Real estate transactions can be complex and intimidating for many people, especially when it comes to financing. Fortunately, there are several creative finance techniques that can help buyers and sellers to structure transactions in ways that benefit both parties. In this article, we will explore three of these techniques: “subject to” real estate transactions, “wrap” real estate transactions, and “seller financed” real estate transactions. We will discuss what each method entails, their advantages and disadvantages, and provide calls to action for anyone interested in implementing them.
“Subject To” Real Estate Transactions
A “subject to” real estate transaction is a type of creative financing where the buyer takes over the existing mortgage of the seller. This means that the buyer does not have to obtain new financing, but instead, makes payments on the existing mortgage. The seller is still responsible for the mortgage, but the buyer is the one making the payments.
Advantages of “Subject To” Real Estate Transactions:
- The buyer can take advantage of the seller’s lower interest rate.
- The buyer can avoid the expense and time involved in obtaining a new mortgage.
- The buyer can purchase a property with little to no money down.
Disadvantages of “Subject To” Real Estate Transactions:
- The seller is still responsible for the mortgage, which could impact their credit.
- The lender may have the right to call the loan due upon transfer of ownership, which could result in foreclosure.
- The seller may not be able to qualify for a new mortgage if they still have the existing one in their name.
If you are considering a “subject to” real estate transaction, it is important to consult with a real estate attorney or financial advisor to ensure that you understand the risks involved.
“Wrap” Real Estate Transactions
A “wrap” real estate transaction is a type of creative financing where the buyer takes out a new mortgage that “wraps” around the existing mortgage. The buyer makes payments to the seller, who then uses those payments to pay the existing mortgage. The seller keeps the difference as profit.
Advantages of “Wrap” Real Estate Transactions:
- The buyer can purchase a property without having to qualify for a new mortgage.
- The seller can earn a profit on the difference between the existing mortgage and the new mortgage.
- The buyer can take advantage of the seller’s lower interest rate.
Disadvantages of “Wrap” Real Estate Transactions:
- The seller is still responsible for the existing mortgage, which could impact their credit.
- The lender may have the right to call the loan due upon transfer of ownership, which could result in foreclosure.
- The seller may not be able to qualify for a new mortgage if they still have the existing one in their name.
If you are considering a “wrap” real estate transaction, it is important to consult with a real estate attorney or financial advisor to ensure that you understand the risks involved.
“Seller Financed” Real Estate Transactions
A “seller financed” real estate transaction is a type of creative financing where the seller acts as the lender and finances the purchase of the property. The buyer makes payments directly to the seller, instead of to a traditional mortgage lender.
Advantages of “Seller Financed” Real Estate Transactions:
- The buyer may be able to purchase a property with little to no money down.
- The buyer does not have to qualify for a traditional mortgage.
- The seller can earn interest on the loan, which can provide a steady stream of income.
Disadvantages of “Seller Financed” Real Estate Transactions:
- The buyer may have to pay a higher interest rate than they would with a traditional mortgage.
- The seller may have to wait for the buyer to pay off the loan in full before receiving the full sale price of the property.
SUMMARY
Seller financing and creative finance can be a beneficial option for home sellers who want to sell their property for a higher price. By offering seller financing, the seller can attract more potential buyers who may not have the necessary cash or credit to obtain traditional financing. This can result in a larger pool of potential buyers, which can drive up the price of the property. Additionally, seller financing allows the seller to earn interest on the loan, providing them with a steady income stream. However, it’s important to note that there are risks involved with seller financing, such as the possibility of the buyer defaulting on the loan. It’s important for the seller to carefully consider their options and work with a qualified real estate attorney to ensure that the transaction is structured correctly.
Contact us today to speak with a Property Specialist about how you can take advantage of selling your property for a premium when you include a pre-existing low interest rate mortgage that’s already in place.