This article was originally published in Think Realty Magazine in the American Association of Private Lenders’ (AAPL)-sponsored “Investor Review” insert in the July/August 2017 issue.
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Are you contemplating investing in real estate? However, you do not have enough cash to accomplish this. Here is a tip you can use as long as the property seller is willing to negotiate along.
To be fair, not all sellers will be willing (or even understand) the concept outlined. Your better wager is to locate a property that the owner has great desire for selling, whether because of moving, a divorce settlement, or they are frustrated with tenants.
Actually, if you are currently renting and thinking about using this technique perhaps the owner would be happy to help you out! There are some variations that may be used depending upon you and your seller. Do they want the market price or are they just desperate to get out of the monthly payments – perhaps facing foreclosure?
The easiest way is to take over their mortgage payments – called ‘assuming’ the mortgage. You will need to be approved by the initial lender to assume the mortgage. If you can’t get approved for an assumable mortgage you may also try a ‘subject to’ assumption where you merely make payments while the property remains in the seller’s name.
You take over the original mortgage and create a second mortgage on the remaining cost of the house with the seller. Offer a high, interest-only payment for a short time frame – 2 or three years. Rather than having the money sit down in a bank they can be getting a high interest over 2 or 3 years with the rest due in full at the end of the term.
When the term draws to a close you should be able to refinance the cost, or you can sell. Unless you strike a real bad market the value of the house should have risen by then.
A lot of mortgage lenders merely want to make a good investment. While your local bank may still shy away there are lots of financial lenders that would like to make a deal. Financiers like real estate. The mortgage is usually based on 60-70% of the value of the land, so as long as they understand they get their money back in the value of the estate if you default, they do not care what kind of money you make. Complete the deal with a second mortgage done with the seller. In case you default they could eventually foreclose on the property and sell it, paying off the existing mortgage with the proceeds.
Now you can see the whole picture. It is better that seller and buyer may work together. In the event they can’t wait for a sale, you may still give them their asking price with a little versatility on their part.