Using Secondary Seller Financing to Achieve Better Leverage
We are discussing creative investment tools real estate investors might use to the next time a property of interest turns up that might not otherwise (perhaps because of price, terms, or lack of buyer cash) be thought worth pursuing. We already covered option, sweat equity, and lease with an option to purchase. In this final segment we’ll discuss secondary seller-held financing.
- Option to purchase
- Sweat Equity
- Lease/purchase
- Secondary seller-held financing
Secondary Seller Financing
Secondary seller financing is when a buyer acquires a property and the seller of the property holds paper for part of the deal. If the seller holds a mortgage a mortgage secured by the property being sold it is called a purchase money second mortgage. When the buyer gives the seller a mortgage on another property it’s simply reffered to as secondary financing.
EXAMPLE A: Buyer wants to purchase an apartment complex selling for $500,000 and knows an institutional lender that would give her a first mortgage in the amount of $350,000. The buyer doesn’t want to put more than 10% down, so she gets the seller agree on a full price offer contingent on the seller carrying a second mortgage in the amount of $100,000 secured by the apartment complex. For a full price offer, the seller agrees, and the buyer winds up closing the transaction with the desired $50,000 cash down payment. This is a purchase money second mortgage.
EXAMPLE B: Same scenario, but in this case the Buyer asks the seller to extend a second mortgage secured by a large office complex the buyer already owns. The value of the office building is substantially higher than the apartment complex, has a low first mortgage, and thus has substantially more equity. Again, the seller agrees and the buyer is able to purchase the aparment complex with the desired $50,000 (or 10%) cash down payment. This is a second mortgage.
How did the secondary seller-held financing benefit the buyer?
The buyer achieved better leverage. Instead of 30% cash down, the buyer purchased the property she wanted with just 10% down. That kept her from having to dig into her pockets for an additional $100,000 and makes that money available for another investment. Moreover, the buyer was able to avoid the problems and cost of obtaining an institutional loan.
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