patrick.net

Besides the things we are ALL aware of such as it’s better not to buy without a lot of cash saved for down-payment

Check your assumptions.

The cost of 15-year money right now is under 3% after-tax. The 15 year bond is paying almost 4% before-tax.

The FHA limit on duplexes in high cost areas is $934,200.

Uncle Sam really, really wants to sell you a house now. He's got millions to move.

The above explanation of an AITD did not make much sense to me. Am I the only one?

Nah - he lost me at "hello..."

Right.

It sounds a bit like seller financing, except that the seller doesn't own the house, the bank does!

It also sounds like a recipe for fraud and heartbreak. Feel free to correct me with a sensible explanation.

It seem like myself, most people have not heard of this investment tool. I say investment because apparently it's used more by investors than real estate agents. My broker friend who's recommending it admitted himself that he's only used it for short term property flipping, and would probably have to restructure it a bit for longer term holding, which is my intent.

Let me use some numbers to make this tool clearer. You find a seller who owes $200K on his $400K loan. He agrees to draw up an AITD because he wants to unload his house, and doesn't want to wait around for the typical escrow period. The deed, which is an agreement between they buyer and the seller only is for the amount of the remainder of the mortgage, or the value of the property, whichever is higher. The seller is still responsible for full repayment of the mortgage he took from the bank, and the buyer is responsible for the loan amount negotiated with the seller, usually for the same amount. Now the seller usually charges an additional 1% interest on the AITD above what they're paying to the bank. So if the seller's mortgage carries an interest rate at 4.5%, the AITD interest rate will be 5.5%. Additionally, the seller can claim some sort of tax credit for having sold their home, not just during the sale year, but every year of the AITD.

The advantage for the buyer again, is getting a home without having to jump through the banks hoops. Negotiating their own terms. The only problem I can foresee here is if the seller stops paying their mortage, which would cause the bank to foreclose on the home, regardless of if the buyer had missed a payment to the seller or not. I think the AITD can contain some sort of clause to protect the buyer if this were to happen, but I haven't researched it fully.

The wrap-around does give one the opportunity to follow Casey Serin's example into real estate glory.

If your credit is so crappy that you can't jump through the bank's "hoops" of providing some W-2s and bank statements, an alternative vehicle is just a scam for people like you. Just go the normal route, save money, restore your credit, etc.

All of these new "tools," "investment strategies," etc. are great for the people who know how to use them. You are on message board trying to understand what this even is. Even your broker buddy doesn't really seem to use this. No offense, but this doesn't seem like a good idea for you to pursue.

robertoaribas says

Also, who do you know sitting on a first mortgage at 4.5%? very very damn few, that is who!

Those of us who have equity and good FICO scores refinanced to get whatever was the lowest rate at the time. Rates posted in the last couple of months are as low as 4% for 15 years. I refi'd in 2008 so my rate isn't quite that low. But then, my rate will be zero next year.
Some of you in California see the whole country through the Bay View window of your overpriced 450sf rental.

However, I agree, that homeowner will not sell his house for less than he has to. And most of us with equity and low interest rates are not in the home selling market.

Adrian,

>>The only problem I can foresee here is if the seller stops paying their mortage,

No kidding.

And then you are screwed, because the bank will take the house and you only have some lower priority claim against the seller.

I'll repeat: It sounds like a recipe for fraud and heartbreak.

Np-one in their right mind would take a chance like this. Just say NO. Geez.

Appreciate the comments, some of you have obviously noticed that I'm not a home owner, and never have been. From what I could find out losing the property because of the seller's failure to pay on their original mortgage is a risk with the AITD. Since they're getting the interest income, and some sort of deferment on their Capitol Gains Tax, I don't see why they would do that, but it's a risk regardless.

Still think Seller financing could work well for a fully owned property(no mortgage or liens). Just depends on finding a seller who could offer better terms than a bank. Personally, I'd rather pay another person interest, than feed the banking institution that brought us to where we are, but that's another matter.

I've done a few of these deals recently (knew nothing about them 3 years ago) and they seem to serve a very specific purpose. A large commercial bldg was partially occupied by the bldgs Owner. She was distressed and couldn't make the payments or keep the building full. We evaluated the deal and with the market down turn her equity was down to about $100k over the note payable - if she could find a qualified buyer, which is the problem. Our offer let her maintain a stake in the bldg (33%) and also sell 66% of her equity for $66k to resolve her financial distress. So here is how, and why, we used an AITD: 1. Only required to put up $66k on $1m, original owner on paper for $1m, us on paper for title when note paid; 2. The distressed owner didn't like having all the downside and only 33% upside, but she needed the $66k cash for immediate bills (she considered it a fair deal); 3. If she were to try and sell in conventional form the bank will call the note; 4. We did not have the cash or the means to obtain the $1,000,000 pay-off; 5. We now hold 60% of a bldg that will likely market for $1,300,000 soon, and is already cash-flow positive (we filled it with tenants). We could not have done this win-win deal using conventional methods. We have since done a couple residential properties that were in the same boat. As one Poster noted above, you won't be finding any equity, you'll be buying at market, minimal down, no qualifying, and little exposure. My advice - if it won't cash flow - DONT BUY! If you can rent it and cover you note, or occupy at what rent would costs - then BUY! You'll have long term appreciation, if you don't pay for it along the way. Hope this helps.

AITD seems like a way to assume a non-assumable mortgage - which is fine & dandy unless there's a pesky clause in the orignial trust deed that says you can't do that.

The only way an owner will do this is if he has no other choice. He's the one responsible for the payment, and the buyer could really screw him and make him foreclose.

this would fall under creative financing as well. huge risk, this was common in the 1920's though... not sure about the 80s.

Would your "friend" be earning a commission by placing you in this arrangement?