Chapter 6 USE CREATIVE FINANCING TO MAXIMIZE BENEFITS

Question 1

What is the goal of the chapter?

Answer 1

To increase investment techniques and strategies to maximize benefits and attain investment goals

The chapter expands on information from Chapter 5.

Question 2

What is crucial for successful real estate investments?

Answer 2

Closing transactions that fit investment needs and pass due diligence inspections

Question 3

What should you do if your investment plan encounters a snag?

Answer 3

Ensure your financing strategy works to move you closer to your desired goals

Question 4

What is a common pitfall for sellers regarding their motivations?

Answer 4

Believing that selling is the only path to achieve their goals

Question 5

What is a creative strategy in real estate deal making?

Answer 5

Examining all opportunities available to both buyer and seller

Question 6

What did the real estate developer from Michigan need?

Answer 6

$450,000 to construct a home on the tract

Question 7

What is ‘burning bridges’ with lenders?

Answer 7

Neglecting relationships with lenders, making future financing difficult

Question 8

What did the developer need to present to the lender?

Answer 8

A detailed plan that benefits both him and the lender

Question 9

What mistake did the motel owner in Fort Lauderdale make?

Answer 9

Investing in an old building instead of selling or developing the land

Question 10

What strategy can sellers use in a buyer’s market?

Answer 10

Become a buyer using their ‘for sale’ property as part of a purchase

Question 11

What does creative financing allow you to do?

Answer 11

Shift equity and ownership while moving toward investment goals

Question 12

What is an example of unconventional real estate financing?

Answer 12

Land leases and timesharing

Question 13

What happens to your equity when you take a mortgage on a property?

Answer 13

Part of the equity is shifted into cash while the remaining equity stays in the property

Question 14

Fill in the blank: A first mortgage comes first, but it isn’t always _______.

Answer 14

the highest rank due to potential subordination

Question 15

What is the significance of mortgage ranking?

Answer 15

Determines the order of claims on the property in case of default

Question 16

What is subordination in mortgage terms?

Answer 16

Changing the rank of a mortgage to give priority to another mortgage

Question 17

What could happen if a second mortgage is recorded before a first mortgage?

Answer 17

The second mortgage could gain first mortgage rights if subordination occurs

Question 18

What should you never rely on when dealing with mortgages?

Answer 18

The mortgagor or mortgagee to provide the whole story or truth

Question 19

What can happen to the rank of a mortgage?

Answer 19

The rank can change due to the terms and conditions in other mortgages

Question 20

Why is it critical to know the entire story when dealing with mortgages?

Answer 20

Because lending institutions may provide wrong, misleading, or incorrect information

Question 21

What should you do if you haven’t read the actual terms and conditions of a mortgage?

Answer 21

Get them, read them, and ensure you understand their impact

Question 22

What is a second mortgage?

Answer 22

An additional mortgage that runs concurrent to the existing financing

Question 23

What must be allowed for a second mortgage to be properly made?

Answer 23

The existing first mortgage must permit secondary financing

Question 24

What can flexible terms of secondary financing provide?

Answer 24

The ability to maximize benefits of investments and fit needs

Question 25

What does the phrase 'I will pay your price if you accept my terms' imply in negotiations?

Answer 25

Price can be less important than the terms of financing

Question 26

Fill in the blank: Secondary financing can enable the buyer to structure the total financing so that they can afford the required _______.

Answer 26

[equity down payment]

Question 27

How can a seller's capital gains problem be addressed?

Answer 27

Through an installment sale that spreads the purchase price over more than one year

Question 28

What is the benefit of spreading the total payment of a purchase over additional years?

Answer 28

It may help the seller avoid excessive increases in overall tax rate

Question 29

What is a wraparound mortgage?

Answer 29

A form of secondary financing where the seller holds a second mortgage

Question 30

What are some advantages of second mortgages from a lender's perspective?

Answer 30

* Higher risk leads to higher rates * Quick to foreclose * Can obtain other security

Question 31

What is a disadvantage of second mortgages for borrowers?

Answer 31

They can mean a high rate on the money borrowed

Question 32

What is the relationship between the percentage of existing financing and the risk to a lender?

Answer 32

Lower percentage of existing financing to total value means lower risk

Question 33

When might secondary financing be needed?

Answer 33

* To afford required equity down payment * To increase cash flow yield * To leverage seller's return

Question 34

What should you consider if new money is tight and expensive?

Answer 34

* Use seller-held secondary financing * Consider wraparound structure * Explore land lease options

Question 35

What can happen if the seller will not hold a normal secondary loan?

Answer 35

Approach with a wraparound structure or look for alternative financing

Question 36

What is an example of a secondary financing strategy when existing mortgage is very low?

Answer 36

Use other property as security for the secondary financing

Question 37

True or False: A second mortgage is always a safe gamble for lenders.

Answer 37

False

Question 38

What is secondary financing?

Answer 38

Financing that is subordinate to the first mortgage, often used when additional funds are needed.

Question 39

When should secondary financing be avoided?

Answer 39

* When the buyer is financially weak * When existing financing is low and equity is available * When a property has several existing secondary loans * When combined financing has a high constant rate

Question 40

What are some types of secondary financing to use when new money is available?

Answer 40

* Use other property as security * Utilize a land lease subordinated to the first mortgage * Leave the seller in the deal with a buyout option * Establish a royalty fee on income overages

Question 41

Who are the primary sources of secondary financing?

Answer 41

* The seller * Commercial banks and savings banks * Mortgage companies * Private investors * Real estate brokers

Question 42

What are five important lending guidelines when dealing with banks for secondary financing?

Answer 42

* Know the institution's policy * Prepare necessary backup material * Precondition the buyer for a cosigner * Only approach if satisfactory financing is unavailable * Identify additional collateral available

Question 43

True or False: The seller is typically the least motivated lender.

Answer 43

False

Question 44

What should you examine to determine if a seller might hold secondary financing?

Answer 44

Examine the seller's goals and needs regarding a quick sale or financial urgency.

Question 45

Fill in the blank: Secondary financing can be in the form of a _______.

Answer 45

[land lease or building lease]

Question 46

What is a potential disadvantage of using commercial banks for secondary financing?

Answer 46

They may not be useful if the existing financing is over 75% of the property's value.

Question 47

What should you do to find private lenders?

Answer 47

* Look in classified ads * Contact mortgage brokers * Ask commercial bank presidents * Send inquiries to local attorneys

Question 48

What is the risk associated with higher loan-to-value ratios in secondary financing?

Answer 48

Increased risk of debt service exceeding property or buyer's ability to handle.

Question 49

What is one reason wealthy sellers can be less flexible with secondary financing?

Answer 49

They may expect cash buyers and can afford to wait for a better offer.

Question 50

What should you do before approaching a mortgage company?

Answer 50

Understand their lending policies and types of deals they handle.

Question 51

What type of loans do commercial banks and savings banks offer for secondary financing?

Answer 51

Home improvement loans and personal loans secured by real estate.

Question 52

True or False: Private investors are typically casual investors looking for quick returns.

Answer 52

False

Question 53

What aspect can influence the terms offered by private lenders?

Answer 53

The general market for other investments and the perceived risk.

Question 54

What is a common mistake brokers make regarding sellers and secondary financing?

Answer 54

Assuming sellers will not hold secondary paper.

Question 55

What factor influences whether a private lender will take a loan?

Answer 55

The initial presentation is critical

Question 56

What do the terms and conditions offered by a private lender depend on?

Answer 56

Many different aspects

Question 57

What is a common characteristic of some private lenders regarding property type?

Answer 57

Some stick to one type of property, while others are less selective

Question 58

How does the general market for other investments affect private lending terms?

Answer 58

The harshness of the terms depends on the risk and rate of other investments

Question 59

What can borrowers do to influence the outcome of a loan from a private lender?

Answer 59

Very little

Question 60

What are the typical closing costs when dealing with private lenders compared to commercial banks?

Answer 60

A fraction of those available from commercial banks

Question 61

What is one warning when dealing with private lenders?

Answer 61

Ensure the lender's attorney does not represent you

Question 62

What should a borrower do before signing a loan document with a private lender?

Answer 62

Have their own attorney review it

Question 63

What might a broker do if a buyer is short of cash to close a deal?

Answer 63

Take some of the paper as a deferred commission

Question 64

What tax implication arises if a broker takes a note as a deferred commission?

Answer 64

The IRS will tax the full amount of the commission in the year the note was taken

Question 65

What may help avoid tax implications when a fee is conditioned on future debt collection?

Answer 65

The future payments are based on continued performance