Something About Creative Real Estate FinancingMost people when they go to buy a home typically use a real estate agent to help them find a house. When they do, they usually take the financing options given to them. That’s generally a conventional loan from a mortgage company or a bank.
In some cases, usually, but not always, on lower priced properties there is often additional choices of an FHA loan which offers a much lower downpayment option for the buyer. Also if the person is a veteran, there is sometimes the choice of a VA loan which also has low or no down payment options, depending partially on the seller.
Being the non conformist that I am and a novice real estate investor I generally use the following types of loans if I can.
For those of you that are not familiar with wraparound or AITD loans here is a brief rundown on them from Investopedia.
Wrap-around loans are a form of owner financing. Some wrap-around loans require consent from the existing lender, and wrap-around loans cannot be done on properties that include a “due on sale” clause in the loan documentation.
Wrap-around loans can also be structured such that the buyer’s payments are directed to the lender, rather than the seller, and the lender then forwards the buyer’s payment to the seller.
The owner (lender) should be able to charge a higher interest rate to the buyer that what is currently being paid on the loan. Buyers often seek wrap-around loans when they cannot obtain standard financing or mortgages.
How I became familiar with wraparound mortgages
How I got very familiar with wraparound loans was through a real estate club in Orange County California I used to belong to. The club was for investors or people like me interested in all sorts of ways of investing in real estate. I never participated in any of the actual investments the club made, but wanted to learn as much as I could regarding creative financing. The club purchased SFH (single family homes) in the Phoenix Arizona area, and in Tacoma in Washington State.
Those Tacoma real estate deals were large fixer-upper apartment complexes which they purchased for little or no money down, fixed up, and then resold using wraparound mortgages or other creative financing methods.
It was amazing to me to see relatively large deals (to me) like a half-million to two million dollar purchases made with either no money or no payments while the property was fixed up.
All those apartment deals required fixing up before they could be resold – in usually about 3-4 months after purchase. The house deals were essentially abandoned single family houses that sat empty during one of the recessions in real estate. The builder had overbuilt and was letting the homes go for an amazingly small smount.
Credit cards were my friend
I didn’t have extra funds at the time I bought it so I had borrowed the needed down payment from my credit card. So in a couple of weeks I had a townhome in a rather undesirable area of Montclair. I had lots of credit cards which I got strictly for the use in real estate investments.
California uses Trust Deeds
I immediately put up the house in Ontario for sale with a lease option to buy. I sold it (by myself – not using a real estate agent) in a short period of time to a service manager of a large car dealer. The Montclair townhouse turned out to be a nightmare.
I had it up for sale for about nine months as a “no money down” sale, but all the potential buyers – there were just a few, seemed too unreliable, so I refused to sell to any of them.
Finally I ended up selling the townhome to an investor. I had quite a few doubts about selling it to him too since after a short background check (using public county records) I discovered he had over 100 houses under his name.
I was working as a Programmer consultant at Los Angeles County Data Processing department in Downey California at the time. I met the potential buyer in the front office there. I thought he might be some sort of shady character after meeting and talking to him, but he assured me everything was on the up and up.
AITDs became my friend
I weighed my options and decided that since the property had been for sale so long I’d better get rid of it then if I could. I thought that even if he did do some shady deals at least buying my property was going through escrow and I had legitimate title through the Veterans Administration so my sale was not a problem.
Now, even though that was sold as zero down deal I did make about $1800 due to closing costs. That was good for me because I had arranged for the person who had bought my townhome originally (that investor) to be able to sell it easily since I had put a new assumable AITD mortgage on it and the money would be coming directly to me. Well almost directly to me because I arranged for the new buyer to make his payments to Bank of America.
What is an AITD? According to Greg Luczak’s Real Estate Blog, the definition – all-inclusive deed of trust (AITD) is:
Wraparound AITD. A wraparound AITD (all inclusive trust deed) is where the seller deeds the property subject to the existing loan and signs a note to the seller secured by a deed of trust on the property. The deed of trust is second (junior) to the existing deed of trust lien.
It is called “all inclusive” because the payment is for the ENTIRE amount. For example, if the sales price is $100,000 and the seller owes $80,000, the buyer may put $10,000 down and sign a note for $90,000. The seller collects on the $90,000 note (with principal and interest) and continues to pay his underlying loan, pocketing the monthly spread.
One other thing about wraparound loans – they are fairly common on commercial properties. It is rather unusual for them to be used on home purchases. When most people buy a house, townhouse, or condominium, they go to a real estate agent and buy it through it them, usually getting a new loan in the process. With a new loan there are exorbitant fees involved which the buyer pays, however, and most of the loans are not assumable (FHA and VA loans excepted). As an investor these and other creative real estate loans work in your favor and you are often able to tailor them to suit your needs.
So in some respects a person buying a property with an assumable loan on it may be getting a better deal unless the seller is purposely trying to rip them off (which is possible). In my case, except for the Montclair townhouse, closing costs for the loans were usually just the cost of escrow, which in all cases was less than $1000.