One variation of Mortgage or Trust Deed is called a WrapAround Mortgage (or All Inclusive Trust Deed - A.I.T.D). In effect, these instruments are used to insulate the Buyer from the original loan terms and liabilities. In certain instances the AITD is used to enable the Seller to continue to be the maker of record with the original lender, while at the same time being able to sell the property to another party without triggering a default on an otherwise unassumable Mortgage or Trust Deed.
When lenders are the only bidders at foreclosure sales, they typically contract with a local Broker to fix up the home for re-sale, and put it into MLS to be sold eventually. That works well when houses are appreciating and sales are brisk. Now that sales have slowed down, there are fewer Brokers who want to spend the time and effort doing this, and there are more lenders with foreclosed properties on their books that are being eyed by government regulators.
We've been looking at looming lender problems that could make seller financing the flavor of choice in the near future, and ways to build in profit spreads when buying and selling. There's yet another aspect to seller financing that has made fortunes for those who understand the secondary market.
One of the features of a tight credit economy is that sellers, who would never have considered carrying the financing on the sales of their homes, become much more flexible; and buyers who have been denied access to institutional financing are able to buy a home with seller financing. Oddly enough, this can create a very lucrative, albeit a different market, for people who understand "paper".
The slow market is going to make bank financing more scarce. In terms of price reductions, I don't think single family houses, priced some where around the middle of the local market, haven't come down much in price. Nationally, even counting all those discounted condos and expensive houses that were bought on spec for fast resale, the average market price INCREASED by a percent or so in 2006; house and condo prices in the top 20% of the market are excluded, but the rest rose about 5%. That's not in the heady realm of the 20% price increases many people enjoyed, but it's a lot more than lenders were paying for cash deposits and CDs.
It’s odd that people love to brag about their net worth at the same time as they complain about needing more cash flow. Of course, when they get more cash flow, they complain about having to pay more taxes. Each of these topics are important for different reasons. Net worth is a measure of wealth. After tax Income determines lifestyle, so learning how to create income without learning how to keep it from being eaten away by taxes does little to improve lifestyle. They go hand in hand. For now, let’s look at ways to create more income; first when buying and selling, and then as long term investors.
I have a firm conviction that most people would rather pay their bills than to default on their promised payments. The problem in many cases is that they have no financial insights to protect them from bad deals, or no self-discipline that will help them avoid them. Thus, they find themselves head over heels in debt because of credit cares. It’s hard to people with money to understand how critical the use of credit cards is for millions of people.
Creative financing often takes financing from one type of situation or product and applies it differently to another. For example, consider how a R.E.I.T. raises money without borrowing any. It slices a target property into tiny slices that everyone can afford by putting it into a corporation and selling shares of the corporation. This concept is applied to real estate by those who convert apartments to condos and sell individual units to users. This can also be applied to large mobile home parks.
Different States treat debt obligations differently; so borrowing money to buy houses carries different levels of risk associated with financing. In California, a person can owe hundreds of thousands of dollars on a house, and if things don’t work out, simply hand the house back to the lender and walk away without any liability. But, in many States, if you personally guarantee a loan, even after a house is foreclosed, you will still have to pay any losses the lender incurs if the house sells for less than the loan balance. You could spend years working to repay off what you owe while the interest-clock ticked on.
One continually hears about creative financing, but it rarely materializes. I was once in Novia Scotia discussing the purchase of a summer home. The real estate agent proudly proclaimed that creative financing terms were available on one of them. The terms were: half this year and half next year.