Creative Financing By Tim Chaffin
If you have tried to acquire financing with banks within the last year or have read news articles related to financing, then you know that it’s become a challenge to obtain a real estate loan. You need stellar credit scores and at least 20 percent down, and must also be able to cover closing costs. When I began real estate investing back in 1985, interest rates were more than 12 percent. No money down and owner financing were the hot topics. Now that the traditional lenders have all but closed their doors, we have to go back to the drawing board on financing real estate deals.
One of the most frequent questions I get from students is, “How do I buy real estate with little or none of my own money?” While this is a complex question, it’s also a simple one. First and foremost, you must find a motivated seller. Sellers who are not motivated are not likely to be interested in helping with the financing. After you have determined that you are working with a motivated seller, there are many options for owner-financing techniques. Listed below is a list of some of the financing methods that may fit your situation.
1) Lease option. Rent the property with an option to buy at a future date, usually 36 to 60 months. Part of your rent would be applied to the principle balance and, when you decide to buy the property, you simply obtain conventional financing and pay the seller the balance of the purchase price. Wealth Intelligence Academy Inc. has a three-day advanced training class on this topic that explains how to master this buying technique.
2) Carry back. Owner would hold back some of the purchase price to offset the amount of money you may need for the down payment to get a conventional loan. This is accomplished by creating a note. This ‘carry back’ could be paid in full in a term mutually agreed upon. At that point, you would refinance with conventional financing and pay off the carry-back amount. Some of the negotiable terms of the note may include the due date and interest rate.
3) Short-term balloon financing. Make payments directly to the seller for an agreed upon term, then obtain financing to pay off the balance. A balloon refers to the balance being due at one time. There is no financing until you have to pay the balloon payment. While this is similar to a lease option, you are buying the property from the start as opposed to just having an option.
4) Contract for deed. Commonly used when the seller does not have an existing mortgage. You get the deed to the house and use the real estate as the collateral, just like you would when using a bank, except the seller is the bank. This can be combined with the balloon payment if the seller is anxious about having a mortgage for longer than five years.
5) Land contract. Commonly used when the seller doesn’t have a mortgage. You would make payments to the seller, and you own the property at the end of the term. A land contract is similar to a contract for deed, but you do not get the deed until the last payment is made.
6) Wrap-around mortgage. Leave the existing loan in place and obtain a new mortgage for the difference paying both mortgages.
7) Borrow equity. Use equity in another property you own with a promissory note as a second or collateral.
8) Create a second and move positions. Create a first mortgage and ask the seller to take second position so you can obtain a first mortgage to pay them the difference. This works best if they have no mortgage on the property.
9) Create a note and then sell it for cash. This technique works best if there is no mortgage on the property. Most note buyers want to see 12 payments before they will buy the note.
10) Borrow broker’s commission. If the property is listed for sale with a real estate broker, then the property must sell in order for the broker to get paid. Sometimes they will let you “borrow” their commission to expedite the sale. Term, interest, and payments are all negotiable.
11) Partner. Use a relative, friend, co-worker, or another investor. Find the deal and show them how you can make a profit by using their money for the down payment and split the deal with them. The negotiations do not have to be 50-50, but whatever you can negotiate. You find the deal, they supply the money.
12) Sweat equity. The owner may allow you to make repairs to the property in lieu of a down payment. You would receive a credit toward the purchase price for the work you do.
13) Equity split. This technique is similar to sweat equity. You could do the work and then sell the property and split the profit.
14) Hard money. This is a loan based on the asset, not the borrower’s ability to pay the loan. These are typically short term—three to eighteen months with high interest rates and points. Today, most hard money lenders require borrowers to have a minimum credit score to ensure that you will be able to refinance the loan.
15) Private money. This option is similar to hard money in the respect that a third party, rather than a bank, is lending the money. This can be just like a partnership, except you are paying them a percent return instead of giving them a percentage of the deal. You also do not have to make any payments during the term. Rather, you add it onto the balance of the mortgage to be paid when you refinance out in an agreed-upon time frame or when you sell the property.
16) Substitution. You can use something other than cash or real estate as your down payment, such as an automobile, furniture, or other assets of value.
17) IRA. Use your retirement account to buy and sell, buy and hold, or wholesale. There are guidelines for doing this and all the money has to go back into the IRA. No dipping.
As with any real estate transaction, you should consult with your attorney when structuring deals in this manner as real estate laws vary from state to state. These are just some creative ways of getting the deal and making it a win-win for you and the seller.