CHAPTER 8

ASSUMPTION & SELLER CARRIES TWO LOANS

Lets examine a scenario of the last chapter in which the property is worth $100,000 and the seller owes $50,000...

 Our seller doesn't need all of his equity in cash, but because of a planned investment he absolutely must have $25,000 cash out of this sale.  There are a couple of ways this can be handled, the simplest would be for the seller to refinance the property to borrow an extra $25,000 against the property which puts $25,000 in his pocket.  You then assume the $75,000 in loans and execute another mortgage to the seller for the balance of $25,000.  Although, this is the simplest method, for various reasons it is not always possible for the seller to refinance.  So, how do we get $25,000 for the seller?  Here's one possibility...

Remember, earlier we discussed the fact that if you have money owed to you that is secured by real estate you could sell the security instrument (usually a note) for cash.  With this formula, we use the seller's equity to create a saleable note.  (i.e. a note that the seller can sell for cash.)  Here's how...

    1) Assume the first loan of $50,000 with existing payments $500 per month.

     2) Execute a second mortgage in favor of the seller for $30,000 interest only at 14%. In other words, have the seller carry back $30,000 that you would owe him.  Make the note due in two years, payments $350 per month.

     3) Execute a third mortgage in favor of the seller for $20,000 interest only at 9%.  Due in two years, payments $150 per month.

 By structuring the transaction in this manner, you are in exactly the same position as in the previous example:

                1) You bought the property for $100,000, ($50,000 + $30,000 + $20,000 = $100,000). 

                2) Your payments are still $1,000 per month, ($500 + $350 + $150 = $1,000). 

 From your stand point, the only difference between the two transactions is that you are now making three separate payments instead of two.  However, from the sellers standpoint, things have substantially changed...

 You are making the payments on the first, so he doesn't have to worry about paying that.  He holds a third mortgage secured by the property that now pays him $150 dollars every month.  He also, holds a second in the amount of $30,000 dollars. 

Because of the high interest rate of the Second note and the fact that it has, what is referred to as substantial "protective equity", this is a very saleable note.

 The seller can now go to a financial institution or investor private party and either borrow against the note (as was discussed in the third chapter on borrowing against money owed you), or sell it. 

However, due to the amount of money that the seller needs, his best bet is probably to sell.  The only real drawback that this note has is the fact that it is not "seasoned".  In other words it does not have a track record of payments being made in a timely manner.  Consequently, the buyer of the note will undoubtedly want a substantial discount. But even with a 15% discount, the seller will still receive $25,500 dollars, ($30,000 x 85% = $25,500).

 By structuring the sale this way--

• The seller sold the property for the price he wanted.

• He got the cash he felt he had to have.

• Plus, he now has a note for $20,000 paying him more than he would get if that money were in the bank. 

 True, there is a the drawback in that discounting the note cost the seller $4,500 dollars.  However, enough of the sellers aims were realized that in most cases he would be satisfied with the outcome. 

And if he weren't satisfied, if you thought the property was worth it, you could always increase the amount of the third mortgage to cover what the seller lost when he discounted the second.

It is important that when studying the sample transactions that you not get too hung up on the precise figures. 

Depending on what part of the country you are in, a $100,000 dollar duplex might seem ridiculously cheap; in another it could seem too expensive.  The prices, numbers and exact formulas will change dramatically depending on many factors such as area, timing, market conditions, etc...  What is important is that you work on understanding the basic principles and realize that with creativity, concentration and a co-operative seller, there is a way to buy almost any property with nothing down.