This article is the third in a series of seventeen articles that will give readers insights into how real estate investors are able to do transactions with little or no money, no credit and little or no risk. In this part of the series we will discuss the technique that is a combination of past Parts #1 and #2. The first was “unprotected to” and the second was seller financing. Both work very well to give an investor the ability to control a character until it can be sold or to be held as a rental character. But what about the combination of the two and how well do they work in conjunction with one another?
As a fleeting review, unprotected to transactions are where the homeowner is motivated to sell his character, so much so that he is willing to allow a buyer to assume his mortgage payments in exchange for a deed to the character. This allows for a quick sale, no credit or lender qualifications for the buyer and no realtor commissions on the sale. The ultimate issue for the homeowner is that he no longer has the strength of ownership of the character and he is nevertheless responsible for the mortgage payments if the investor doesn’t pay them. This can be a win-win for each party involved or a terrible mess for the seller if the investor doesn’t do as he agreed to.
In owner financing, the seller takes back part of all of his equity, essentially defers getting it at the closing, in the form of a mortgage. Once again, this form of financing allows the homeowner a quick sale (in just days), no realtor commissions, fair market value for his character, and the buyer doesn’t have to get traditional financing which can take months or not happen at all. The risk to the seller and now mortgagee is that the buyer stops paying his mortgage and the former homeowner has to foreclose to get his character back.
The combination of unprotected to and seller financing is where the seller allows the buyer to assume the mortgage payments of his first mortgage and grants or issues an additional, or junior mortgage, for part or all of the equity in the character. The seller has the ability to foreclose and get his character back if the investor didn’t pay the junior mortgage. However, if he did start a foreclosure proceeding, he is facing the very likely prospect that the first, or senior mortgage holder will also start a foreclosure proceeding. If the foreclosure proceeding is successful, the junior observe holder, the original homeowner, will have to pay off the first mortgage to get his character back.
As bad as the prospects sound for a seller, the reality is that motivated sellers will frequently do these transactions. In a moral, financial and sometimes legal sense, it is the responsibility of the investor to make timely mortgage payments on both mortgages and if the investor finds that he can’t, he should deed the character back to the original seller as quickly as possible. Otherwise, everyone including the senior mortgage holder, the investor, and the seller are damaged in the transaction.
In summary, using a combination of unprotected to and seller financing allows an investor the ability to buy similarities with little or no money, no credit qualifications and minimal or no risk. Truly motivated sellers will truly pay for the closing costs to get out of the responsibility of paying the existing mortgage on the character. But, remember they nevertheless are responsible for its payments if the investor doesn’t uphold his obligation. Using a quitclaim deed will virtually eliminate closings costs but it is strongly suggested that any buyer of a character get title insurance to make sure he is getting a marketable, not just insurable, title so he can resell the character later without title defects.