"SUBJECT
TO" ASSUMPTION & SELLER
CARRY
BACK
Let's now assume that you have come across a property that
is selling for $100,000; it has a loan balance of $50,000 with payments of $500
per month. With this scenario, the
seller has $50,000 in equity. Like
anyone else, he would prefer to sell the property and get his $50,000 equity in
cash. But, consider this...
When he sells the property, what is he going to do with the cash?
In many cases, this money is going to go into a bank account and sit
there collecting 4% interest. Do
you think that if he could get a secured 12% interest instead of a mere 8% he
would be interested? The answer is
obvious. Now we will see how you
can give him what he wants, namely, a high interest rate and get what you want a
property without a down payment.
The first part of the formula is simple assume the first
loan of $50,000 (as we discussed under assumptions). Or simply take the loan
“Subject To”.
This simply means that you don’t
actually formally assume the existing loan, you
simply take responsibility for the loan, and make the payments directly to the
lender. You take over
the payments of $500 a month and you're set.
But what do you do about the other $50,000 that is still owed the seller?
Simple! You execute a second
mortgage in favor of the seller, secured by the property you are buying.
What this means is simply this: The $50,000 that you owe the seller, (his equity) is now
secured by the property you are purchasing.
In other words, if you do not make the payments, just as any other
lender, he has the right to foreclose and take back the property. When creating the second mortgage, the terms can be whatever
you and the seller decide upon. It
can be 10%, 12%, interest only, due in 5 years, 10 years, 30 years or whatever.
Any terms that fit the wants and needs of both you and your seller will
work. However, in our example, we
said 12%, so lets see what happens...
For our example lets say we created a 12% interest only
note, all due and payable within two years. What this means is that for the
duration of the loan, (2 years), you pay only the interest.
(12% x $50,000 = $6,000 per year or $500 per month)
By paying only interest, your monthly payments stay low, however, at the
end of the two years you still owe the seller $50,000.
There is a reason for stipulating that the loan be paid
off within two years... Although
the seller may not have an immediate need for the cash, it is very rare that a
seller would want to wait ten, twenty or thirty years for his money.
By structuring the transaction in this manner, the seller not only gets a
high rate of return on his money but he has an assurance that he will have
access to his money in the near future. Two
years is a short enough period of time to make it attractive to the seller and a
long enough period to create enough appreciation to either
refinance to repay the second
click for refinance sources,
or sell the property at a profit.
You have just purchased a one hundred thousand dollar
piece of property with nothing down. Your
payments are $1,000 per month, ($500 to the first mortgage plus, $500 to the
seller); and as we explained earlier, even if you barely break even on a monthly
basis, in the long run, you have just made thousands!
What if there is no loan to
assume?
Here's
a simple variation on this financing method.
If the property is "free and clear", (no loans against it), the
seller can usually refinance the property, put the proceeds in his
pocket, have you assume or take that loan “subject to”, and then have you
execute a second mortgage for the balance.
This way, he gets his money, and you still get the property
with nothing down.
In this example the seller received NO cash out of the transaction. What if he absolutely insists on putting a substantial amount of money in his pocket? See next chapter.
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