Real Estate Investing Using Other Peoples Money

Even in today's marketplace, there are still many ways to invest into real estate using leverage (OPM), such as credit cards, lines of credit, home equity loans, investors and many other techniques.

Getting Started

In my beginning days of real estate investing I was lacking both credit and cash. But I did have the determination to succeed. I just loved the idea of investing into real estate and I had purchased many books on the subject.

A few years back I was talking to a friend about this very same subject. How do you purchase real estate without much credit or cash? My lady friend had just gotten her real estate license and was eager to get something going.

Selling real estate as a licensed agent can be extremely competitive in most areas of the U.S. I had explained to her how I had chosen not to go that route, but instead, I chose to pursue the 'rehab' market. I showed her a few examples of some small, past investments that I had done and she really liked the concept of it.

In fact, she had liked it so well, that we decided to invest into a project together. So we did!

I had always's made it a point to pick out different areas of town and to drive through the neighborhoods. I would be on the lookout for that 'diamond in the rough' property. The type of property in a nice area that had the overgrown weeds in the yard and was in desperate need of repairs.

Although there are many other ways to find these type of properties, I especially liked this way because it kept me in tune with the 'pulse' of the area.

Several weeks prior to our meeting, I had come across an unique piece of property. I had already ordered a property profile through a local escrow company and found that the property was on an acre and a half parcel and consisted of two buildings.

One was a small, 2 bedroom 2 bath house and the other building was a 2100 square foot barn with 6 stables. Both buildings were in need of repairs, but both were structurally sound with good roofs.

It was also located adjacent to a larger parcel from which it had eventually been subdivided from.

Interesting enough, this large parcel of 5 acres had a 3 story, 10,000 square foot home with a swimming pool and was owned by the U.S. government through foreclosure (REO) and was appraised at $1,000,000.

These two parcels were originally built to serve as the guest house for clients and as quarters for the ranch hands who maintained the grounds and horses.

For many years, it was a very popular 'divorce ranch' and in it's heyday, people would come to Nevada from all over the country to establish 'residency' and apply for a 'quickie' divorce.

Here the guest's would be entertained with horseback riding and swimming, while waiting for their divorces to become legal and final, which generally took only a matter of days, at most.

Another factor which also made this property unique and very appealing was it being nestled in the center of a newly developed subdivision and was the only property zoned for hoses and other wonderful farm animals. At the time of this transaction, these homes were valued around $350,000 and were all on 1/3 acre lots and were very well maintained, demonstrating the 'pride of ownership' at it's finest.

Meeting with the Owner

Now that we had our preliminary research done, it was time to meet with the owner to find out what they were asking for the property (if they indeed wanted to sell it at all) and also to find out the particulars concerning the financing.

We discovered that the owner was a single, older woman who lived in the Lake Tahoe area. After learning some encouraging facts from her about the price and financing, we made arrangements to meet with this woman at her home and two days later, we drove to Lake Tahoe.

It was a large, beautiful home near the lake's edge surrounded by tall pine trees. Once invited in, she served us coffee and explained the details in full.

She explained to us that she was a widow, and in her prime, she and her husband had a substantial amount of money that they would loan, but only for real estate investments. As I listened, I thought to myself that maybe she would be interested in financing some projects for us, but as she continued speaking, she explained that she didn't do that anymore.

She went on to say that this particular property that we were interested in was a loan to some personal friends. It was a doctor and his wife who had purchased the property many years ago as an investment. It had worked out well for them for the many years they owned it as a rental, but unfortunately, this couple became divorced and consequently, stopped making payments altogether.

Still maintaining their friendship, the owner explained that she had to take legal action in order to protect her interest in the property. The doctor and his wife understood completely and in order to eliminate any foreclosure proceedings, they offered her a Deed In Lieu Of Foreclosure, which reverts the property back to the owner and stops all legal action.

She further stated that she wasn't interested in the value of the property, but instead, she only wanted to recoup the $55,000 that she had originally invested in the property many years prior. She wasn't interested in financing, she only wanted her money back.

It all sounded very good to us, so we wrote up an offer right there at her table. She was a very lovely and down to earth woman and so we kept our offer in the same manner. It was a very simple and straight forward offer. We offered her $55,000, all cash, we would pay all closing costs, the appraisal and based our offer contingent on us being able to obtain financing within 120 days. She accepted the offer and we immediately opened escrow.

By this time Amy was really getting excited about what was unfolding before us. She asked where we were going to get the money and based on our sub-par credit and work history, I was thinking along the line of a hard money lender. After all, the loan to value ratio would certainly spark an interest. Here we had just contracted a piece of property for $55,000 and even though this unique property was hard to comp out, our comparables of market research showed the property, as is, in it's present condition, to be worth around $125,000.

She thought for a minute and then said that she had a friend that she went to real estate school with who had talked alot about investing into real estate, more so than wanting to sell it. I told her that her friend, also newly licensed, was probably in the same financial boat that we were and probably wouldn't be of much help to us. I don't think so, she said, her husband is a commercial airline pilot.

Finding the Financing Using OPM

Amy called her friend and after explaining our offer to her, JoAnn said that she would run it by her husband. The next day, JoAnn called and after having explained the deal to her husband, said that although it sounded good, they weren't quite ready to make a plunge. However, she said, we do have a friend that might be interested and that she would call her.

Several days later, JoAnn called and said that her friend did show a bit of interest and would be interested in meeting with us and that she had set up a lunch date within the next couple of days to discuss it with us in more detail.

Armed with all of the facts and figures that we could possibly put together, we met for lunch.

Gayle was a single, middle aged woman with a very sweet disposition. We all hit it off in the very beginning, which made it much easier to present our proposition.

Gayle told us how she had never invested into real estate before and that the majority of her activity was in the stock market and commodities. For me, I had dabbled in stocks and commodities a long time ago, but they were to risky and to much of a roller coaster to suit my needs.

I began by explaining to Gayle the security, stability and the constant increase of appreciation in value of the local market and especially the value in this particular property. I further explained the amount of money that was required to pay off the owner and to also cover the renovation.

Although our plan was to sell the property within the next 18 months, we were asking for a 5 year loan to allow for more appreciation and, depending on how things went in the future, to possibly reconsider keeping the property as a long term investment.

We also offered her a much better than average return on her money.

Based on our comparables, she could easily see that, if anything were to go wrong, she could always get her investment back without any difficulty whatsoever.

After several hours of answering questions and seeing the before and after pictures of previous investments, she wanted to see them in person and then take a look at the subject property.

Driving by the properties, she was impressed by what she saw and so we headed towards the subject property. Just by driving into the area alone she knew that we were in an upscale neighborhood and a popular area of town.

We went completely through the house and barn. Almost every step along the way I was explaining our plan, costs and time table for renovating the property.

She liked everything she saw. She stood silent for a minute, then turned to us and asked, "exactly how much money do you need and how quickly do you want it?"

At this point we were both very excited.

The very next day she deposited $70,000 into escrow and we closed two days later.

A little less than a year later we were still working on repairs when a lady stopped by and asked if we would be interested in selling the property.

She continued on by saying that her husband and her were history buffs and that they had seen this property before and that they had absolutely had fallen in love with it and that they were willing to pay more than fair market value for it.

We took her phone number and told her we would think about it and get back to her. About a week later, we found another piece of prime property and decided to purchase it. It to, had a great deal of potential. A large house on 5 acres with a creek. A rarity indeed. We called Gayle and she said that if needed, she would finance that one for us as well.

After much thought, we decided to sell the house that we had still not quite finished the repairs on. We called the potential buyer and she was just ecstatic over the wonderful news. She said not to worry about finishing up on the renovation because her husband and her would just love to be able to put their personal touch to it.

That was fine with us, especially since we had a new property that we were preparing for.

We suggested a lender for her to visit with so that they may get pre-qualified for the loan, but she said that it wouldn't be necessary, because, regardless of the price, they would be paying cash.

To be completely fair and for the benefit of everyone involved, we had the property appraised again.

Here is a basic overview of the two transactions within a 10 month period:

(A) Paid (borrowed) $70,000 for the initial purchase from Gayle
(B) The property was appraised 'as is' for $135,000
(C) $65,000 instant profit in equity
(D) After 10 months of mortgage payments to Gayle ($70,000 loan amount @ 16% interest amortized over a 40 year = $934.95 principal & interest =$9349.53) (most of this was paid from our initial loan)
(E) New appraisal for buyers in 'as is' condition $205,000
(F) New sales price $205,000
(G) Minus our initial investment of $70,000
(H) Profit from this investment within a 10 month period approx. $135,000

This is one of my favorite types of investments: Finding a 'fixer upper' (without requiring a great deal of expense to rehab) in a upper class neighborhood & a much sought after type of property

This particular investment was purchased and renovated without any money of our own and was structured based on a bit of sweat, knowledge and just doing it. This was one of the better real estate investing transactions using OPM that I had ever experienced.