Transcript Creative Financing - David Harrison

Creative Financing Structures
 Common Forms of Creative Financing
 Assumable Loans
 Advantages:
 Disadvantages:

Wraparound Loans
 Advantages:
 Disadvantages:

Buydowns
 Advantages:
 Disadvantages:
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
Assumable Loan Example
 Determine the Cash-Equivalent Value of the
Following Assumable Loan:
Original Balance = $67,000
 Contract rate = 8%
 Market rate = 12%
 Remaining term = 18 years
 Original term = 30 years

David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
Buydown Loan Example
 A developer is offering a buydown in order to sell a
property. With a market rate of 12 percent, she is
willing to buy the rate down for the first 2 years to 8
and 10 percent, respectively. If $80,000 is borrowed
on a 30-year term with monthly payments, what is the
buydown fee?
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
Wraparound Loan Example
 Smith wants to buy a property for $120,000 but he has no
money to make a down payment. Jones, the seller, is willing to
do a wrap for the purchase price with an existing monthly
payment mortgage having a fixed rate of 8 percent. This
existing loan had an original balance of $100,000 and has 20
years remaining on its original 30-year term. The current market
rate is 12 percent on 20-year mortgages. Jones is willing to
write the wrap loan at a 10 percent interest rate. What is the
effective equity yield for Jones if the wrap is written for the
remaining term of the existing mortgage and both are held to
maturity?
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University