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Structuring Deals #2: Multi-Mortgage
Joe: Hey, it’s Joe Crump. We’re talking about structuring zero down deals and I’m talking about the zero down structure hierarchy. The second structure in the hierarchy is multi-mortgage. The first one is subject to, the second one is multi-mortgage. Like a subject to a multi-mortgage also gets the deed. So the seller is transferring the deed to the property. But a lot of times on a multi-mortgage it’s because there’s equity in the property. So let’s say you’ve got a property, it’s worth $150K. The guy says, “I’ll sell it to you for $140K but I don’t want to sell it for $100K, which is, you know, I don’t want to do it subject to with $100K because I only owe $100K on it. But I’ve got that $40K worth of equity that I’d like to get out of it.”
Joe: And so what you can do is have a second mortgage on that property with you as the person who’s borrowing the money and them as the seller. So you’re making payments to them, over time, on a $40K mortgage that’s attached to this property. That way they have the right to take that property back if you default on it. They won’t lose their equity. And that’s a good way to do this that protects them. But it also obligates you to make these payments. Now, you don’t have to have credit to do that, or, you know, you don’t have to show income or any of that stuff to do that. You’re just doing the paperwork. But you do have to have the paperwork and they do have recourse against you if you don’t make the payments.
Joe: A lot of times, though, if that situation would arise where you can’t make the payments, you could probably give it back to them without too much problem because they can go and find a realtor and sell that property and get their equity back that way. As long as you don’t damage them.
Joe: things don’t go the way they’re supposed to. People are much more understanding if you are kind to them. If you try to beat them up or try to rip them off they will come after you and that’s how the people that are in lawsuits all the time are people that are difficult to get along with. And it’s not necessary.
Joe: So that’s a multi-mortgage. It’s the same as subject to. It’s transferring the deed. You’re taking a second mortgage on there. You’re giving them their equity out of it. Most of the time, rather than doing a multi-mortgage, I’d rather ask the seller to go and refinance that property, refinance it up to $140K and let me take over that note. That way I don’t have my name on anything, he’s got a refinance, he’s been able to pull cash out because a lot of times people want their cash out and that’s why they’re trying to sell it with a realtor because they want that cash. But if they pull it out with a refinance, that saves them that problem and it’ll end up making them more money in the long run because they don’t have to pay a realtor to sell the property. And, it allows you to get into a property and make money off the deal as well. And it might even make sense if there’s enough cash flow in this deal and they get a lower interest rate that you could do a 15-year mortgage instead of 30-year mortgage and it’ll reduce the time it takes you to pay off that property and get it done.
Joe: Now, of course, you’re going to turn around and sell this property. If you’re going to keep it in your portfolio, you’re going to turn around and sell this property, and, you know, on a lease option, and/or you’re just going to put a tenant in there. Lease options are good because they give you a chunk of money that you can put into a reserve. That way if you have a vacancy or you have to do any repairs on that property you can do that and, you know, not have to come out of pocket to do that. You always want to have reserves.
Joe: You don’t have to have, you know, $5,000 reserve for every $150K property but if you’ve got two $150K properties you probably have $5,000. If you’ve got three, you might want to have $7,000. You know, put a couple thousand in for each one that you’ve got. You know, maybe on the first one put all $5,000 in. The second one, put a couple thousand in, third one put a couple thousand in. Just so you have enough money in there.
Joe: One of the things that happened to us during the 2007 crash was that a lot of our subject to’s went vacant because people lost their job. And they couldn’t pay anymore, so we had to ask them to leave. And when they left, we had to go find new tenants. So, we’d have a month or two or three months plus we’d have some repairs we’d have to do to the property because a lot of properties were going vacant so there was a lot more competition.
Joe: We went from 3% vacancy rate to 20% vacancy rate and we had all these mortgages to pay as well. So we had the reserves, or I had the reserves, and I was able to do that. But it was still unpleasant and painful. But we were able to maintain these properties and didn’t have a problem, didn’t lose them, didn’t damage the credits of the people that we bought from, and I still own those properties.
Joe: So, that’s how you want to do this so that you’re doing it the right way. Don’t spend the money on your life that you need to keep in reserve. That’s part of your business and you need to make sure you keep, I would even keep a separate account for that, just so you can be disciplined in that way.
Joe: All right, so that’s multi-mortgage. That’s step two in the hierarchy. And I’m going to explain how the hierarchy works in the video, in a later video. But that’s number two. Let’s go on the number three and we’re going to talk about land contracts and contracts for deed in video number three. I’ll see you then.