Progressive
Purchase
How the Program Works
Reality Check
Hedge the Bet
My house once appraised for $295,000 two years ago, sure wish I'd sold. Now I'm told it’s only worth $225,000 and all I'm getting are offers for even less. Let’s split the difference. I’ll let you buy the property for $250,000 with as little as 5% down payment and I don’t care about your credit. What’s the catch?
You have the opportunity to make payments on the balance of the money you owe based on a thirty year time period with a balloon payment required after two to three years.
If you don’t have the money to pay a big down payment today and your credit is poor how is that going to change in three years?
How does this deal work?
Is it safe?
Why haven’t folks done this before?
The Progressive Purchase program incorporates all of the successful features of installment sales finance and wrap around mortgages within a safe and secure vehicle to eliminate the risk to sellers, buyers and mortgage lenders. That’s it! No one figured out how to do that; until now.
I’m a licensed
I recommend using a realtor.
I will transfer title to the property for sale (for example, let’s pretend it’s my property), subject to the first mortgage, to a newly formed Progressive Purchase Limited Liability Company (PPLLC). If you don’t know what that is don’t worry it’s just a legally recognized “company” sort of like a corporation but easier to use and an excellent tool to protect everyone involved from outside influences that could affect the program’s success. I will be admitted as its initial member. You will pay your 5% down payment to the PPLLC, be issued a prorate share of the membership certificates and be admitted as a member as well. As you make payments of principle and interest you will be credited for your entitlement to the remaining membership interests. When you finally pay me the balance of the purchase price with a balloon payment in two to three years you will be receiving the balance of all membership certificates and will own 100% of the company that owns your beach property and will have completed the program. Within the PPLLC is an agreement that memorializes your purchase of my membership interests in the company, which is being owner financed using a thirty year amortized schedule with a balloon payment required at the end of either two or three years. What’s this all about?
I’ll take a minute here to explain why it’s done this way. By technically selling you the membership interests in the company that owns the property rather than selling you the property directly, we save by not paying “land transfer taxes” or “revenue stamps” which is a nice savings and can offset other expenses. More importantly, the use of the limited liability company as a conduit through which our progressive purchase functions serves as the safety net for all parties in order to avoid the unforeseen breach of either party. Last, but not least, the financing of the sale of membership interests allows us to receive the benefits of an investment interest deduction for the buyer for otherwise neither buyer or seller were going to be eligible for the mortgage interest deductions.
A special bank account is opened for the PPLLC with Gateway Bank in
We will appoint an interim trustee/manager of the PPLLC (if were not dealing with my property you can use my law firm) to provide us both with the security that allows the program to avoid the inherent problems of earlier versions of installment sales contracts (one of us could be a crook, could die, file bankruptcy or get a whopping judgment against us which would be a lien on the property any of which would screw up the deal). While both you and I can monitor the PPLLC account to make sure everything is going according to plan, only the trustee/manager can facilitate the draft of payments. In summary all you have to do is keep your word and make all the payments on time.
The buyer and seller will have to agree on a future time in which the balance of debt is due and payable to the seller; i.e. twenty four to thirty six months. When the time comes to pay off the seller, the property should have appreciated enough in value as a result of any or all of the following reasons:
1) you paid a down payment;
2) you have been paying mortgage payments every two weeks in an accelerated program; and
3) the real estate market should rebound within this period of time.
The buyer applies for a refinance, is eligible for a loan pledging the appreciated property and can now receive a loan amount representing 80% of the new value of the property.
Buyers Safeguards
The program is safe for the buyer because it is designed to avoid the problems that plagued installment land contracts for decades. Installment land contracts weren’t able to protect the parties so people stopped using them. What if the seller is a crook and doesn’t give me my deed when I’ve paid him in full or what if the seller sells the property to someone else without my knowing it? The seller no longer owns the property and no longer has any authority to convey title, the trustee/manager does. Same answers for the fears of death or judgment creditors; the trustee/manager is the boss, not the seller. When the buyer completes his commitment he will receive full ownership from the trustee/manager.
I heard that one slip up and the buyer loses everything? If there is a default in payments historically the seller just “pulled the rug” out from under the buyer when using an installment land contract, easy to do, (just file a termination form at the court house) but this was thought to be really unfair to the buyer who might have made all the payments except the last one and lost it all. Well, the courts thought the buyers’ “equity of redemption” should be protected like they are when a bank forecloses. This means that if there is a foreclosure and the property brings more at sale than the buyer is owed then the buyer gets the excess. So, the Progressive Purchase program went overboard and made provisions to do just that; provide for a method of protecting everyone from an unfair or inequitable result. How?
Default
If and in the event there is any fear of a delinquency and the seller believes the buyer is headed for trouble there must be notice given to the buyer to “cure” that deficiency within 15 days (two weeks). If not cured the trustee/manager places the parties on notice that the property is listed with a licensed broker (usually the same one that helped sell it in the first place) and marketed for sale in the MLS. Any proceeds received over and above the balance owed to the seller, including expenses associated with the sale, rightfully belong to the buyer. If no one purchases the property within a ninety day listing period then the membership units of the buyer revert back to the seller and the PPLLC will re-list the property for sale to another prospective purchaser.
Note: the buyer always has the right to “save” his investment with a payment in full to the seller within that ninety day period. The payoff would of course include interest and costs through the date of payoff.
Sellers Safeguards
The seller is protected in several ways.
1) he can monitor the deposits and payments online for the PPLLC bank account;
2) payments are made every two weeks and there is only a two week window of notice required to warn the buyer of his delinquencies;
3) there are three months of principle and interest escrowed within the PPLLC account so there is never an interruption of mortgage payments to the lender.
If the buyer slips up, the seller tells the trustee/manager immediately to provide the proper notices to the buyer and everyone knows the triggering provisions are in place to deal with alleged default.
Safety Precautions
At the inception of the program there was a payment into the PPLLC of 5% of the purchase price. These funds must be first applied to bringing current any arrearages of the seller such as delinquent mortgage payments, taxes and insurance. A three month escrow of principle and interest payments must also remain in the account of the PPLLC. The seller may receive any balance remaining from the down payment and of course is the beneficiary of the mortgage escrow when a final closing occurs. It is this key component of escrowing a three month reserve for continuity of mortgage payments that contributes to the secured lenders willingness to cooperate.
NOTE. There may also be sales which result in the bi-weekly deposits of funds in excess of that necessary to meet the mortgage obligations of the seller. These funds could be applied to the accelerated reduction of the sellers’ mortgage but could be disbursed to the seller in a routine manner if the seller desires. These details need to be negotiated up front.
Mortgage Lenders Agreement
The sellers secured mortgage lender is apprised of the Progressive Purchase agreement between the parties and is asked to execute a forbearance certificate wherein they agree not to exercise their option of implementing the dreaded “due on sale” clause within their security instruments. This due on sale clause is the single most referenced obstacle in all installment sales and wrap around mortgages but nothing we’ve done has diminished the security interests of the lender. The documents clearly acknowledge the continuing liability of the seller until the program is completed and the lenders’ forbearance addresses the “due on sale” clause only not the remaining default provisions of their deed of trust.
The Final Closing
When the refinance loan is ready, there will be a closing where the seller transfers the balance of the membership interests to the buyer. Now the buyer owns all the membership interests in the company that owns the property. CONGRATULATIONS
The Key
Growth in equity!
Look, this program is designed to work in times where there is a depressed real estate market. You either agree or disagree that now is that time. Property values have fallen which means they will eventually rise. Your guess is as good as mine as to when that time will come. The progressive purchaser is banking on sometime within the next three years. So, if from now until the balloon period comes the market rises you will be the owner of a property that has appreciated in value. That’s called “passive appreciation”. In addition to your inheriting that appreciation you’re going to cause an active appreciation in the property’s value by making “accelerated” payments every two weeks. Huh! What ever the monthly payments turn out to be you’ll simply make that same payment, but in two parts, half every two weeks. Your monthly budget doesn’t change. When it comes time to pay the balloon payment you will have the ability to get a lender to refinance your property with an 80% loan to value (LTV) and pay the seller off.
The buyer has made an investment in a property that would have never ever been available to him unless he won the lottery. But now, the buyer can go to the mortgage lender and apply for a refinance of his property. At that time either the market is better or it's not.
If the market is still depressed the buyer and seller can extend the balloon period. Why not, the seller has no incentive to find another prospect if the market is still depressed. If the market is good again, the property should have appreciated enough in value to allow the buyer to obtain an eighty percent loan to value of the new appraised value.
You see, with the traditional approach of buying and financing property the lender will only loan you 80% of the property’s value or its sale price, which ever is lower. You must have been involved in an “owner financed” arrangement for more than a year to get beyond what the banks call their “seasoning” period. With the Progressive Purchasing program you’ve been involved for around two or three years, ok? This way the lender can be allowed to consider “your” equity in making you the loan and not be limited to a loan based on the price of the purchase.
The buyer wins because he's been able to finally invest in a property at the right time without coming up with twenty percent in cash or savings for a down payment. The buyer may be that individual who needs some credit rehabilitation and whether you know it or not the credit score requirements have risen dramatically in the era of the mortgage meltdown.
The seller wins because rather than accepting a price for his property to that rich speculator he splits the difference with the buyer. What?
I recommend full disclosure and honesty between the seller and buyer.
The seller had great equity a few years ago and missed the opportunity to cash out and the buyer doesn't have the money to drive the bargain like the rich guy. Let's split the difference in what was and what is the property’s value and allow both parties to profit.
At the very least the seller has received a reprieve from the negative cash flows that have been a drain on his finances and has moved closer to that day when property values rebound.
Realtors
I encourage the use of a real estate professional. Realtors are encouraged to participate in the success of the program by deferring receipt of some commissions until the program has been completed. I believe it is fair to ask the realtor to defer receipt of 3% of a 6% commission and to allow the deferral amount to accrue a modest rate of interest during the payment period. This negotiation will be between the parties.
The buyer and the seller win if the buyer is successful. There is really no incentive for the seller to use a program that won’t end up with the buyer qualifying to buy the property, that’s why the projections for increased appreciation have to be realistic. This is not some get rich quick scheme, it’s based on a conservative estimation of the property’s growth in value.
If you don’t believe that real estate values will ever go up again then this program isn’t for you. Look at this real property example for a way in which you can see for yourself that it will happen.
Actual Properties for Sale
Residential
Property located at
Two story with upper floor which contains two bedrooms, one bath and lower floor with potential for another two bedrooms and bath. See Attached for photos. Property appraised three years ago for $295,000.00, currently being asked to accept $225,000.00, will accept $250,000.00.
Down payment = 5%= $12,500.00
Balance Financed = $237,500.00
Bi-Weekly Payment (P&I) = $750.59
Bi-Weekly Escrows (taxes & insurance) = $134.10
Total Bi-Weekly Payment = $884.69
Sales price = $250,000
Balance of loan after three years = $225,144.23
Future value for property necessary to accommodate refinance = $282,000
The property once had a value of $295,000 and now needs to regain enough value to reach $282,000. Will the market rebound at a rate of around 4.2% per annum or more. Who knows?
If the market doesn’t and the buyer needs more time will the seller object? It’s either a good market or not.
Commercial
Commercial office condominium located
Office size is 1,000 square feet with five offices, kitchen and two bathrooms.
Property once valued at $350,000 but now estimated at $280,000.
Sales price $300,000
5% down payment = $15,000
Balance financed = $285,000
Bi-weekly payments (P&I) = $900.70
Bi weekly escrows (taxes, & assessments which include insurance) = 148.92
Total Bi-weekly payment = $1049.62
Sales price = $300,000
Balance of after three years = $270,173.74
Future value of property needed to accommodate refinance = $338,000
The Progressive purchase program cannot forecast the market. What it is designed to do is to provide both buyer and seller with a safe method of accommodating their agreements without interference from outside influences such as death, bankruptcy or judgment creditors or intentional violations or breach of contract.
There are more questions and answers provided above.
