Creative Financing Technique

 A seller had his $105,000.00 (free and clear) house on the market more than one year, and was willing to finance the sale, but could not sell it because he wanted at least $20,000.00 down. He had a very serious buyer with acceptable credit, but only $5,000.00 dollars to put down. After thorough discussion and explanation of two alternative finance methods, the seller agreed to sell his home with the following terms:

•Buyer put $5,000.00 down and seller took a note and mortgage for $100,000.00 at 10% for 30 years. The monthly payment amount is $877.57.

•Seller sold the first 3 years (36 payments) of his promissory note in exchange for:
-$5,000.00 down payment
-$25,000.00 from sale of the 36 payments
-Principal balance of the note in 3 years when he starts receiving payments will be approximately $98,151.65 still owed to him
-324 payments of $877.57 will remain (Total: $284,332.68)
In case the seller could not have gone for the first 3 years without receiving the monthly payments, he could sell ½ of each payment OR the alternative method of financing presented was as follows:
•Buyer would pay $5,000.00 down and seller would create identical first and second mortgages and notes for $50,000.00 each at 10% for 30 years with monthly payments of $438.79 each.
•Seller would sell the first 8 years (96 payments) of the first mortgage he just created in return for:
-$5,000.00 down payment
-$25,000.00 from the sale of the payments from the first mortgage.
-360 Pmts. of $438.79 from 2nd mortgage begin immediately (Total: $157,964.40)
-Principal balance of $46,766.60 on first mortgage after 8 years when it would revert back to seller for 264 payments of $438.79 (Total: $115,840.56)
-Total payments from financing: $278,804.96
 
Now Compare to Conventional Owner Financing:
-Buyer would put down $25,000.00 and the seller would hold mortgage and note for $80,000.00 at 10% for 30 years, for 360 payments of $702.06 (Total: $252,741.60).
Note: Most buyers paying $25,000.00 down would demand a sizable discount on the selling price of the house.

-In all examples, the seller receives $30,000.00 at closing, but the creative method seller receives 36,591.08 more and $26,063.36 more, respectively, than the conventional seller receives on Total payments paid during life of the loan.

Now let's look at this as a TVM calculation from a note broker's point of view:

N 
I
PV
PMT
FV
360
10
$100,000
$877.5
0

This is the original note created at closing. The mortgagee sells 36 pmts. to an investor at a generous 12% yield.
N
I
PV
PMT
FV
36
12
$26,421.44
$877.57
0

After the $25,000 is paid to the seller, there is $1,421.44 left remaining for the brokerage fee. If the note pays off early, the investor and seller are paid according to the amortization above, by applying the actual interest rate of the note to determine the non-discounted present value.The example below shows the investor's portion of a payoff after 12 months. The rest goes to the Seller ... ($99,444.12 - $19,017.69 = $80,426.43)

 
Example:
N
I
PV
PMT
FV
36
10
$27,196.98
$877.57
0
12
10
$27,196.98
$877.57
$19,017.69

If the Buyer defaults, the Seller has the right, but not the obligation to buy-out the investor, and foreclose.

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