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 Equity Purchase

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.

Example Summary Technique #4

Using Equity In One Property to Buy Another

 

What You Need To Begin:

Asset with equity

 

Summary Of Terms:

Two family property

$60,000

Existing mortgage

$25,000

Seller's equity

$35,000 

 

Procedures:

Give the seller a promissory note and mortgage secured by another asset as down payment.           



$15,000

Ask the seller to take a wrap-around mortgage.


$45,000

 

Results:    

 

  • The buyer has $15,000 equity in the two family property and has once again bought with no money down.

Specific Situations to Apply Technique #4

 

The Property

Low Interest Assumable Mortgages

 

The Buyer

Cash for only Part of Down Payment

No Cash at All

 

The Seller

Will Rent or Sell

Equity Purchase To Blanket Mortgage