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Start Your Real Estate Empire Without Using Any Cash
show he/she has the needed amount of cash in their savings or checking account (see Figure 3.1).
• Then, if we’re ever examined by the regulatory authorities and
they ask why we made the first mortgage loan when the borrower did not have enough cash on hand, we point to the gift letter. Such a letter is always accepted by the authorities.
(As an aside, the authorities want us to make more loans, too. Why? Because this creates jobs for them, giving them more lenders to check on! Get the point?)
To: Bank of___________________
As parents (grandparents, uncle, aunt, brother, sister, or other relative) we plan to make a gift of $25,000 (or whatever other amount is needed) to our son (daughter, grandchild, nephew, niece, brother, sister, or other relative) to purchase the property at 123 Main Street for which you have agreed to provide the first mortgage. This gift is being made to a family member with no expectation or requirement that it be repaid.
Very truly yours,
Figure 3.1 Example of a Typical Gift Letter
While I cannot say for certain, it has been mentioned to me that a gift letter has been known to be used when the buyer (called the mortgagor) borrowed the down payment for the property being purchased. This, of course, might cause the mortgage applicant to be turned down because all mortgage lenders want the borrower to have some investment in the property.
Many lenders will provide you with the gift letter wording they prefer. Hence, the gift letter above is given only as an example. You should, of course, use the gift letter wording your lender provides to you.
Why? Because it has been proven that when a buyer has no money invested in a property, he/she will often run away when the first serious problem surfaces. I’m sure that none of my BWBs would run—they’d stick it out!
For a gift letter to be acceptable to a lender, it must have these five features:
Requirements for an Acceptable Gift Letter
1. The gift letter must be signed by the person making the gift.
2. The amount of the gift must be stated exactly in the letter.
3. The person giving the gift must give his/her name, address, and telephone number in the letter.
4. The person giving the gift must tell what his/her relationship is to the borrower—parent, grandparent, etc.
5. The person making the gift must state that the recipient is not expected or required to make repayment of the gift.
While you may not have a wealthy relative who can give you a down payment gift, it is wise to keep in mind this possibility. Your partner, friend, or business acquaintance might be able to obtain such a gift to give to one of your relatives.
Why do I point this out to you, my good friend? Because we bankers want to make more loans to earn more interest so we can buy a bigger boat, play more golf, spend more time on the ski slopes, or other luxuries!
Never Overlook Possible Partners for Your Down Payment Loans
When you’re starting your career in real estate, you may need help from a partner for your first few deals. Why? Because your partner can provide you with:
Start Your Real Estate Empire Without Using Any Cash
• Stronger (called enhanced) credit.
• A cosigner, co-maker, or guarantor.
• Real estate experience you do not now have.
• Working capital needed to get started in any real estate investment.
• A shoulder to cry on when you run into unexpected problems in real estate ownership.
• A needed loan for your income real estate down payment. You do the work and your partner shares in the profit while you repay the loan.
So, although you may be a loner who enjoys working alone, for your first few deals a partner may be just what you need. After all, your entire goal is to get started owning income real estate. So swallow your pride and take on a partner. It can be great! To attract partners:
• Offer to do all the work while sharing in the profits generated by your property.
• Offer an “equity kicker”—that is a small percentage of ownership in the property. Typically, you’ll offer 5 percent of the ownership in the property.
• Offer a share in the appreciation of the property when you sell it. Thus, with a 5 percent equity kicker, your partner would receive 5 percent of the profit earned on the sale of the property.
See if You Can Get Some of Your Down Payment Back on Closing
Many of my BWB students are amazed to learn they might be able to mortgage out—that is, walk away with Money-in-Fist (MIF) at the closing when they take possession of the real estate they purchased.
Mortgaging Out Successfully
Mortgaging out, as it is called, can help you recover some of your down payment money. Here’s an excellent example from a reader’s letter:
“Thank you for your advice in your books, newsletters and kits. Last November we purchased an investment home by mortgaging out with zero cash down. The seller’s asking price was $36,000. We were approved for a $40,000 loan by the bank. So we proposed that the loan be written for $40,000 and the seller would accept $32,000 for the house, giving us back $8,000, less expenses. At first the seller was reluctant but he finally consented. The bank deducted closing costs, earnest money and points from the $8,000 we would receive.