A higher interest rate rather than the current mortgage interest rate may encourage the seller to accept terms that would otherwise be unacceptable.
This creative real estate financing technique #2 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.
| Example Summary Technique #2 | |
| Lower The Price / Raise The Interest Rate | |
| What You Need To Begin: | |
| A seller who does not have to receive cash at closing and is interested in monthly income. | |
| Summary Of Terms: | |
| Asking price | $100,000 |
| Mortgage | $ 50,000 |
| Monthly Payment | $ 450 |
| Required down payment | $ 10,000 |
| Mortgage by seller @ 10% | $ 40,000 |
| Procedures: | |
| Offer | $ 95,000 |
| Take over loan | $ 50,000 |
| Accept mortgage by seller at higher rate of interest. | $ 45,000 |
| If cash flow is negative, restructure the interest payments. | |
| Results: | |
| 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. | |
| The seller has received a good price and high monthly income. |
| Specific Situations to Apply Technique #2 |
| The Property |
| Property Offered Below Market |
| The Buyer |
| No Cash at All |
| Poor Credit |
| The Seller |
| Must Sell Immediately |
| Will Finance: Wants High Interest |
Interest Rate To Wrap Around Mortgage