the lowest rates possible are the types of real estate investors who have a large pile of cash to use to make real estate purchases.
Using Hard-Money Lenders
One effective technique for individual real estate investors is to set up relationships with hard-money lenders that can trigger immediate financial support for deals that meet their funding parameters. Hard-money lenders will always want the borrowers to have “some skin in the game.” This means the maximum they will loan is about 65% of the purchase price. That means 35% of the cash has to come from the borrower.
The 35% invested by the borrower is a temporary measure. Think of it as a place marker to get control of the property and then refinance the purchase to get the investment money back and pay off the hard-money lender. To achieve this, the property purchase must be at substantially below market value. The best deals are at 50% of market value or less.
Motivation to “Dump” the Property
By putting out a low-ball ALL CASH offer on a property, the real estate investors is testing the motivation of the seller. The discount from market value needs to be a large as possible for success in ALL CASH deals. Other ALL CASH opportunities come up by acquiring properties at a steep discount by purchasing a bargain property at an auction.
Clever real estate investors submit two offers at the same time. One is the ALL CASH offer at a steep discount and the other is an offer for a higher price if the seller will accept terms.
Paper Control of a Property and Finder’s Fees
This technique is used to achieve control over the opportunity to buy the property at a certain steeply-discounted price, without having to put up much cash (in some cases, no cash). The real estate investor creates a legally binding option agreement to buy the property at a discounted price and then sells the option to another investor for a small amount, which is typically $5,000 to $10,000 dollars.
The real estate investor who has the option pockets the cash for selling the option as a reward for finding and capturing a great deal at a steep discount for larger real estate investors or groups that have the cash.
As long as the deal meets the larger real estate investor group’s investing parameters, they are happy to pay a fee to acquire the option to buy the property. Sometimes they intentionally look for people who hunt for properties and pay this option amount as a “finder’s fee.”
One important reason a “finder” is valuable to a larger investment group, is that the finders bring in great deals that are not easy to locate. Examples would be a deal that is not listed or a property on the brink of foreclosure.
Summary
Cash is King in some real estate deals and amazing discounts are available for those that can make ALL CASH -Fast Close deals. Advertising the capacity to do these deals gets attention. It can also bring in deals that do not qualify for ALL CASH offers; however, an offer is still possible to acquire the property using traditional financing.