Different states treat debt obligations differently; So borrowing money to buy houses carries different levels of risk associated with financing. In California, a person can owe hundreds of thousands of dollars for a home, and if things don’t work out, simply return the home to the lender and walk away without liability. But, in many states, if you personally guarantee a loan, even after a home is foreclosed, you will still have to pay the losses incurred by the lender if the home is sold for less than the loan balance. You could spend years working to pay what you owe while the interest clock ticks.
When I buy a home for resale, I look for financial conditions that do not create personal liability for debts. My favorite goal is a home that has an existing loan that I can take on without liability. Here are some ways I do this:
1. If I take the title by means of a deed of concession or deed of guarantee, I want to include language to the effect that “the concessionaire is taking the title SUBJECT to any bond, lien, usurpation, covenants, easements and record restrictions “.
2. With a Deed of Resignation, I do not need to add any of that language because it is implied in a Deed of resignation that only the capital held by the other person is transferred to me, subject to any defect in claims to title by others.
3. As Trustee, Corporate Officer, Managing Member of LLC, if I add “and not individually” after my name, I have no personal responsibility for the loan repayment and I can turn over the property to the lender if I cannot get things to work outside.
4. Yes, instead of borrowing money to buy a property, I give the seller the same down payment, but with the option to buy the property at an increasing price instead of paying interest on a risky loan. Therefore, I avoid all responsibility for any debt.
5. I can buy the property on a contingent contract and do not have to complete the sale unless certain contingencies are eliminated. My favorite contingency language is: “The buyer will not be obligated to comply with this contract, and all money in guarantee will be returned until the buyer has examined and approved the condition of the facilities, the title and the financial arrangements to date. of the deal. “This gives me a lot of last minute leverage to get financial terms without risk.
Price is critical when buying a home to resell, but when buying a home as a long-term rental, financial terms are paramount. I am willing to pay more for seller financing that I can comfortably repay from the rental cash flow. Suppose you can buy a free $ 200,000 free house for $ 160,000 for quick cash, but I have to borrow the money at 10% interest only from a private lender; my payments would be $ 1,333.33 per month plus another $ 3,000 per year for taxes and insurance. Let’s say that for a full year, my rents averaged $ 1,250 per month minus about $ 250 per month in operating expenses. It is going to cost me about $ 4,000 per year to own this house. I could afford a house like this, but not ten houses. In other words, negative cash flow seriously limits the total wealth that I can accumulate by holding houses for long-term appreciation and amortization.
Suppose I pay the full rental value of the house in exchange for two things: a small margin on cash flow and zero interest. Let’s say my financial conditions might require two loans of $ 100,000 – the first loan to be repaid with payments of $ 1,000 per month for 100 months. The second loan will be repaid in a single balloon payment after 100 months. I would raise it by refinancing the house or selling it. The seller will be paid in full in 8.5 years. Using the same operating expenses, I will go out of my cash flow from day one and can continue to buy houses. Comparing these two approaches, if the house appreciated at 5% per year, at the end of 10 years it would be worth $ 325,779. In the first case, you would still owe $ 160,000 and would have paid $ 40,000 in negative cash flow. In the second case, I would have written off $ 100,000 of the debt and I would have $ 100,000 left to pay. In the long run, financing, not the market, is what creates social capital.