The American Education Institute

BUY BY DEFERRING SOME PORTION OF THE PURCHASE PRICE

Sometimes, in some highly, competitive areas of the country, prevailing prices and rents for real estate are such that it might seem impossible to break even or achieve a positive cash flow.  But this problem can be overcome sometimes by negotiating no-or low-interest financing on the part of the seller or else by deferring something of the purchase price itself.  The second alternative is often much easier to negotiate and works just as well.  What usually is deferred is some portion of the price or some interest on the loan.

Suppose you find where a seller has a three-bedroom home on the market for $95,000.  It also carries an existing $46,000 assumable first mortgage.  You may be able to negotiate with this seller a deferred purchase deal that works something like this:  In return for you offering to pay the full purchase price, the seller should be willing to carry another mortgage on the balance for whatever is the going rate of interest.  As a further consideration, the fair market rental on a house like this is approximately $750 per month.

You might offer this seller that you will assume the existing $46,000 mortgage and make the second mortgage for the $49,000 balance with him by using two notes, one for $25,000 at prevailing interest and the second for $24,000, also at a prevailing rate but with payment of this interest being deferred for six years.  But you can assure him that when the six years are up, both notes plus the unpaid interest on the second note would become due and payable.

Or better yet, stipulate that the first note should remain on the property while just the second note with its deferred interest becomes due and payable in full.

Now here is the “secret”:  Be sure to stipulate that the deferred interest on the second note for $24,000 is accumulated and not compounded.  If you don’t, you will be paying interest upon interest, which would cause the note’s unpaid balance plus interest to skyrocket, making it cost prohibitive for to pay.  Please the following illustration.

ILLUSTRATION FOR METHOD NUMBER 20

Simple vs. Compound Interest:

This shows the total difference between computing interest two different ways on a $2,4000 loan at 9% per year after six years.

Example of what to expect:

• Total interest compounded monthly                      $17,100.00
• Total simple interest                                                      $12,960.00
• How much more you pay for compounding        $   4,140.00

When the six years are up, in this example, you could refinance and then pay off the entire first (assumable) mortgage to that lender plus both notes to the seller.  Preferably, however, you would like him to agree to your paying off only the second note (for the $24,000 plus accumulated interest)  and leave the first one ride on the property.  Then just the seller’s first note (for $25,000 plus prevailing interest) and your new mortgage (through refinancing) would sty with the property.

But if the seller’s note for $25,000 plus interest is in fact to remain after refinancing, you must first have included a subordination clause in that note at the time you bought the property and assumed the first mortgage.  This legalese will allow for the possibility of future mortgages to be subordinated to this note, or else enable this note to become subordinate to some future larger mortgage.  Which ever works out for the best, you will need to safeguard and ensure your ability to take out a future longer mortgage in order to fulfill the six-year term you negotiated with the seller in the first place.  (More about subordination clauses in contained in this text discussing how to make real estate offers.)

One more thing you need to consider.  If you believe the rents you are able to charge will not support a refinanced mortgage plus the original note for $25,000, you’ll need to have the seller agree that the interest on that note could be adjusted downward to a point where the property rent can support repayments.  At the same time, the second ($24,000) note’s simple interest could be correspondingly increased.  This is another creative way to make end meet.

IN CONCLUSION:  MORE THINGS FOR NOTHING

These have been four more “advanced” yet practical methods for creatively financing property at (or very nearly at)  100%.  They include:  making a pledged asset mortgage, using discounted bonds, entering into a purchase agreement or land contract, and deferring a portion of the purchase price.  Again, they positively reinforce the fact that you can indeed buy real estate using none of your money.

With the previous text and now this text, you have at your disposal 20 different and creative methods on how to do just that.  And there are still other 100% financing methods and variations to be discovered in the text material ahead!

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 3-28-10