The American Education Institute

TO BEGIN

You should reread all of the other 16 methods presented in this text and make sure that you’re familiar with all 16 methods.  the following text builds upon that material and also points to some governmental programs that are available in the United States which might well be used to help you make purchases or other wise sustain your real estate investment efforts.

After you’ve begun to master the 100% financing methods described so far, you might want to do a little research into governmental grants, loans, subsidies, and insurance programs that could possibly be available to you.  Remember,  these programs are not free.  They are almost always established from revenue sources which are funded by taxes you (and other) have already paid.

ADVANCED METHOD NUMBER 17

TAKE OUT A PLEDGED ASSET MORTGAGE.

Most real estate investors think of bank financing only as a last possible resort, and even that borders on desperation.  Why is this?  Because almost everyone knows that bankers are among the least “creative” people on earth when it comes to financing property.  Banks only bet on sure things.  This is probably the biggest reason why, in almost every American city you drive through, the tallest downtown buildings carry the signs and logos of banks or, of course, insurance companies.   And you can bet those buildings are not very creatively financed.

Inasmuch as “pledged assets” are regarded by most banks as risky, speculative, and “creative,” there are still some banks in this country that have made such (in effect) 100% financing mortgages.  Partly because those ventures have been reasonably successful, today pledged asset mortgages are gained a bit in feasibility.

A pledged asset mortgage works like this:  Instead of a cash down payment, other assets are offered by the borrower as collateral to satisfy the cash portion of the bank’s mortgage requirements.  If you’re the borrower, you might offer as collateral assets that you own or even that a friend or someone else in your family owns.  The agreement mush stipulate that the mortgage lender cannot convert those assets to cash unless you default on your loan and the lender is forced to foreclose.  Finally, banks that will make this type of loan generally won’t charge you any more than the current lending rates for making such a pledged asset mortgage.

The downside of this program is that the only types of assets these banks will presently accept are certificates of deposit from federally insured banks or credit unions.  Furthermore, their rules generally require that collateral, such as  CDs  amount to 10% of the purchase price for an owner-occupied parcel of real estate, and 20% of the property’s purchase price if the owner doesn’t intend to occupy it personally.

The upside is that the owner of such pledged collateral continues to earn interest on these CDs, and once an agreed payment history or amount of equity has been reached, the mortgaging bank will release that collateral back to the person who pledged those assets.

But don’t ever let contemporary practice, current banking policies, or somebody else’s  rules stop you from asking questions or offering “creative” ways around them.  For example, you should always approach loan officers with the reasonable suggestion that they consider each proposition on a case-by-case basis.  If you are credit -worthy, you might be able to pledge as an asset which is not in the form of a certificate of deposit.  Some banks have been known to accept blue chip stocks or pension funds, annuities, or other financial securities in lieu of cash or CDs.  Another possibility you may be able to negotiate is a property seller’s pay-down of rates of interest.  This means that, for a negotiated amount. a seller can pay down the bank loan’s rate of interest for a few years to a rate sometimes as much as 3% to 4% less than the usual current rate.

You might also be able to procure a bank mortgage based on a gift down payment.  You might even be able to have that gift asset be pledged again so that it won’t be cashed out unless you default on the loan.  Or, you could agree with whoever is giving you the “gift,” that (so long as they trust you)  they turn it over for you to use as your own pledged asset, and then of course you’ll give it back to them once you’ve satisfied the bank’s payment and equity requirements and the bank releases this collateral back to you.  In addition to pledged CDs or other securities, you might try to see if a bank will accept titles to other property, such as a fine automobile, jewelry, a luxurious boat, business inventory or even accounts receivable!

What about a Letter of Credit?  This would guarantee from a substantial creditor full payment of your mortgage to the bank in case you ever defaulted.  If you own another property, you might even be able to secure that Letter of Credit yourself with the equity you have in that other property.  In other words, what all these things are doing is guaranteeing to the bank that it will get its money back if you don’t pay the money you owe back to the bank on its mortgage.

So don’t hesitate to negotiate a creative 100% financing method with a bank and its mortgage lending personnel.  As long as you can present such “sure things” to the officer, you’re going to make it very difficult for him or her to refuse your loan proposal.  Remember that banks do indeed like sure things, but they also mush make loans.  Otherwise, banks make no money at all.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 2-17-10