Structuring a Creative Financing Entry Fee, part 2
Guys, in our last blog we talked about a big misconception when it comes to creative financing and that’s the initial entry fee.
As you learned, a lot of people think the first step - which is knowing what the amount of money that the seller needs - is the entry fee, but the problem is they miss all the other parts!
It’s such a big thing, I made a video about it:
Let’s quickly recap the first 3 parts of structuring a creative financing entry fee:
Remember it’s ALWAYS more than just how much the seller wants…
Learn how much money the seller needs. Always ask this question!
The arrears. This is basically any back payments, like HOA, loans, mortgages, etc.
The cost of acquisition. If you got your deal from someone else, they would probably like a nice referral fee for the deal they brought you.
Now that you have learned the first 3, let’s look at the next 4 parts, which are:
4. Close of escrow
Depending on the cost of the property that you’ve bought, as well as the state you reside in, this amount will vary.
My house was about $400,000 and in my state of Arizona, the cost to close escrow is about $3000.
Again, this number can be different depending on where you live.
Before we get to renovations, let’s look at where our entry fee is at currently:
$2500 to Dave, my seller who I bought the house from
I luckily didn’t have any arrears to pay for, so that’s $0
$2500 to the real estate agent who gave me the deal
$3000 for escrow
Now we’re at $8000.
Renovations for a property are usually in the thousands, all depending on the condition of the house when you purchase it.
Continuing the example of how I went about buying my own house, I originally was going to use it as a rental.
That had been the plan until my wife saw it and immediately knew this was the house for us.
So, change of plans, but we still needed to do a few renovations on the home.
We were lucky that Dave kept the home in very good shape, so we initially only did about $1000 for renovations.
A lot of properties won’t be that simple; sometimes you’ll be looking at a grand to renovate, sometimes it could be ten grand. It all depends on the property.
6. The maintenance
This next cost of the entry fee and the last cost are two of the most commonly missed steps from buyers.
Guys, when you buy a house on subject to, you are taking over the payments from the seller; you’re paying off the mortgage.
Along with the mortgage payments, you also have to pay utilities. Even if you plan on renting out the property, this can still take between 30-45 days.
There’s also landscaping and pest control, which depending on the area you live, can be a lot. So how do you figure out that cost?
Simple formula – mortgage + utilities + HOA + exterior maintenance.
For my house, it was $2500. If I was going to rent it out, I would take that $2500 and multiply it by two.
That is your maintenance costs.
Again, this last step for the entry fee is one of the most overlooked portion. You have to add in the costs of marketing.
For me, I always add in a standard $1000 flat fee for marketing; this includes virtual assistants, batch leads, etc.
Adding all of these costs together, the end total for the entry fee is $15,000. $15,000 on a property that the owner wanted $2500 for at the beginning.
Do you see why the entry fee is so crucial?
And the entry fee is crucial because, as a creative financing investor, you want to have as many deals as possible without having to use your own money.
Private lenders can give you the money you need, but if you aren’t accounting for all of the above, you’re going to find yourself short of money.
Money that may need to come out of your own pocket.
If you want to learn more about the entry fee, more about subject to, and other creative financing tips and tricks, be sure to check out my YouTube channel.