Most of us assume that when it comes time to buying a building, whether it be a house or a million dollar structure, that there are only two ways to do it: Pay cash or get a mortgage. Well I’m here to tell you that there are many, many other ways to do creative financing.
The two easiest ways are standard text in our real estate purchase forms:
1. Assuming another’s mortgage
We don’t see much of this or at all these days because the interest rates are at their lowest. When they do go up, why wouldn’t you want to assume the sellers rate at 3.75%. By assuming their mortgage and financing the rest to make up the selling price and you could potentially save a lot of money over the rest of their term.
Quick note: Got this from my client today: “Okay, some very heavy conversations with brokers and banks here this morning. One thing is for sure is apparently variable mortgages are not assumable!”
2. Balance of sale
This is a great tool if you believe that you can increase the value of the building within a few years or know that you will be able to pay it off when the term is due. The way it works is that the seller **“lends” you a certain amount of money at an agreed upon rate for a limited time (usually 1-2 years). You pay them the interest either monthly, quarterly or annually for the time period on the total amount borrowed from them and at the end of the term or sooner, you pay the full amount back. This works if you are low on cash or wanting to keep your cash. After the 1-2 years renovating or re-renting (apartments) and increasing the value of the building, you refinance and pay the vendor back.
**”lends”: The vendor doesn’t really hand over the money, it’s just that you don’t give him the amount until a later date.
Great benefits:
- You get the chance to improve the building and increase the rents for refinance.
- The vendor receives money through collected interest (if the deal needs sweetening)
- Delays the capital gains for the Vendor
- Gets the building sold!
