Guys, today we’re going to talk about how to structure the entry fee when doing creative financing.
This is actually a big question from my students, regardless of them being brand new to real estate investing or if they’ve been in the game for a while.
Figuring out the entry fee throws people for a loop.
And what really throws them off their game is the fact that’s an entire scope of steps that make up the entry fee.
What is an Entry Fee?
I’ve taken classes, I’ve gone to seminars, and I’ve asked other real estate investors and until I went through the process myself, a lot of them had no idea what the entry fee was.
The simple definition of an
entry fee is the cost of buying a subject to, seller finance, or any creative financing property deal.
The entry fee is the cost that you’re going to be putting into the deal.
Guys, I made a whole video on what the fee is and how I figured out the actual process to finding the total costs. You can check out below:
What I’ve discovered is that there is more than just one step to the entry fee; in fact, because there’s a few steps that encompass the whole process, a lot of people tend to forget or skip some of these steps.
How to Structure an Entry Fee for Creative Financing
When people send me deals, the first question I ask is “what is the entry fee?”
As we covered, a lot of people don’t know what that is or what that means, so they’re completely confused when I ask.
I’ve broken the structure of an entry fee into 7 essential parts:
Arrears
Close of Escrow
Maintenance
Let’s look at each of these.
1. The Amount of Cash the Seller Needs
The first part of an entry fee is to always ask the question – how much cash does the seller need?
This is simply asking the seller how much cash they need to vacate the property and move on to the next chapter of their life.
Here’s a great example:
My current home, the one I share with my beautiful wife and children, I bought through sub to.
I wasn’t initially going to buy the home, but my wife loved it, so we bought it.
I bought my house for $2500.
Because that was how much the seller needed in cash.
So, in this example –the entry fee was $2500.
2. Arrears
So, you might think that the money to the seller is the entry fee.
No.
And for some people, that’s the first trip up.
The second portion of the entry fee is the arrears. What the heck are arrears?
When you’re buying a home subject to, sometimes the homeowner is behind on their payments; the amount of money that a homeowner owes is called the arrears.
You have to pay for those arrears.
Now, for subject to, you’re already taking over the mortgage payments, but if the homeowner has fallen behind on those payments, you’re responsible for catching those payments up with the bank.
This step not only covers any back payments, it also covers homeowner association costs, any liens against the home, etc.
In the above example with my house, my seller had no issues, the mortgage was paid and up to date, etc. so my costs were zero.
3. Cost of Acquisition
This third part is one people don’t really think of and that’s the costs associated with getting the house.
This includes the marketing associated, any virtual assistants, batch skips or leads…as well as any money to the referral who sent you the lead.
With my house, this came as a referral from a real estate agent who couldn’t sell the property. This came to me after being on the market for 6 months and I paid the agent $2500 for the referral.
Before we go on, let’s look at what the entry fee is so far:
$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
That’s a total of $5000 and we’re only at step 3.
There’s still four more steps to go through, so we’ll check those out in the next part.
If you want to get started doing creative finance, then don’t wait. Come join us in the Subto community.