Interest Rate Creative Real
Estate Financing
Technique #2...
A higher interest
rate rather than the
current mortgage interest rate
may encourage
the seller to accept
terms that would
otherwise be
unacceptable.
This
technique could
allow a seller to
postpone a portion
of capital gain that
might otherwise have
to be reported in an
installment sale
under the new tax
law.
For example, a
seller has a
property for sale at
an asking price of
$100,000. The
property has an
existing, assumable
mortgage of $50,000
payable at the rate
of $450 per month.
The seller wants
$10,000 cash at
close and will
extend you a loan of
$40,000 in the form
of a mortgage at 10%
interest.
Offer the seller
$95,000 with no
money down. Agree to
take over the loan
of $50,000 and
pay 15% interest on
the remaining
$45,000 for a period
of five years. The
result is a monthly
interest payment of
$563 ($45,000 x 15%
divided by 12
months) to the
seller. You
initially pay only
the interest with
$45,000 due in five
years.
If the total
monthly payments for
the first and second
mortgage of $1,013
per month ($450 +
$563) result in a
negative cash flow,
restructure the
second mortgage so
that only a portion
of the 15% interest
is paid monthly. The
balance would be
accumulated but not
compounded and would
be due along with
the $45,000 at the
end of five
years.
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Example
Summary
Technique #2
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Lower
The Price /
Raise The
Interest Rate
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What
You Need To
Begin:
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A
seller who
does not have
to receive
cash at
closing and is
interested in
monthly
income.
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Summary
Of Terms:
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Asking
price
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$100,000
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Mortgage
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$
50,000
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Monthly
Payment
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$
450
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Required
down payment
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$
10,000
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Mortgage
by seller @
10%
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$
40,000
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Procedures:
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Offer
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$
95,000
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Take
over loan
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$
50,000
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Accept
mortgage by
seller at
higher rate of
interest.
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$ 45,000
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If
cash flow is
negative,
restructure
the interest
payments.
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Results:
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- The buyer has a
property
for no
money
down. The
monthly
payments
may be
high, but
restructuring
the
interest
can help
alleviate
some of
the
burden.
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- The seller has received
a good
price and
high
monthly
income.
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Specific
Situations to
Apply
Technique #2
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The
Property
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Property
Offered Below
Market
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The
Buyer
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No
Cash at All
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Poor
Credit
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The
Seller
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Must
Sell
Immediately
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Will
Finance: Wants
High Interest
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Interest Rate
to Wrap Around
Mortgage
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