Pyramid Financing – How the Buyer Benefits by using a Pyramid – Part 2
Read Part 1 regarding how the Pyramid creative financing technique before reading this article.
How the Buyer Benefits by Using the Pyramid
1. Circumvents existing mortgage limitations and replaces it with secondary financing.
2. Can reduce debt service
3. Can increase yield on cash invested.
4. Geta a yes from the seller.
1. Circumvents Existing Mortgage Limitations to Seconday Financing
When the existing financing on a property is being assumed by the buyer, one must be careful that all the terms of the mortgage contract are being abided by. For example many lenders include in the mortgage contract that the loan be limited to prohibit the ture existance of any secondary finacning on the property that secures the loan. The thinking behind this is that the lender does not want to have the proeprty overleveraged to the point that any additional financing increase the total loan to value ratio above the initial percentage when the loan was originally made. This problem can also arise even if the mortgage you want to assume is a second mortage as they can also contain this kind of limitation even though the first mortgage does not. Therefore if the buyer encounters this kind of provision if will affect the type of real estate financing that can be placed on that particular kind of property. So therefore wraparound mortgages, blanket mortgages and regular secondary financing would also be excluded from being implemented in this kind of deal. The pyramid does not have this kind of problem because the security for the loan is another property. It is important to remember however that that the use of blanket mortgage or a wraparound mortgage could still be used as long as they do not include the new investment, assuming of course it has these limiting provisions.
