Sometimes you may come across a property that you can get way under market value, but only if you buy it outright with cash.
It could be a distressed or motivated homeowner who just needs out quickly and doesn’t care about getting the maximum amount for their property. Or it could be a foreclosure, auction or short sale. Whatever the case, you’re getting the property at a steep discount, but only if you pay with cash.
If you don’t have the cash yourself, or even if you do and don’t want to tie up all your funds on one property since it limits your buying capability, you’re going to need to get the money somewhere.
One option is to get a loan from a bank, but this has some serious drawbacks. You’ll have to jump through lots of hoops, have excellent credit, and you’ll be tying up your personal credit which might prevent you from making other purchases such as buying your own home or a vehicle. Not to mention, it can be a slow process dealing with banks. If your credit isn’t ideal or you don’t meet some of the other qualifications, this simply may not be an option.
So here’s where a cash investor can come in handy. A cash investor is someone who has enough money sitting in the bank to buy the property outright. So essentially you’re going to get them to loan you the money so you can buy the property.
As you can imagine, this is not the average person working a regular job, but someone who has either inherited a large sum of money or has a high-paying profession. For example, doctors (especially specialists), lawyers, and various business owners could be good candidates.
You may wonder, why would they be willing to loan you the money? Well, you have to make it worth their while by giving them a much higher interest rate, probably on a short term basis, than what they’re making where there money is currently sitting (such as in a savings account, CD or money market account).
So to get their attention, you’re going to offer a really great return on their investment. And to do that, you have to know your numbers and know what you can offer. You’ll have to get the property way under market value to be able to make this a profitable venture for yourself and the cash investor.
Just as an example, you might offer something like 12-15% on their investment, which would typically be more than they would make if it’s just sitting in a CD or money market account. Keep in mind that they’re taking on a significantly higher risk with their money than where it currently is, so they deserve a good rate on it.
So an example situation might include finding a property that you can get for say 40% under market value. You lock it in with a contract, with a clause that makes it contingent upon you getting the funds within a certain amount of time (you could even put something like “Subject to partner’s approval”) which makes it easy enough to back out of the contract if you’re not able to find a cash investor.
You negotiate the terms with the cash investor and sign an agreement so there is no misunderstanding. You buy the property, fix it up if needed, then sell it for either market value or under market value for a quicker sale. After getting cashed out, you pay back what you borrowed from the cash investor, plus the interest you agreed upon. If you’ve done it correctly, you’ve made a nice profit on it and you’re ready to move on and do it again.
This is just a brief overview and sample situation to give you the general idea of how it might work. Before attempting any techniques, I’d suggest going through a book or course that covers this in more detail and make sure you have an attorney review any contracts before using them.
For information on marketing to cash investors, please browse or search our site and you’ll find some great ideas.
To your success,
P.S. For more information on marketing your real estate investing business and really growing your business, check out The Real Estate Investor’s Missing Manual: How To Effectively Market Your Business.