| The average homeowner in America already holds | | | | same process without leaving his home. Imagine that |
| the secret to perpetual income and endless cash | | | | John pulls the equity out of his home through a |
| flows in their hands and they don't even realize it. | | | | traditional refinance at 6%. He now has roughly |
| There are some real estate investors who grasp the | | | | $200,000 to invest in another house. John pays cash |
| concept of cash flow and will spend large amounts of | | | | for the next house and then he sell that house to a |
| money to purchase these income producing | | | | buyer using "free and clear seller financing." The buyer |
| properties. The fact is that anyone one who owns a | | | | pays 5% down with a $200,000 principle balance and |
| piece of real estate is already in possession of the | | | | 8% interest only payments. Without leaving his home |
| most important ingredient in the cash flow formula. | | | | John and just created his $300/month cash flow and |
| Now they just need a little education. | | | | the monthly income is now paying off the refinanced |
| According to the 2005 census nearly 33% of homes | | | | mortgage. |
| in the United States were owned free and clear, | | | | What happens when the buyer eventually refinances |
| meaning that they no longer have a mortgage that | | | | or sells the property and John's seller financed |
| encumbers the property. These homeowners | | | | mortgage is paid off? John will find another home to |
| certainly have achieved a certainly level of financial | | | | buy with the cash and sell it using seller financing. This |
| maturity. But how are these great investments | | | | is how John can create perpetual income through |
| benefiting these owners? | | | | seller financing. In fact, any home owner can create |
| Consider this hypothetical example. John Homeowner | | | | perpetual income through seller financing following this |
| bought his home for $100,000 at 7% interest which | | | | cited example. |
| gave him a monthly payment of approximately $700 | | | | Let's consider the risks to "free and clear seller |
| month (PITI). By the time John paid off his home | | | | financing": |
| mortgage the value of the home has gone up to | | | | Risk 1 - What happens if the buyer stops making |
| $200,000. Now John has an asset (his home) worth | | | | payments? When the buyer purchased the property |
| $200,000 but that investment isn't a great | | | | they gave a $10,000 down payment. In addition, the |
| performing asset because he is making $0 return | | | | seller was saving $8,400/year because the property |
| annually on this investment. | | | | was owned free and clear. If any of this money was |
| Now consider this cost/benefit analysis for John's | | | | saved then there should be more than enough |
| situation. By doing nothing but living in his home John | | | | money to hire an attorney to foreclose on the |
| is saving $8,400 each year (12 months x $700/mo | | | | property. The owner takes the property back and |
| mortgage payment) because he has no mortgage | | | | sells it again. The new buyer will give a new $10,000 |
| payment. But if John were to make the same | | | | down payment and if property values have gone up |
| $200,000 (the current value of his home) and invest | | | | then the owner will be able to increase the principle |
| it into an investment that had a return of just 4.5% | | | | balance and possibly the interest rate which will |
| he would make $9,000/year (better than his savings | | | | increase the cash flow. In most typical situations the |
| by over $600). And if he were to make a smart and | | | | original owner is actually in a better situation after the |
| safe investment of that same $200,000 at 6% | | | | foreclosure and 2nd sale. |
| ($12,000/year), 8% ($16,000/year) or 10% ($20,000 | | | | Risk 2 - What if the buyer destroys the property? |
| year) his return would be far better than the $8,400 | | | | The purpose of home insurance is to protect the |
| savings that he has by owning his property free and | | | | lender (the owner) in case of property destruction. |
| clear. | | | | So if the buyer destroys the home the owner will |
| Here is how this scenario relates to seller financing. | | | | make an insurance claim and have the home |
| Let's say that John has to move to another city and | | | | professional restored (paid for by the buyer's |
| he is forced to sell his home. John understands the | | | | insurance premiums). |
| power of seller financing and he decides to sells his | | | | Risk 3 - What if the property values go down? It |
| home to a buyer using "free and clear seller | | | | doesn't matter. The buyer is still obligated to make |
| financing". Because John offers seller financing he is | | | | the mortgage payments regardless of market |
| able to sell his home quickly and for slightly more than | | | | conditions. |
| average market value. Imagine that John sells his | | | | Risk 4 - What if the buyer defaults in a down |
| home with the following terms: 1.) 5% down | | | | market? Then the owner can foreclose using the |
| payment ($10,000), 2.) $200,000 principle balance, and | | | | buyer's down payment money (or personal savings) |
| 3.) 8% interest only payments ($1,450/mo, $16,000 | | | | and then resell the property. The owner may end up |
| year). | | | | sell it for less because of the market conditions. Or, |
| John can now move to a new city and find himself a | | | | the owner can invest the positive cash flow into |
| home for about $200,000. He is able to purchase the | | | | private mortgage to protect the investment (principle |
| property with 5% down payment and can borrow | | | | balance). Or, the owner could take the property back |
| the balance of the purchase price at a 6% interest | | | | and then rent it until the market recovers and at |
| rate. So John now has a principle balance of $190,000 | | | | which point the property will sell at the market higher |
| at 6% which gives him a payment of about $1,140 | | | | values. Or, the owner could invest their money in a |
| mo. John now has a positive cash flow of over $300 | | | | partnership with a trusted real estate investor who |
| month (the difference between his investment | | | | will buy the property and assume most or all of the |
| payment and his current mortgage payment). Not | | | | risk for a slightly lower return on the invested money |
| only does he have a positive cash flow but the | | | | but with a guarantee on the investment (principle). |
| principle value of his asset stays at $200,000 but the | | | | Risk 5 - How will I know if the buyer's payments are |
| principle value of his new home will amortize and | | | | being made? A good practice is to use a third party |
| eventually go away giving John additional value (a | | | | escrow company to receive the mortgage payments |
| second asset of significant value). Now his original | | | | from the buyer. The third party escrow company will |
| house is actually paying for his new house with | | | | then send the owner a receipt of payments along |
| additional cash flows. | | | | with the payment money. This way all the money is |
| What happens if John doesn't want to move? | | | | being tracked for financial and legal reasons. |
| Because John is savvy he knows that he can do this | | | | |