Creative financing will enable you to buy properties that
you’d thought were beyond your reach, and to reap your share of the fortunes
being made in real estate.
But truly creative financing is more than just borrowing
big. It involves fairly sophisticated transactions. Before getting into them,
you’d better make sure you understand the fundamental techniques of real
estate financing.
Mortgages and trust deeds are the two most common
arrangements for borrowing money on real estate. They are different from other
loans. The lender is usually more concerned about the piece of property offered
as collateral than about the character and quality of the people who borrow the
money. The security is mainly the land and the building, not the future income
of the owner of them. Therefore, as you become an owner of property, your
borrowing power increases.
In some states mortgages are more common than trust deeds;
in others the reverse is true. Whichever type of paper is used, it enables
someone either to borrow money against property he already owns or to pay the
seller les cash down payment for property he is buying. The borrower signs an
agreement that he will pay back the borrowed money, together with interest at a
specified rate, either in a lump sum or (more commonly nowadays) in installments
due on specified dates. Usually the agreement gives the lender the right to
foreclose – that is, force a sale of the property to satisfy the debt – if
payments aren’t made as agreed.
The biggest difference between the two kinds of paper is
that there are only tow parties to a mortgage, and three parties to a trust
deed.
If you take out a mortgage you are called the mortgagor,
and you owe money to the lender, called the mortgagee.
If you take out a trust deed you are called the trustor.
The lender is called the beneficiary. The third party, who holds naked title to
the property, is called the trustee.
This difference becomes important only if you fall behind
in payments. Foreclosure can usually be faster if you signed a trust deed.
Foreclosure on a mortgage could take up to a year. The
lender must first declare a default, and then he must usually file a foreclosure
action. The court then orders an auction sale. But the successful bidder
doesn’t always get clear title to the property immediately. Instead he may get
a sheriff’s Certificate of Sale. Under such circumstances, you (as the
borrower) may have as much as a year or more after the foreclosure to come back
and take over the property gain by making good all the past due payments,
penalties, interest, and costs. The law on this varies from state to state.
Foreclosure on a trust deed is simpler. In the beginning,
when you made the transaction, you signed a trust deed to the property, and gave
it to the trustee. The deed empowers the trustee to sell the property if you
default on your loan, and to deliver a trustee’s deed to anyone who buys it at
foreclosure. Under a trust deed, as soon as the lender tells the trustee to
record a “notice of default” – meaning that you’re behind in payments
– you’ll usually have only three months to make up the overdue payments plus
penalties and costs. At the end of the three months, the trustee advertises the
property for sale at least three weeks. You can still reclaim it during those
three weeks but only by paying off the full amount of the loan, if the lender
insists on it. (Sometimes a lender will settle for all back payments and the
penalties and costs). Anyhow, after three weeks the trustee can auction off the
property. Whoever buys it will receive a Trustee’s Deed. You’ve lost the
property, in a period of less than four months.
To a lender, the main advantage of a mortgage is that if
the property isn’t resold for enough to pya off all you owe him, he can get a
“deficiency judgment” giving him the right to claim against other property
you may have (except where laws prohibit this under certain conditions).
Most lenders prefer trust deeds – because these usually
give a lender the choice of foreclosing as either a mortgage or a trust deed. He
can go the long route and foreclose as a mortgage if he figures that an
immediate sale won’t bring in enough to cover the amount of money lent against
the property. (This is rare in our era of inflation and rising realty values,
but if the property has gone badly to seed, maybe he’ll prefer the chance to
get back the rest of his money through a deficiency judgment.)
