Different methods of creative purchasing enable investors to get the most out of their real estate deals, so the wrap-around mortgage and land contract are two techniques that you should become familiar with. Both are very similar and support the end goal of good profits and low risk, so by learning the ins and outs of the wrap-around mortgage and land contract, you can continue building a solid portfolio of rentals with good tenants.
A land contract or contract for deed is a form of financing that offers the seller a higher level of protection in deals for vacant land. By requiring the purchaser to pay for the majority of the property upfront before they receive the legal title, the seller can maintain control if the deal falls apart and recoup the payments up to that point. The title is not transferred until a predetermined number of payments are made by the purchaser, so if they were to default, the payments made from the time of possession to the time of default will be deemed as rent. Those payments are typically made in the order of interest, real estate taxes/insurance, and the principal balance of the purchase price. To establish clear title at the start of this process, you should execute a quitclaim deed so that the seller can regain possession if the buyer defaults.
For that process to work, you need a seller who is looking for some cash at closing but doesn’t need the total balance. And even with bad credit, the buyer can purchase the property, bring in a tenant, and generate a monthly cashflow for themselves and the seller. The reason you should consider using this technique in your next deal is that for a small down payment by the seller, they essentially get everything they want while being relieved from any and all ownership responsibilities.
A wrap-around mortgage is a very similar process and appears to be the same transaction, but it is entirely unique. The mortgage literally wraps around the existing mortgage because the buyer makes direct payments to the seller while the seller continues making their current payments. In that case, the payments on the new mortgage are higher than the payments on the old mortgage and the seller keeps the difference.
Both of these techniques are extremely powerful depending on the type of market you’re in and they can be leveraged to help put you in a cash position as a buyer. By using land contracts and wrap-around mortgages, you can get more creative with your investments at a lower risk to the seller. If you are interested in learning more about creative purchasing techniques, make sure to visit www.myinvestmentservices.com and click on the members section.