Equity Purchase Creative Real
Estate Financing
Technique #4...
Equity is a form of real estate financing in which the value of
the property less any mortgages or liens.
Create a promissory note and mortgage on the existing equity you have in an asset (home,
boat, investment property, automobile, vacant land, etc.) and use it as a down payment on another property.
Using equity in one property to purchase another. Assume that you have located a two family property that is on the market for $60,000,
with an existing $25,000 mortgage. Therefore, the seller's equity is $35,000 ($60,000 less $25,000). Create a promissory note and mortgage in the amount of $15,000 secured by equity in one of your assets. Use that as a down payment on the two family property, and ask the seller to take a
$45,000 wrap-around mortgage for the balance. (Wrap-around mortgages are discussed in "Technique Three"). When you buy the two family property, you will immediately have $15,000 equity in the property because of the $15,000 down payment.
The
home equity mortgage that you are creating on your asset should have a substitution of
collateral clause, allowing you to later move that mortgage from your assets to
another property where you have equivalent or greater equity. Thus, you might
use equity in your own home to buy investment property "A;" your
equity in "A" to buy "B" to buy "C;" and then, by
the substitution of collateral clause, move the mortgage from your own personal
residence to your most recent purchase, property "C". If the seller or
the two family property, Property "A," is concerned about not
receiving any cash at the time of close, the note and mortgage can be converted
into cash by selling them to someone else.
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Example
Summary
Technique #4
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Using
Equity In One
Property to
Buy Another
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What
You Need To
Begin:
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Asset
with equity
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Summary
Of Terms:
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Two
family
property
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$60,000
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Existing
mortgage
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$25,000
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Seller's
equity
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$35,000
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Procedures:
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Give
the seller a
promissory
note and
mortgage
secured by
another asset
as down
payment.
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$15,000
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Ask
the seller to
take a
wrap-around
mortgage.
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$45,000
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Results:
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- The
buyer has
$15,000
equity in
the two
family
property
and has
once again
bought
with no
money
down.
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Specific
Situations to
Apply
Technique #4
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The
Property
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Low
Interest
Assumable
Mortgages
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The
Buyer
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Cash
for only Part
of Down
Payment
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No
Cash at All
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The
Seller
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Will
Rent or Sell
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Equity
Purchase
to Blanket Mortgage
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