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Creative Real Estate Investing | Get Stinkin' Rich Financing Property With Balloon Payments - YouTube
Channel: Epic Real Estate Investing
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I'm working with a new
real estate investor,
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and she's doing great.
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She's going to be a total rockstar.
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But when she told me
that she just walked away
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from a seller-financed deal
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because they wanted a balloon payment,
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I was like, "What?!"
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Then I caught myself.
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It's cool, baby steps.
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We're not that far along
in her training yet,
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but did you know you can get stinking rich
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financing property with balloon payments?
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Well, I'm going to show you how.
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Let's go!
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Hi, my name is Matt Theriault,
CEO of Epic Real Estate,
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where we show people how
to invest in real estate
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so they can escape the daily grind
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and retire early.
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And one of the ways we speed that up
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is by using more of
our mind than our money
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with creative real estate investing.
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And last week,
a new client of mine,
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as we were debriefing after
an appointment she had just had,
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she told me that she met
with a motivated seller,
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an older gentlemen,
and she asked him
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if he could carry back financing for her.
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And he agreed
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and she proposed a small down payment
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of which he didn't object to,
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but it was the 30-year amortized
carryback he didn't like.
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In fact, his exact words were,
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"I'll be dead by then."
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Now, she's still very new
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and she didn't see a solution
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so she left and just
said she would follow up.
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And so I asked her, "What
did he want the term to be?"
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She said she didn't ask
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but then she explained
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it had to be a 30-year amortized loan
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in order for the property
to produce a positive cashflow.
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So, amortization is the
reduction of a loan value
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over a set period of time.
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If you could pay off a loan over 30 years,
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you'd most commonly pay it
in equal monthly payments.
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And if you reduce the term
of the loan to 15 years,
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that monthly payment would
have to be much higher
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since you only have 15 years to pay it.
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And this was her concern.
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That higher payment would amount to more
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than what the property
would produce in rent;
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therefore, the property would produce
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a negative monthly cashflow.
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Under conventional financing with a bank,
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she would be correct,
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but we're dealing
directly with the seller,
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of which enables us to get
creative with the financing.
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So I went on to explain it's possible
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to get the payment of a
30-year amortized loan
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with a 15-year or a 10-year
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or even a 5-year term,
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and you can do that
with a balloon payment.
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A balloon payment,
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it's a final payment that is much larger
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than any earlier payment made on a debt.
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Typically, it would equate
to the outstanding balance
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to be paid at the end of the loan term.
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So, she understood that
but her next question was
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- and I get this almost every time
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someone hears the word "balloon
payment" for the first time -
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"Where am I going to come up
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with all that money
in 5 years?"
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Well, it's actually pretty easy,
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and I'll give you multiple places
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to where you can get the
money in just a second.
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But this how you get stinking
rich with balloon payments,
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and I'll use her deal
as an example.
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First, understand that the objective
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to real estate investing
is to not necessarily own it
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but to control and profit from it.
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By accepting a seller's terms
with a 5-year balloon,
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you'd profit monthly
per the positive cashflow.
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You'd also pay down some of the loan,
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the amortization,
which I consider profit, too.
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You'd also get the tax breaks
from the property
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and there's a decent chance
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you'd see some appreciation, as well.
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Mission 1, accomplished.
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Multiple streams of profit
achieved over the 5 years.
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Mission 2, control.
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It was Nelson Rockefeller
who famously said,
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"The secret to success is to own nothing,
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but to control everything."
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In this instance,
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she'd be named on title of the property
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but more importantly,
she'd control it
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had she accepted a balloon payment.
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And as John F. Kennedy famously said,
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"A rising tide lifts all boats."
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Having a balloon payment in
your creative financing toolbox
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enables you to get
control of a lot of boats.
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The more you control,
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the greater you do
when the tide rises.
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That's how people get stinking
rich with real estate.
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They (1) control a lot,
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(2) profit a lot while they do,
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and (3) when that tide rises,
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their wealth grows exponentially.
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Now, regarding profit and control,
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most people understand that
and so does my client,
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but to address her concern,
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what do you do when the
balloon payment comes due?
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Well, let's take a look
at all of the options
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a creative real estate
investor has at their disposal
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when balloon payments are involved.
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And I came up with 6 of them
but there's more, I'm sure.
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You see, you're only limited
by your own creativity.
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For #1, the worst case scenario,
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in 5 years, you got
to give the property
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back to the seller.
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Realize that there's no default jail
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and unless you have a
super sophisticated seller,
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the amount carried back by the seller
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is a non-recourse loan.
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It won't impact your credit score.
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Now, I wouldn't consider this a win.
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Nobody feels good about doing this
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but I wouldn't consider it a loss either.
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You profited from the
property for 5 years.
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The seller received the down payment
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and monthly payments for 5 years.
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It wasn't a waste of time.
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And actually, even if the
seller doesn't see it this way,
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you are doing them a favor
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because when they get the property back,
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they get to sell it all over again,
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and likely for a higher price.
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And that dynamic should
give you some insight
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as to why banks are in the
business that they're in.
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They make money by originating loans,
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and they make money
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when their borrowers
default on those loans.
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#2. Refinance.
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After up to 5 years
of property performance,
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and you don't have to wait 5 years,
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replacing the seller's loan
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with a conventional loan
or a private loan
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will typically be easier
than a new purchase loan.
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The property will have a track record,
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some equity per the down
payment and monthly payments,
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and whatever appreciation
you experienced along the way.
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#3. Sell.
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I mean, you likely negotiated a
discount purchase price up front,
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you likely paid some sort of down payment,
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and you made monthly
payments along the way,
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and there's a better than average chance
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you also experienced some appreciation.
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You should have some equity,
maybe a lot of it,
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and selling the property,
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it's a very viable solution
to the balloon payment,
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not to mention a nice chunk
of cash for you in your pocket.
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#4. Portfolio management.
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If this were the only deal you ever did
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and you weren't already wealthy,
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you might be limited to
the first three options,
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but a lot can happen in 5 years.
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For example, you do more deals,
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you buy more property,
you build a portfolio.
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When you have a portfolio,
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your options are essentially endless.
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It's easier to manage the finances
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on a portfolio of properties
that you purchased at a discount
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and are producing profits
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than it is to find new
discounted properties
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that produce profits.
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Here's what I mean.
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You could refinance a different
property in your portfolio
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to pull out the cash
to pay the balloon payment.
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You could sell a different
property in your portfolio
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to create the cash
to pay the balloon payment.
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Or, something I do with all of
my seller-financed properties,
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is insert a substitution
of collateral clause
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in the loan documents.
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And that allows me to move
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property A's debt to property B's,
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making property A
a free and clear property
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of which would make it
very easy for me
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to refinance or sell property A
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to pay off a balloon payment
of property C or D or E.
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So when considering a balloon payment
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for one of your seller-financed deals,
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don't view it in a vacuum.
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It's just one deal of the many
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you're going to do
over the loan term.
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And that brings me to the next option.
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You're likely flipping properties, too.
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Don't discount the probability
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that you'll have accumulated
some cash along the way.
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I mean, that's why we're
in real estate, right?
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To make some money?
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When you're super concerned
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with a balloon payment
5 years from now,
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what you're actually doing
is selling yourself short,
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assuming you'll be in the same
position you're in right now.
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Don't do that!
You're better than that.
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#5. Pay it.
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You could just pay the
balloon payment when it's due.
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Or, #6, pay it off early.
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You see, my strategy for all
of my seller-financed properties
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is to set a reminder every six months
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to give the seller a call,
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and that conversation
sounds something like this:
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"Mr. Seller, it's Matt,
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and I've got another property
I'm ready to purchase.
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I've been making my $300
payments to you each month,
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and I still owe you about $50,000.
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Now, before I buy this other property,
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I just thought I'd call you first
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and offer to settle
our balance for $40,000
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instead of giving it to
the seller for his property.
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Would you like to do that?"
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And just be quiet
and wait for the answer.
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If they say yes,
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I just got an additional $10,000 discount
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off whatever discount
I originally negotiated.
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If they say no,
I say, "Okay, no problem,"
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and I keep making my payments.
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And then I'll call them
back in six months,
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when my reminder goes off again,
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and I'll have a similar conversation.
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I get these early payoff
proposals accepted
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within three years
about 70% of the time,
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because the seller typically
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is emotionally less attached
to the property later on
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and they get tired of receiving
the small monthly payments,
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and either need or have plans
for a big chunk of cash,
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even if the payoff is at a discount.
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In my world, a fast
nickel beats a slow dime.
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And oftentimes in the seller's world, too.
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So embrace the balloon payment.
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No need to be afraid.
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That's a poverty mindset to be so.
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You're a creative rockstar
real estate investor.
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A balloon payment?
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it's a big nothingburger of a challenge
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for someone like you.
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So, what did you find most valuable?
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Let me know below.
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And who do you know
that needs to see this?
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When their name comes to mind,
please share it with them.
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Oh! And if you're already subscribed,
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I've pulled this video out
special for you to watch next.
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Otherwise, I'll see you next time.
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Thanks for watching.
Take care.
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