Unlock Your Real Estate Equities Without Going To The Bank

Wayne Carlson, a colleague of mine and fellow member of the Minnesota Real Estate Exchangors (M.R.E.E.), recently completed a transaction that typifies a very creative method of acquiring real estate without going to a bank or mortgage company.  He created a note and mortgage on a parcel of real estate already in his portfolio and traded the payments for two free and clear rental condominiums.  Here are the steps:

#1 – He sat down in front of his computer and created a note with himself as mortgagor (the person making the payments) and the person who owned the condo’s as mortgagee (the person receiving the payments).  The note contains the meat of the transaction.

Here’s the picture: Property A                                          Property B 12 – Unit                                              2-Condo’s Value $715,000.00                            Value $60,000.00 Debt $510,000.00                             Debt -0-               Equity $205,000.00                           Equity $60,000.00  2nd Mortgage -$60,000.00            ←Deed to A 5% int. = $500.00 per month payment to→B

#2 – He created a mortgage containing the legal description of the real estate all in recordable form as security for the mortgage.  The terms of the note don’t have to be included in the mortgage. 

Here is the transaction:

Wayne is the owner of a twelve unit building with a value of $715,000.00 and first mortgage debt of $510,000.00 and equity of $205,000.00.  The owner’s condo’s have a value of $30,000.00 each for a total of $60,000.00. Free and clear.

Wayne created a second mortgage of $60,000.00 on the 12 unit building and exchanged the payments for a deed to the free and clear condo’s.

The payments on the note are $500.00 per month including 5% interest for thirteen year payout. The rents on the condo’s net about $875.00 per month.  The net cash flow on the 12 unit building was reduced by the $500.00 per month.

Wayne’s net cash flow increased by $375.00 per month or $4,500.00 per year.  This was all accomplished with very little out of pocket expense.  In addition two very important elements of the “sweet heart mortgage” were contained in the note.

#1 – Non-personal recourse.  The real estate is the sole collateral.

#2 – Substitution of collateral-The mortgage can be moved to an asset with equal or greater security.  Why is this important?  You have spent your time and talent negotiating a “sweet heart mortgage” and in the event of a sale or exchange, the incoming buyer won’t benefit from your expertise, and you retain the benefits.

Wayne now owns two free and clear condo’s which he can finance for cash and/or create a mortgage for another deal.

In chapter #8 of my book, “Swapping Real Estate for Fun and Profit”, I outline how I created a mortgage on a parcel of  land to acquire a commercial/residential property.  There’s also a chapter on the “sweetheart mortgage”.

Paul Kelley

[email protected]

www.swappingrealestatebook.com

 

Copyright 2012 Creative Real Estate Solutions.  All rights reserved.

 

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