Chapter Eleven

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It is always preferable to be able to pay cash for your building lot. However, there are ways to start with little or no cash investment. I feel it incumbent upon me to point them out, so that I will have covered all bases.

You are in need of a lot that is free of indebtedness, because you will have to secure a construction loan, which must be in the form of a first mortgage.

Thus you must convince a lot owner that it is an advantage to him to deed his lot to you and take back a second mortgage for the amount of the selling price. This action is called "subordination." In other words, he allows his mortgage to be subordinated to a construction loan.

Secondly, you must find a lender who has no objection to making a construction loan under the above circumstance. Some will require that you have a cash equity in the lot and some will not. Thus, do not give up at the first refusal, because you do not need a lot unless you can secure funds with which to develop it.

And now, what do you supply instead of cash to set the deal in motion? You supply a story, a story which indicates that you have more than an even chance to bring the project to a successful conclusion. Of course, it must be a true story and bear investigation.

To begin with, your credit should be in good shape. It is no sin to be low on cash. There are many good reasons why a person might find himself perpetually in such as position—a man supporting a wife and kids for example.

However, if a credit check shows that you make it a habit to live beyond your means, the prospects are dim that you would handle someone else's money prudently.

A definite plus in this situation would be experience in the construction business. Another would be a working wife, who could cut down the burden of living expenses. Your ability to work on the job would carry a great deal of weight.

Another good possibility might be an owner who was not willing to deed his lot over to you but would consider a partnership agreement. In such as case, you both would agree on a value for the lot, to be paid upon sale of the house.

You would need a written agreement spelling out how each of you fitted into the picture. The owner would be entitled to nominal interest on the money value of the lot, during the construction period, although he might not require it. You would be entitled to a stated amount per hour for your labor if you worked, and you should receive it. If you did not do the work, it would be necessary to pay someone else to do it.

In some cases the seller would insist on a percentage of the profits, even up to 50%. This would not be entirely unreasonable. After all, he must sign the loan papers, which means that he supplies both the land and the financing.

The business of starting off with no money and working up to millionaire status is not an easy task. You may find it necessary to share profits with others at the start. To build on the firmest ground, neither party should have an advantage. "Fairness" is the key word, not only for your first endeavor but for your entire business life.

It is a matter of give and take, but it must be done. In conclusion, I must admit that I do not recommend that a person attempt to start in the real estate investment field with no cash assets. It entails a horrendous struggle.

But it is possible to achieve success. I know, because that is the way I started in the business.

Copyright ©1995 Robert A. MacDonald, All Rights Reserved.
Last revised: May 10, 1998.