CHAPTER 12
LET'S GET CREATIVE!
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
must 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.
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) First-
Assume the "unassumable",
first mortgage of $20,000 by
using a wrap around mortgage.
See Chapter 7.
Remember,
if the financing company has
enough 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?)
3) Borrow $10,000 using
present assets as security.
(The buyer has now raised a
total of $70,500.
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.
$60,500 +
$10,000 = $70,500. To make this
deal work, he needs $80,000 or
an additional $9,500. Where to
get it?)
CREATE A
SALEABLE NOTE:
Remember, 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 now 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 note 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 a 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, what's important is to
know hat, if necessary, it
can be done.
The proper application of
these creative financing
techniques and principles can
accommodate almost any financing
need.
See
Chapter 13.
How to Borrow
Even Closing Costs
