Although, we have discussed only a limited number of actual purchase transactions, it is vital that you realize that the creative financing techniques and principles that you have learned are anything but limited! In one way or another, these creative financing techniques form the structure of about 98% of all real estate transactions that fall into the category of "creative financing", (anything other than making the standard down payment and getting a loan from the bank).  These principles are not mutually exclusive.  In other words, using one principle, does not exclude the use of an altogether different principle within the same transaction.  These principles are the building blocks that will allow you to create the necessary financing structure for almost any purchase...

We are now going to discuss one more real estate transaction.  Only this time, putting this deal together is going to take a combination of many of the principles we have learned...

 Here is the situation:

This property is worth $115,000 but because the seller absolutely has to have cash right away, he is willing to sell it for $100,000, but only if he receives all cash.  Furthermore, the property has a $20,000 non-assumable loan against it.  Since the seller owes $20,000 the buyer needs to be able to raise $80,000 cash for the seller.

The buyer sold a property last year and is still owed $10,000.  Plus, his car is paid off and worth about $8,000.  He is currently unemployed and consequently, not able to qualify for a standard type of loan; but that doesn't matter anyway because right now, even if he could qualify income wise, he only has $100 in his checking account and doesn't have the 20% down that would be required on a non-owner occupied loan.  And yesterday-- his dog died.  Sorry, I couldn't help it.

Anyway, in spite of his shaky financial situation, because of his thorough understanding and correct application of our real estate financing principles, he is about to raise $80,000 dollars and acquire about $15,000 in equity without taking one penny out of his pocket.

Here's how...

        1) Assume the "unassumable", first mortgage of $20,000 by using a wrap around mortgage.

         Remember, if the financing company has ample protective equity, they will usually lend even if you don't have a job.  They will usually lend up to 70% of the property value, (not price), minus any existing mortgages. Although, he is buying the property for $100,000, it is worth $115,000, so their loan will be 70% of $115,000 not 70% of $100,000.  70% of $115,000 equals $80,500.  There currently exists a $20,000 first mortgage against the property so, the finance company will lend $80,500 minus the $20,000 or $60,500...  So what does the buyer do?

         2) He gets a second mortgage from the finance company for $60,500.  (The buyer has now raised $60,500 but still needs $19,500.  But where to get it?)

With the assets that the buyer has, namely, the $10,000 owed him and the $8,000 car, he should have no problem using them as collateral to raise 55% of their value or about $10,000.  Most banks would consider that to be a very secure investment.  However, if they still balked at making the loan, he could offer a portion of his soon to be realized equity in the property he is buying as extra collateral.  For most banks, that would be an irresistible combination of security for their loan.

        3) Borrow $10,000 using present assets as security.  (The buyer has now raised a total of $70,500.  $60,500 + $10,000 = $70,500.  To make this deal work, he needs $80,000 or an additional $9,500. Where to get it?)

We can use the seller's equity to create a saleable note; a note that can be sold to a financial institution or mortgage investor.  For a note to be marketable it must have an ample rate of return, i.e. high interest rate, and at least 20% protective equity. In other words, the total of the first, second and the mortgage we are creating cannot exceed 80% of the property's value.

The subject property's value is $115,000.  80% of $115,000 is $92,000.  There is already a $20,000 first plus, a second mortgage of $60,500 for a total of $80,500 in loans.  This means that if we want a mortgage that the seller can sell for cash, it cannot be for more than $11,500.

       4) Execute a third mortgage in favor of the seller in the amount of $11,500.  (The seller can now sell the note for cash.  If he sells it at a 15% discount he will then realize 85% of the value of the note in cash or $9,775.)

Let's now analyze exactly what just happened:

                    1) Assumed (by wraparound or subject to)....$20,000...cash generated..$0

              2) Borrowed (second mortgage)..........        60,500...cash generated...60,500

              3) Borrowed against present assets.....       10,000...cash generated...10,000

              4) Created saleable note (3rd mrtg)            ..11,500...cash generated....9,775

                                                                   $102,000.................( $80,275 cash generated )

Although, the seller was asking only, $100,000 his actual objective was to net $80,000 cash out of the sale. Due to the discounting of the saleable note, raising $80,000 cash for the seller actually necessitated a sales price of $102,000.  However, paying $102,000 for a property that is worth $115,000 and buying it without any down payment is not bad.

Although, it is highly unlikely that you will ever need to create a financing structure as convoluted as the one just examined, it's important to realize that, if necessary, it can be done.  The proper application of these creative financing techniques and principles can accommodate almost any financing need.  Next Chapter


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