HOW TO BUY REAL ESTATE WITH NOTHING- METHOD #3
December 5th, 2009 . by Eric MartinMAKE A WRAPAROUND MORTGAGE
This is another 100% financing method that happens to be based on a new type of financing called the “wraparound” mortgage. The best way to explain this is throug the following example.
Suppose a seller has a property that has an FMV (fair market value) of $50,000. It also carries an existing, and assumable , mortgage for $30,000 with an 8% interest rate and a monthly payment of $245. From this you can see that the seller’s equity (FMV minus mortgage owed) is $20,000.
The usual 100% financing on a property like this would entail the buyer to assume the first mortgage and offer the seller a second mortgage on the $20,000 balance at a little higher interest rate, perhaps, 10%. This would give the seller $200 a month and the payment to the original mortgage holder would stay at $245. The buyer would then be paying $445 every month, which should certainly be less than the rent he or she receives every month. It would have to be.
With this new financing method, however, you as the buyer can avoid all costs and liabilities involved with assuming the first mortgage by simply offering the seller a wraparound mortgage for the full amount of the sale, $50,000. This is a completely legal financing method. In fact, it is known in some states as an All Inclusive Trust Deed (AITD) You should offer this full mortgage to the seller of whatever interest will keep your payment to $445 per month. It looks like much the same deal as before, doesn’t it? Actually, it is quite different.
The wraparound mortgage literally “wraps around” the existing mortgage and is payable directly to the seller, not the mortgage holder. The seller, meanwhile, continues to make those payments on that mortgage. The buyer’s payments to the seller, of course, are considerably larger than the payments to the mortgage holder, and the seller retains the difference.
Your total annual wraparound payment to the seller would be $5,340 ($445 multiplied by 12), while the seller’s total annual payment to the mortgage holder is $2,940 ($245 multiplied by 12). The seller’s income ($5,340 minus $2,940) would then be $2,400 a year. Meanwhile, the seller’s equity is $20,000, so his actual return on investment is 12% ($2,400 divided by $20,000 equals this percentage).
Also, the first mortgage happens to be older and so more of each payment is going toward reducing the principal. Thus it is being paid off at a faster rate. And when it is finally paid in, say, 20 years, the wraparound mortgage will still show an unpaid balance of approximately $33,000. Then the seller’s equity will have increased from $20,000 to $33,000 and returned him 12% annually in the meantime. You, of course have bought the property with none of you your own money and produced your own net profits from the rents you’ve received. This is another classic win-win situation, it is not? (Please see chart below.)
METHOD NUMBER 3 IN BRIEF
What it is designed to do:
Make a wraparound mortgage
What you need:
Only somewhat flexible seller
What your terms are:
1. Property asking price $50,000.00
2. Existing assumable mortgage $30,000.00
3. Current rate 8%
4. Existing monthly payment $245.00
5. Present seller’s equity $20,000.00
How you proceed:
1. Offer full wraparound mortgage $50,000.00
2. Buyer’s annual lpayments $ 5,340.00
3. Existing mortgage remains $30,000.00
4. Seller’s annual payments $ 2,940.00
5. Seller’s annual profit $ 2,400.00
What the seller can expect:
- Seller retains $2,400 in annual income
- Seller’s $20,000 equity earns 12% yearly return on investment
- Seller’s mortgage is paid off on schedule
- Seller’s equity in 20 Years grows to $33,000
What you, the buyer, can expect:
- You avoid traditional costs and liabilities of assumed mortgage.
- You acquire income property with 100% financing.
Dr. Eric T. Martin / 100% Financing When BUying Real Estate / 12-5-09
