How to Buy a Property With No
Money Down and Still Give
the Seller Cash at Closing

Next to finding good deals, getting the money to buy the property is the biggest obstacle most real estate investors face. There are many who teach real investors how to do no money down deals, by taking control of the property subject to the underlying mortgage. It’s a great method, except the seller gets no cash. For many really great high-profit deals, the seller will insist on getting a substantial amount of cash upfront.

Here’s a creative way to close a real estate deal with no money down (that is no money down to you!) while the seller of the property actually receives a substantial cash payment. It is a method of owner financing by creating a seller-carryback mortgage, and selling part of the payments to create the cash for the seller.

This is a brilliant win-win-win solution for the buyer, the seller and the note-buyer. You can use this when buying single family homes, duplexes, quadraplexes apartments, multi-family units, and commercial property.

The Problem:

You want to buy a house with a FMV of $400,000 with no money down.
Seller must have 20% down ($80,000).

The Solution:

Create a 100% seller-carryback mortgage.
Sell enough of the payments to raise the $80,000 for the Seller, plus $5,000 to cover your closing costs.

The Details:

Create the following note, secured by a first mortgage on the property:

$400,000 Original Principal
Amortized over 30 years
5 year balloon

Calculate the payment amount:

360	8%	-400,000.00	2,935.06	-0-
N	I	PV	PMT	FV

You arbitrarily decide to round the payment to $3,000. Calculate the balloon amount as follows:

60	8%	-400,000	3000.00	375,507.11
N	I	PV	PMT	FV

You want to sell enough of the 60 payments to raise a total of $85,000 ($80,000 for the Seller and $5,000 for your closing costs). You call an Investor and find out that they would want a 10% interest on this type of mortgage. To determine how many payments you would need to sell, simply enter -$85,000 in PV, zero in FV, and 10% in I:

32.45	10%	-85,000.00	3000.00	-0-
N	I	PV	PMT	FV

Solving for N, you find that if your Investor wants a 10% return, then he would pay $85,000 for the right to receive 32.45 monthly payments of $3,000.00 each.

Since we really don’t want to sell the Investor a fraction of a payment, round N up to 33 and solve for PV to find out how much the Investor would pay for 33 payments:

33	10%	-86,242.26	3000.00	-0-
N	I	PV	PMT	FV

So if you sell 33 of the 60 monthly payments to an Investor looking for a 10% rate of return, you would have $86,242.00 to split with the Homeowner as follows:

$ 86,242.00		Proceeds from sale of 33 payments
- 80,000.00		Pay to Homeowner as a down payment
$ 6,2s42.00		Cash to you to cover closing costs, repairs, etc.

The result:

The Homeowner receives $80,000 CASH AT CLOSING, perhaps to use as a down payment on another property, to pay the realtor, or to pay off a small mortgage that is on the property.
After the Investor collects the 33 payments he has purchased, then the remaining 27 monthly payments and the final balloon will be paid to the Seller.

If you are curious as to how much of a discount the Homeowner has actually taken, all you have to do is calculate the Present Value of the 33 payments that were sold, based on the 8% rate on the note:

33	8%	-88,602.78	3000.00	-0-
N	I	PV	PMT	FV

The value of the 33 payments prior to any discount is $88,602.78. If you gave the Seller $80,000 for those payments, then the Seller took an $8,602 discount:

$ 88,602		Value of 33 payments without any discount
- 80,000		Amount paid to Seller for 33 payments
$ 8,602		Discount taken by Seller

If the Seller was wanting a quick sale of the property, they probably would have dropped the sale price by more than $8,602 anyway. Additionally, if the Seller does not qualify for an exclusion for selling their own home, then their tax savings may more than make up for the $8,602 discount. (By carrying back a mortgage, the Seller receives the tax advantages of an installment sale.)

Additionally, consider the total amount of cash the Seller actually receives:

$ 80,000		Downpayment
81,000		27 remaining payments of $3,000 each
375,507		Final balloon payment
$536,507		Total amount the Seller receives over time

Another way to look at what the Seller receives is that after the Investor receives the first 33 payments, the balance owing on the note that reverts back to the Seller is $387,741.63:

33	8%	-400,000	3000.00	387,741.63
N	I	PV	PMT	FV

So the Seller receives $80,000 Cash Now; then after the Investor collects the first 33 payments, the remaining balance of $387,741.63 reverts back to the Seller and the Seller collects an additional $387,741.63 plus 8% interest thereon.

So what would motivate the Seller to do this deal?

Quick sale of the house
Over time, the Seller receives more than the full value of the house
Tax benefits of an installment sale (unless Seller qualifies for an exclusion for selling their own home)
Seller winds up with a safe, real estate-secured investment offering a very nice 8% return

What are your advantages to doing this deal?

You purchase a property for no money down. You can even build in enough cash to cover your closing costs and repairs or walk away with cash at closing.
You now get the appreciation and the tax benefits of being a homeowner as opposed to being a tenant on a lease option.

How do you structure the deal?

If you want to close without using any of your own cash and without the Seller knowing your profit from the sale of the 33 payments, then you want to close the deal as a three part, simultaneous close:

First leg: The Settlement Statement shows you purchasing the property for $400,000 with the Seller carrying back a $400,000 mortgage.
Second leg: The Settlement Statement shows the Seller selling the first 33 monthly payments to you or one of your LLCs for $80,000.

Third leg: The Settlement Statement shows you or your LLC selling the first 33 monthly payments to the Investor for $86,242. The closing works like this :
The Investor wires $86,242 into the title company.
Working backwards, on the third leg you will receive $86,242 from the sale of the 33 payments:

$80,000 of these funds will be used to fund the second leg of the simultaneous close. These funds will go to the Seller as the Seller’s proceeds from the sale of 33 monthly payments. The Seller may use these proceeds to cover any realtor fees, transfer taxes, real estate taxes, mortgage payoffs or other costs that they may incur on the first leg of the transaction.
The remaining $6,242 will go to you to cover your closing costs, repairs or whatever you want to spend it on.

A true win, win situation for everyone!

Two important words of caution:

Make sure to use a special Partial Purchase Agreement. (Most generic Partial Purchase Agreements do not adequately describe how to calculate early payoffs on partials or what happens in the event of a default.)
You can make a lot of money on partials. Don’t get carried away and sell multiple parts of a note. If you sell more than one part of the note, you may be violating security laws.

There are lots of variations to this particular structure. The great thing is that you can tailor make the deal to give the Seller whatever they need or to raise cash for yourself. Get your calculator out and have some fun!

Donna Bauer

For more information on discounted mortgages, Click Here

How to Buy a Property With No Money Down and Still Give the Seller Cash at Closing