By Mike Heayn

What is an AITD? What does it mean for a seller to carry paper? The real estate world is filled with interesting, creative concept financing, some of which become trendy when a real estate market begins to change. During slowing or lean times, many types of real estate financing become available, such as AITD, seller carry and lease option, just to name a few.

An “all inclusive trust deed,” or AITD, takes a new purchase financing and ‘wraps’ it around the existing loan. For example, take an individual named Philip who owns a house worth $500,000 and owes $200,000 with a 5 percent loan on it. A buyer named Lisa wants to buy Philip’s property. Philip could offer to have Lisa pay him 10 percent down, or $50,000, and he would finance the remaining $450,000 at a 7 percent rate. Philip would have Lisa sign a promissory note for $450,000, which would wrap around the existing $200,000 mortgage. Lisa would get the benefit of getting into a property with only a little down and Philip would have the benefit of a cash flow above what he is paying on his mortgage. A potential problem is that if the original lender does not know about the transfer, the first note or loan could be called due.

If you hear someone say that they will carry paper, or take back a second, it means that they will provide a second loan behind the bank’s first loan. Normally, when a seller carries paper, he or she will be in the second position and charge a higher interest rate. The purpose of a seller carrying back a second trust deed is twofold. First, a seller can earn a decent interest rate on money that is lent out. Also, a second trust deed allows deals to come together more easily.

An example of a seller-carried second trust deed is as follows:

Ken would like to sell his farm for $1 million so he can move his family. Ken owes the bank $350,000 and needs about $400,000 to buy a new house. A buyer, Jeff, comes along and offers Ken $1 million, but is only able to get a loan for $800,000. Jeff can put down 5 percent, or $50,000, but needs another $150,000 for the deal to work. Ken offers to place a second behind the new first trust deed of $800,000.

Jeff gets the benefit of completing the transaction, while Ken gets the benefit of selling his farm, getting enough money to buy a new house and earning interest on the second trust deed secured by the farm. The risk lies in the second position if the buyer has the property foreclosed on. In some states, if foreclosure takes place, all other liens except for the first lien or loan are removed and not needed to be paid back.

A lease option is a creative way for someone to afford a piece of real estate by allowing the buyer significant time to get financing. A lease option generally means that a person leases a property they own to a person who may want to buy it within a specified amount of time for a specified amount of money. Each month, part of the lease payment goes towards an account which can be used to supplement the eventual down payment on the property. At the end of the term, the lessee has the option to purchase the property for the agreed amount. The benefit to the seller is that they can charge a higher rent and, if the lessee does not exercise their option to buy, they can keep the excess money that had been placed aside. The benefit to the lessee is that they can save money and work on improving their credit. This can translate into a discount six, 12, 24, or even, 36 months down the road. However, most lease options have an exercise clause within 12 months.

Many different creative financing options exist today. They generally come back into popularity when real estate becomes harder for sellers due to a changing or declining regional real estate market. It is important to exhaust all financing options, both conventional and creative, before passing on a deal that you think could be profitable.

Mike Heayn is a Washington Mutual multi-family loan consultant. He can be reached at 310-428-1342, or at michael.heayn@wamu.net. Visit his web site at www.re101.net.