Creative Seller Financed Options

How do you structure a deal if you can’t find outside financing? I’ve used a number of creative financing options as a buyer, a seller, or as a deal facilitator for others.

Please note: Different states may have different terminologies or methods for these financing instruments. Check with your local legal and accounting advisers as well as your local escrow and title companies before beginning the process.

These are some of my favorite creative financing methods:

  • “Subject To”
  • AITDs (All Inclusive Deeds of Trust)
  • Land Contracts

“Subject To”

“subject to” purchase is when you purchase a home (or other property type) subject to the seller’s existing mortgage.

trust deed

“Subject to” is sometimes called
“getting the deed.”

Usually, you do not formally qualify for the existing loan. The seller gives you a Grant or Quitclaim Deed in exchange for some type of consideration (i.e. money, a note, or other assets). Your “earnest money” may be as little as $10.

The borrower may be an individual, a corporation, an LLC, or some other type of entity. The borrower essentially takes over the payments of the existing mortgage. The seller still has the loan liability until this underlying loan is either paid off in full or refinanced at a later date.

The lender may have the option to call the loan all due in payable for a violation of the “alienation” or “acceleration” clauses in the existing mortgage. Lenders require that buyers formally qualify for their mortgages, and they frown upon other buyers just “taking over” the payments.

However, it is very rare for a lender to actually foreclose on a new property owner who just took over the loan payments. But it can be a very real possibility depending upon the motivation of the lender or loan servicing company.

There are so many non-performing loans these days, most lenders are just happy to receive a monthly payment from anyone. At worst, they may just send out a few warning letters to the new property owner requesting that they refinance the loan.

If you purchase property this way, make sure you get a clear title insurance policy from a national title insurance company. There may be tax, loan, or other liens secured against the property that you (or the seller) may not know anything about, which might reduce the property’s overall value.

All Inclusive Deeds of Trust (AITDs)

An AITD is a “wrap” of an underlying mortgage. I have structured many AITDs (recorded instruments) and Land Contracts (or Contracts for Deed – unrecorded financial and deed document transfers) over the years. A “wrap” is essentially the creation of a new mortgage which “wraps” around an underlying mortgage.

For example, I may have a 1st mortgage loan in the amount of $70,000. The interest rate may be 7%, the loan term may be 30 years, and the approximate monthly principal and interest payment may be $465 per month.

I may find a buyer who cannot qualify for a loan from his local bank. He offers me $110,000 for my same home with the following terms:

  • $10,000 down payment
  • $100,000 wraparound mortgage
  • New Wraparound Interest Rate: 9.9%
  • Loan Term: amortized over 30 years, due in 7 years
  • New Wrap Monthly Payments: approximately $870 per month

As the seller of the home, I receive $10,000 in the form of a down payment (excluding closing costs). In addition, I am earning approximately $405 per month in net proceeds as the different between the underlying $465 bank mortgage in First lien position, and the new wrap mortgage payment in the amount of $870 per month.

The AITD buyer also must refinance or pay me off in full within 7 years of the purchase date. When he or she pays me off, I will also gain the difference between the underlying principal amount of the First mortgage (originally $70,000) and the new Wraparound Mortgage amount of $100,000 (approximately $30,000).

Please keep in mind that the underlying $70,000 mortgage amount will amortize or pay off faster than the new Wraparound mortgage amount since it is has a much lower interest rate (7% vs. 9.9%).

There are installment sale tax benefits to the seller of a wraparound mortgage that your tax adviser can explain to you. It’s typically much easier to sell a home with a no qualifying wraparound mortgage than with a conventional bank loan, regardless of interest rate differences.

When an investor structures a large number of AITDs or Contracts for Deeds, they can ask a title insurance company to collect all the wrap payments, pay the underlying First mortgage still in his name (or someone else’s name), and credit his bank account with the net difference each month.

Additionally, the title insurance company may issue the corresponding 1098 and 1099 tax forms and help maintain a consistent track record of the monthly and annual numbers. Some title insurance companies or accounting firms perform this service for as low as $10 per month.

Land Contract or Contract for Deed

Land Contract financial and sales agreements are similar to the AITDs listed above, and they can be used for many different types of properties besides just land. The main difference is that the buyer does not receive the formal recorded Grant or Quitclaim Deed until the wrap is paid off in full or refinanced. The Contract Payer (the buyer) has “equitable title” but not “legal title” in the property in many states.

Typically, a third party like an Escrow, Title Company, or an Attorney will hold the Grant Deed for both parties until the Land Contract is paid in full. Once the Contract Payer pays off the Contract for Deed, then the Grant Deed is recorded in his name at the local county recorder’s office.

Land Contracts (or Contracts for Deeds) can be risky for both the buyer and seller as there can be “clouds on title” that affect the property’s value. For example, the seller may have future tax liens, which can later be recorded against the same property.

Many property owners hold recorded or unrecorded ownership interests in creatively seller financed homes under LLCs or Corporations. Some non-conventional lenders will allow property owners to refinance into the name of an LLC or Corporation after the borrower provides proof of ownership interests in the separate financial or legal entities as well as solid proof of an on-time mortgage payment histories, such as copies of the last year or two’s cancelled mortgage checks.

Get Professional Advice

Please get several legal, financial, and accounting opinions from your local advisers before you decide to try either an AITD or a Land Contract.

While there are risks involved with just about any type of real estate transaction, an investor who does his “homework” ahead of time will soon learn that creative seller financed home sales are some of the easiest and most profitable real estate investment options out there today! (*** Originally published on CRE (Creative Real Estate) Online - www.creonline.com)


Interest Rate Swings

Historically, the #1 reason why home prices generally rise, remain flat, or fall is directly related to the latest 30-year fixed mortgage rates. This is true because the vast majority of home buyers need third-party funds from banks, credit unions, or mortgage professionals to purchase and sell their homes to new buyers who also usually need bank financing to cash the seller out.

Over the past 10 years, a very high percentage of mortgage loans used to acquire residential (one-to-four unit) properties have originated, directly or indirectly, from some form of government-owned, -backed, or -insured money, such as FHA (Federal Housing Administration), VA (U.S. Department of Veterans Affairs), USDA (U.S. Department of Agriculture for more rural properties), Fannie Mae, Ginnie Mac, and Freddie Mac in both the primary and secondary markets. Most of these same government-assisted mortgage programs allow buyers to purchase properties with as little as no money down to just 3.5% down payments. Many times, the seller and family members can credit the most or all of the closing costs or down payment requirements so that the buyer really has no money invested in the property.

To the buyer, the most important part of the purchase deal is related to qualifying for a very low 30-year fixed mortgage rate and an affordable monthly payment. When the interest rates are too high, then fewer buyers can qualify for properties. During these higher rate time periods, home prices typically stay neutral or fall in price as seen during past periods of deflation like back in the mid-1970s. As such, almost all “boom” (positive) or “bust” (negative) housing cycles are directly related to low or high rates of interest, so they tend to correlate or go hand-in-hand with one another. 

Interest Rate History: 1971 - 2018

Between 1971 and 2018, 30-year fixed-rate mortgages have ranged between a low of 3.31% in 2012 to a high of 18.63% in 1981. Fixed-rate mortgages are still hovering near historical lows at present and in recent years. An estimated 60%+ of mortgage holders are paying fixed-rates on their residential owner-occupied properties somewhere within the 3.00% and 4.90% rate ranges as of 2015, per data released by Freddie Mac.

During this same 47-year timespan (1971 - 2018), the average 30-year fixed-rate mortgage was near 8.08%. This rate is almost double the average 30-year fixed-rate mortgage loan between 2010 and 2019. Because the ease of qualification and the affordability of mortgage loans is typically the most important factor behind a booming or busting housing market, the more recent 3% to 5% rate ranges over the past 10 years has helped fuel a stronger housing market with rapid appreciation rates as well.

Most often, owner-occupants are using some type of a government-backed or insured mortgage loan and / or secondary market investor to purchase their properties. These loans include FHA, VA, Fannie Mae, and Freddie Mac. The typical down payment ranges used to purchase these properties are very likely to average somewhere within the 0% to 3.5% down payment range. Many times, the seller provides a credit towards most of the closing costs and / or another family member assists with the down payment as a gift of some sort.

If so, a very high percentage of owner-occupied home buyers have purchased their homes with little to no money down out of their own pocket prior to qualifying for tax-deductible mortgage payments that were less than a nearby apartment to lease. Additionally, these same homeowners have boosted their overall net worth after the vast majority of residential properties have appreciated at significant annual percentage rates. In some cases, homes have double in value in less than five to seven years due to the combination of affordable mortgage loans, easier mortgage underwriting approval processes, and increasing demand for properties to purchase. 

Year               Lowest Rate    Highest Rate        Average Rate    

2018             3.95%             4.94%             4.54%
2017             3.78%             4.30%           3.99%
2010             4.17%             5.21%             4.69%
2007             5.96%             6.74%             6.34%
2003             5.21%           6.44%             5.83%
1995             7.11%             9.22%             7.93%
1990             9.56%           10.67%            10.13%
1985            11.09%         13.29%          12.43%
1980             12.18%         16.35%         13.74%
1975              8.80%         9.60%         9.05%
1971               7.29%         7.73%         7.54%    

Overall          3.31%         18.63%         8.08%

Source: Freddie Mac’s Primary Mortgage Market Survey (PMMS)

The Consumer Debt Anchor

With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.

Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.

 

 

Rising Global Debt 

 

According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

 
  • Households: 59.8%

  • Non-financial corporates: 91.4%

  • Government: 87.2%

  • Financial corporates: 80.8%

 

Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 

 

On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.

There are three additional Federal Reserve two-day meeting dates scheduled for 2019 that include:

 

  • September 17-18

  • October 29-30

  • December 10-11

 

It’s fairly likely that the Fed will cut rates one or more times at these remaining 2019 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens between now and year-end in 2019 and beyond. 

Original article source was published here (pages 87 - 91):

https://view.joomag.com/realty411-magazine-learn-grow-invest-more-great-resources-here/0422365001565216118?short&fbclid=IwAR0552bH7WfUR8_sF6uCt9QOMp6i04On-JWEklMBUFkJKMSOxhkCjjUI8do

Page 1 of 24
March 8, 2014

The Credit Crisis ebook now sold on Amazon Kindle

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Please look for my updated 2014 version of my ebook edition entitled The Credit Crisis Deals: Finding America's Best Real Estate Bargains which is sold on Amazon Kindle. Here is the link: https://www.amazon.com/The-Credit-Crisis-Deals-Americas-ebook/dp/B00INAAX3S

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September 4, 2013

The Financial & Asset Bubble

The Financial and Asset BubbleSince the official start of our six (6) yearlong “Credit Crisis”, we have all seen the various wide-ranging extremes of the financial and asset cycles with both busts and booms. During the past several years, our economy has experienced deflation, inflation, and potentially hyperinflation partly due to a weakening U.S. Dollar, declining job numbers and investor demand, and various financial strategies and bailouts.

 

In spite of numerous analysts allegin...

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August 30, 2013

The Frozen Securities Markets

frozenhousingmarketAs the securitization market for mortgage loans has effectively been “frozen” for several years as I had forewarned many of my readers in various regional and national real estate publications several years in advance of the “official” start of The Credit Crisis back in 2007, we primarily have seen loans being funded which are backed by governmental bodies via Fannie Mae and Freddie Mac (both taken over by the U.S. government back in September 2008) and FHA (government insured financing).

...

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August 29, 2013

Billions of Ballooning Commercial Mortgages

rebubbleThe last big “real estate buying” period for both residential and commercial real estate properties nationwide was around 2007/2008.  As real estate investors we should be aware that many of the existing 5 year fixed commercial loans used to finance those real estate investments may be ballooning or becoming all due and payable in 2013.

Ballooning Commercial Mortgages

 

Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities) with loan balances near $55 billion may need...

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August 8, 2013

A Higher Percentage of All Cash Buyers

cashbuyerIn Southern California, upwards of 55% of all homes purchased in 2012 may have been acquired with either all cash or FHA loans partly since the secondary markets are so restricted. A very high percentage of these home purchases were for homes priced below the conforming / FHA loan limits of $417,000.

Many of these all cash buyers were investment or hedge funds, domestic and foreign. Obviously, the mortgage lending markets have tightened up significantly since 2007 with the Jumbo Mortga...

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July 2, 2013

The Ongoing Credit Crisis

 
 

Credit MortgageThe ongoing and worsening Credit Crisis continues at a rapidly escalating downward spiraling pace. The various bailout programs offered by governments and Central Banks worldwide have done absolutely nothing to help the everyday citizen on the street.

These bailout programs have only worsened the financial crisis worldwide, and have adversely impacted our once capitalistic wa...

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May 14, 2013

Why Commercial Real Estate Values are Improving

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Since the Credit Crisis began back in the Summer of 2007, both commercial and residential property values have fallen significantly throughout the USA. As I have written before, property owners are more likely to walk away from their “upside down” homes, office buildings, retail shopping centers, or other types of properties if their existing mortgage debt exceeds their current market value.

Thankfully, home prices have begun to stabilize or increase in price ranges of between 5% and 20%...

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April 11, 2013

Real Estate: An Exceptional Hedge Against Inflation

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Whether one believes annual government statistics which allege 3% to 4% annual rates of inflation or if one chooses to take a closer look at the costs for their goods and services in real life which seem to increase in price closer to 8% to 10% + each and every single year, I do know that the cost of gasoline, food, water, and utilities has skyrocketed in recent years thanks to our weakening U.S. Dollar.
 
Historically, real estate has been one of the best forms of investment...

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April 5, 2013

The Shadow Inventory vs. Declining Home Listing Inventory

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How is it possible that home listing inventories have fallen in many regions by upwards of 30% to 70% in year over year comparison numbers in spite of our ongoing sluggish economy? With the rapid home listing number declines in various regions, then many homes have increased in value by 5% to 17%+ just over the past year as well.
 
Are there potentially several million "Shadow Inventory" foreclosure homes which may have been delayed partly due to a wide variety of legal and financia...

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March 26, 2013

What is easier to fund today - commercial or residential loans?

real estate investingAre commercial real estate loans easier to find than residential loans today? Had I asked that question back in 2007, most people would have then said “No way.” Today, many investors and brokers may have to really think about it first prior to giving an answer one way or another.

Since the last real estate market peak near 2007, both the residential and commercial market sectors have sadly experienced massive price declines. In many cases, homes, retail shopping centers, land, hotels, a...

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