The American Education Institute

REPOSITION A PRIVATE MORTGAGE FROM FIRST TO SECOND LEVEL

Suppose you find a seller with property for sale for $60,000, having a $30,000 first mortgage which was taken out through a private lender.  In this case you would approach that private lender and ask if there might be a way to move that first mortgage from a senior, or primary level, position to a junior, or secondary level, position if, for example, you pay $10,000 in cash and thereby reduce that mortgaged amount to $20,000.  However, you need to make it clear that you’ll pay that cash if a new first mortgage can be secured.

If this is agreeable, the next thing you do is take out a $40,000 first mortgage on the property, using $10,000 of this to satisfy the cash payment offered to the now-secondary level mortgage lender.  The remaining $30,000, of course, goes to the seller in payment of his full asking price.

You have just financed the property at 100%, using two mortgages;  the seller  has received his full equity; the private lender has his debt repaid by one-third; and the new lender holds a first mortgage for an amount just two-thirds of what the property is worth.  This is truly a win-win-win-win proposition for all parties concerned, is it not?

You’ll find that this method is also quite useful when the private mortgage lender doesn’t want to discount the original loan in exchange for payment in full.  Another time to use this method could be when you yourself own property on which a private lender holds the first mortgage, if that lender will agree to reposition your loan in similar fashion, you could free up your equity to make another real estate investment purchase.

NOTE: This method is briefly summarized in the following chart.

METHOD NUMBER 11 IN BRIEF

What it is designed to do:

• Reposition a private mortgage from first to second level

What you need:

• Good credit history

What your terms are:

1. Property asking price                                          $60,000
2. Privately mortgaged amount                           $30,000

How you proceed:

1.  Offer to pay private mortgage cash

in exchange for lowering to 2nd level                        $10,000

2.  This makes 2nd mortgage amount                        $20,000

3.  Secure brand-new 1st mortgage                            $40,000

4.  Deduct/pay to private mortgagor                        $10,000

5.  Remainder to seller to pay equity                        $30,000

What you can expect:

• Seller realizes full sale price and cash payment of equity.
• You have 100% financing with two affordable mortgages.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 1-15-10