Creative RE Financing
The Fundamental Technique of Real Estate Financing
By
Oct 16, 2005, 20:35

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.)



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