This is a transcript of a previously-aired segment of “Self-Directed Investor Talk” co-hosted by Carole Ellis, managing editor of Think Realty Magazine
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Are you thinking of investing in real estate? But you do not have enough money to do this. Here is a tip you may use as long as the property seller is willing to negotiate along.
To be fair, not every seller will be willing (or even understand) the concept outlined. Your best wager is to find a property that the owner has great interest in offering it, whether because of moving, divorce, or frustration with tenants.
Actually, if you maybe currently renting and thinking of using this technique perhaps the owner would be glad to help you out! There are some variations that may be used depending upon you and your seller. Do they need the market price or are they just eager to get out of the monthly payments – maybe facing foreclosure?
The simplest method is to take over their mortgage obligations – called ‘assuming’ the mortgage. You will need to be approved by the original lender to assume the mortgage. If you cannot get approved for an assumable mortgage you could also try a ‘subject to’ assumption where you merely make payments while the property stays in the seller’s name.
You take over the original mortgage and create a second mortgage on the remaining cost of the property with the seller. Offer a high, interest-only payment for a short time period – 2 or three years. Rather than having the money sit in a bank they could be getting a high interest over 2 or 3 years with the remainder due in full at the end of the investment term.
When the term ceases you ought to be able to refinance the cost, or you can sell. Unless you hit an actual bad market the value of the house should have risen by then.
Most mortgage lenders merely need to make a good investment. While your local bank may still be scared there are a lot of financial lenders that would like to make a deal. Financiers like property investing. The mortgage is usually based on 60-70% of the value of the property, so as long as they understand they get their money back in the value of the land if you default, they don’t care what kind of income you make. Conclude the deal with a second mortgage done with the seller. In case you default they can still foreclose on the property and sell it, paying off the existing mortgage in the proceeds.
Now you can see the whole picture. It is good that seller and buyer may work together. If they can’t wait for a sale, you may still give them their initial price with a little versatility on their part.