The American Education Institute

USE ONE PROPERTY’S EQUITY TO BUY ANOTHER PROPERTY.

Another classic method of 100% financing is to make a promissory note and/or mortgage on the existing equity that you may have in some tangible asset (income property, land, boat, car, even you own home) and then use that to make a down payment on some other property.  Remember that equity is the property value minus whatever you still owe on that property.

Suppose a seller has a solid two-family income property for sale with an FMV of $60,000 and carrying a $25,000 mortgage.  From this you can see that the seller’s equity is $35,000 (the value minus the mortgage).  Suppose further that you have a tangible asset available for you own use showing an equity of $15,000.  You can create a promissory note and mortgage for that amount secured by that asset itself as collateral.

Now you can use that note as your down payment on the seller’s property, and then offer him or her either a $20,000 second mortgage to make up the difference in equity or else a $45,000 wraparound mortgage on the full balance, as described in method number three.  Note that when the deal does through, you will automatically have a $15,000 equity in the newly acquired property because of the down payment mortgage note you made that is secured by equity in your other property.

Further to this, the mortgage note which you have used in this way would contain a clause known as “substitution of collateral.” This clause allows you later on to move that mortgage, which you created when buying the two-family property, to still another property where you have equal or greater equity.  In other words, you can later move this mortgage for equity to be secured by the two-family property, in order to put a down payment on yet another attractive property.  In effect, then, you are using your mortgage note as a down payment on the two-family property, your $15,000 equity in that property to secure a down payment on a future property, and then later that equity on still another future property, and so on and so forth.  Lastly, with the substitution of collateral clause, you could then move your original mortgage note now to be secured by the equity you’ve created in your latest purchase.  In this way, you absolutely maximize every dollar of equity you have.  Every amount of equity is used to secure a mortgage on some other property.

If at any point along the chain a seller objects to using a secured mortgage note for a down payment, you can sell the property you originally used as collateral (substituting equities as needed to secure all other mortgages) and then use the cash from that sale for the down payment instead.  (This is discussed later more fully in how to convert paper to cash and take cash at closing.)

METHOD NUMBER 4 IN BRIEF

What it is designed to do:

• Use one property’s equity to buy another property

What you need:

• One asset with equity

What your terms are:

1.  Two-family property price                              $60,000.00

2.  Outstanding mortgage                                       $25,000.00

3.  Present equity                                                      $35,000.00

How you proceed:

1.  Offer note seucred by asset                            $15,000.00

2.  Offer 2nd mortgage ($20K) and

assume 1st mortgage ($25K) totaling      $45,000.00

3.  OR, offer full wraparound                             $45,000.00

What you can expect:

• Seller realizes full asking price & full down payment.
• You have $15,000 instant equity in two-family property.
• You have also obtained 100% financing.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 12-9-09