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Substitution of Collateral or Walk the Loan

How To Create Your Own Mortgage

A Real Life Example

A Present Day Dilemma
 

The Importance of Equity

Look to Zoning to increase your Wealth

  Flexible Payments

A Creative Solution
 

Substitution of Collateral or Walk the Loan

Present Condition As an exchangor you would like to use your property, a 8-unit apartment building and exchange into a 24 unit building.  There presently is a private second mortgage of $180,000 on your 8 - unit making this a problem for the owner of the 24 unit building.     

Possible Resolution You approach the holder of the private second mortgage on your 8 unit and request he move security for the note from the 8 unit to the 24 unit building.  The terms of the promissory note may remain.

Benefits to you This will increase the equity in the 8 unit by $180,000. You may have to offer the note holder a sum of money, or rewrite the present note, but you will have a larger piece of property to work with.

Benefits to Exchangor It makes it acceptable to the owner of the 24 unit building to do the exchange.

Benefits to Note holder The positive benefit to the holder of the note is a greater and more desirable security for the loan.  He may also have received a sum of money along with rewriting the present loan.
                     

How To Create Your Own Mortgage

If you have a typewriter and have a sheet of paper, or a computer you can create your own mortgage

There is a huge market of investors who buy privately created mortgages (often referred to as "paper"). Many investors like to buy real estate paper because they can obtain a very good return on their investment. Since the investment is secured by real estate, it is much safer than the stock market.

         Make Your Mortgage Marketable To Sell It Quickly 

Therefore, the primary concern in structuring your mortgage is to make it "marketable" to the investment community so you can sell, or exchange it quickly. Four factors affect marketability:

  (1) the interest rate; (2) the term; (3) the loan to value ratio (LTV); and (4) the yield.

When you structure your mortgage, be generous with the interest rate and yield you offer, and keep the term short. In today's marketplace, See if you can offer a 14% to 18% yield (with an adequate LTV).

    Keep The Term Short

The "term" of the mortgages you create should be very short, usually 2 to 5 years. You create short-term mortgages for two reasons. First, a short-term mortgage is more attractive to investors. Second, because of the time value of money, a short mortgage is worth more than a long mortgage. Therefore, the faster the mortgage pays off, the less you will have to discount it to produce an attractive yield
                     

A Real Life Example

Perhaps the best way to explain how to create your own mortgage is by giving a real-life example of a mortgage that was created recently.

 $38,000 20 year 10% payment $366.71 Balloon 36 months ( $35,909.11 )

36 payments of $366.71 = $13,201.56 + balloon of $35,909.11 = $49,110.67

The first thing to remember in selling any mortgage is to demonstrate an adequate loan-to-value ratio to the investor. The investor wants to make sure there is enough "cushion" in the deal to protect their money. You should always, provide the investor with all the current comparable sales in the neighborhood.

 The formula for calculating LTV is:   Loan Amount divided by Market Value.

The $38,000 loan amount divided by the $65,000 market value equals 58%. Therefore, the LTV on this mortgage is 58%. A great LTV for a first position mortgage!

This note will sell or exchange, for $30,500 and the investor or exchangor will receive a 16 % yield on their investment.

Because of the "time value of money," this gives the investor a 16.% yield on his money. This is the classic Win/Win/Win transaction. The investor will have earned a great yield on their investment. And you will have received $ 30,500 in cash to buy and fix up a property, or exchange for a boat, car, or what ever, all of it without having to qualify for a loan or use any of your own money toward the purchase or exchange.
                     

A Present Day Dilemma

Present Condition The owner originally purchased their property years ago.  During the last several years for many reasons, prices rose two to three times the original market value, giving the owner a tremendous amount of equity.   The owner uses his equity line of credit and invests the borrowed money into another property. The owner now has a new mortgage on their original property, and a mortgage on the investment property. Both of these mortgages are adjustable rate mortgages, which at the time were great deals.

What is the Problem The housing market has stalled, interest rates are rising,  lenders are tightening borrowing standards, and properties are being appraised much lower than investors would like.  The owner could refinance both mortgages, but now his payments would be hundreds of dollars higher on each property, and the value of the investment property is now lower than the original purchase price and along with taxes and insurance the cash flow is severally negative causing the owner great distress.  

Possible Resolutions The owner may be willing to take cash and allow you to renegotiate the present mortgage and walk from the investment property. The owner may be willing to hold a second mortgage and allow you to renegotiate the present mortgage and walk from the investment property.

Benefit to Owner Owner gets peace of mind, and relieves him from possible greater financial loss, and keeps their homestead property safe. 

Benefit to You You are able to with a small amount of cash or a soft note to purchase a property at a big discount. 
                     

The Importance of Equity

Question How important is equity when exchanging property

Which property is more valuable to a prospective exchangor, the property with a small amount of equity or the property with a large amount of equity?

 Lets look at each property

Situation -            (Taxes and Insurance are not to be considered in this situation, both properties are managed by an                                                 outside source, and the exchangors have good credit)                       

Property A has a value of $1,200,000 and even though the property is 95% financed it provides a positive cash flow.     (equity of approx. $60,000)

Property B has a value of $1,200,000 and is 50% financed and provides a positive cash flow.    (Equity of approx. $600,000)

Property A and B have been completely upgraded and the rents are in line with the condition of the building and surrounding community, providing a positive cash flow. 

Benefits to Sellers - Sellers of both properties will receive creative offers, but Property A and B will attract different types of investors.

Seller of Property A should find a buyer very quickly as only a small amount of money or property is needed to exchange into this property.

Seller of Property B with a large amount of equity has a lot more room for creativity.

Benefits to Exchangors - Exchangor for Property A, with only a small amount of cash or property, along with their good credit will allow the exchangor to take over the present dept.  As this property has a positive cash flow, this is a great deal for the exchangor.

Exchangor for Property B, will need to borrow $600,000 or have a large amount of equity in another property to exchange into this property, and most likely will have to go through the process of raising the rents to keep a positive cash flow.
 

Look to Zoning to increase your Wealth

Present Condition You have a vacation residence that you don't get to use as often as you had originally planned, you see properties in your area appreciating greatly, and homes are being torn down and turned into mini-mansions.  You would like to sell or exchange this property, but you know you missed the hot market.  You would like to maximize this property making for a better sale or exchange. You notice that your property is much larger than some of the surrounding properties, and wonder if your property can be split into two or three lots.

Resolution - You decide to take a trip to the local building department to check out the zoning of your property. You check out the zoning and also the lot density, which is allowed in the zoning. You discover, to your great pleasure, that it is possible to split your property into two or more lots!

Benefits to you You have taken a piece of property, and by doing a little leg work, making it much more valuable.

Benefits to Exchangor The exchangor has a present residence to use while he is in the process of dividing the property, and getting plan approvals. 

Seller of Property A should find a buyer very quickly as only a small amount of money or property is needed to exchange into this property.

Seller of Property B with a large amount of equity has a lot more room for creativity.

Benefits to Exchangors - Exchangor for Property A, with only a small amount of cash or property, along with their good credit will allow the exchangor to take over the present dept.  As this property has a positive cash flow, this is a great deal for the exchangor.

Exchangor for Property B, will need to borrow $600,000 or have a large amount of equity in another property to exchange into this property, and most likely will have to go through the process of raising the rents to keep a positive cash flow.
 

Flexible Payments

Present Condition You have been trying to sell your house for several months with very little response.  You know that this should be expected as the housing market is very slow and may stay that way for quite some time.  You find a potential buyer that is willing to give you your price, but because of the buyers work situation may not qualify for a conventional mortgage.  As you own your house with a very small mortgage you offer to hold a mortgage on remaining balance.

Problem Even though the buyer is willing to purchase your property for your price and you will hold a note, the buyer has a seasonal full time job, and for the other five (5) months is only able to work part time, making monthly payments very difficult.

Resolution You propose that for those five months of part time employment, the payments on the note will be reduced greatly, even below the monthly interest payments on the note. The other seven months of full time employment the payments would be increased. 

Benefit to You You will sell your house now and by receiving flexible payments you know the buyer will always be in a position to make their payments.  By receiving flexible monthly payments you will need to carefully calculate the repayment of the note and be able to convey that to the buyer.

Benefit to Buyer The buyer will purchase a house without going through the mortgage process, and will also be in a position to comfortably make the monthly payments.

Note: This flexible payment method is often used in the sale of a new business, or business that are seasonal.
 

A Creative Solution

Present Condition Karen needs to move out of the area for personal reasons, she has owned her home for several years and it's appraised value is $435,000.  The balance on her mortgage is $165,000, giving her $270.000 in equity

What is the Problem Karen needs a quick sale of her house, and as lenders have tightened there borrowing standards, requiring buyers to have full documentation and a15 to 20% down payment, this reduces the pool of buyers willing to pay the full $435,00 value that Karen is looking for, causing a longer time period to close a sale.

Possible Resolution - Karen's real estate agent has a buyer that has $45,000 for a down payment, and the ability to make the PITI as required. 

The Resolution For a small amount of money to the lender, the buyer takes over Karen's present mortgage.  Karen receives the $45,000 cash from the buyer and   creates a second mortgage of $225,000 and closes the deal quickly.

Benefit to Karen She sold her house quickly, she received $45,000 ready cash,and she will receive a monthly income from the note she created.

Additional Benefits to Karen- She can keep receiving the monthly payments, which gives her a great return on her investment, she can sell the note and receive cash, she can exchange the note for something of value (another property) she can use it as collateral, an option on another property, etc.

Benefit to Buyer - The buyer was able to purchase a home with a small down payment and not have to go through all the requirements of the lender, and close quickly.
 

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