This is an example of what I call sub equity, meaning the house is worth $130,000 and the person owes $70,000. In theory there’s $60,000 of equity in that property. Again, the seller wants $100,000. We’re going to keep the scenarios fairly consistent.
That transaction is again a way to do a no cash out of your pocket transaction. You would go to a private lender – or even possibly a traditional lender if you had it pre-approved – and you would borrow $70,000, $75,000 or $80,000. You would offer that to the seller.
Let’s say $75,000 to make the math easy. You would offer them $75,000. They would obviously take $70,000 of that to pay off their first mortgage and they would have $5,000 left over in cash. The other $25,000 would come in the form of a “subordinated seller note”. Again, the seller is essentially foregoing $25,000 and will get that over time.
Structuring Seller Notes
The way I structure all of my seller notes is very simple. The example of $25,000 would be $250 over 100…