Creative Financing in Real Estate is legal, when done right.
It is another way to buy and sell real estate every day in the U.S. The most common creative financing is when an investor needs to come up with the money to purchase a property, but doesn’t have all of the money to fully pay for the purchase.
Creative Financing is any means other than traditional bank financing.
What does this mean if you are selling your house?
While it shouldn’t mean much to you if you are the seller, as long as you receive your full purchase price at closing. What it mean to the investor however is a whole different story.
Did you know that selling your house yourself you can also employ some kind of creative financing to sell it, especially if you have had your house on the market for a while.
Most people only know one way to sell their house, which is to put it on the market with an agent, find a buyer and get the cash at closing. It’s been done this way for a long time. Plus, for many sellers, that is what they have to do when they sell, so they can use that money to purchase their next home.
What if you have a rental property, or inherited someone’s home? Tired landlords that are interested in selling, or they are older and want to get away from rentals are perfect people to use creative financing. By financing someone the purchase, they are using what is known as seller-financing. This is especially useful for selling based on payments, as the rental income would go away if they sold for all cash.
This can keep them receiving income from the same property for a specified term, many years in fact.
Not every seller needs the cash. Over the years we have worked with many people that were more interested in a monthly payment than an outright sale. The reasons can vary widely, but the most common is that they enjoy the money coming in every month, and they can rely on the same payment coming in next month.
One deal we had a few years back, the seller financed it, and when we sold it to pay her off before the term was up, she got very irate that she wasn’t going to get a monthly payment anymore.
Another deal we got was from 6 people that were scattered around the country, they inherited Dad’s house in Florida, and they didn’t care to rent it out, they just wanted a sale. We asked for seller financing, which they agreed on, and we had a payoff of 7 years later on a small balloon note.
The most interesting part of deals like these are that they don’t require a large down-payment to secure them.
Creative Financing is used for many types of real estate purchases. Private Lenders are people who lend money to real estate investors for purchasing properties and they create the financing that goes along with the loans. We have used forms of Private Lenders many times over the years.
If we have purchased too many properties and our own funds are getting low, and another deal comes along, we turn to our Private Lenders to finance it at terms that we both agree on. These can be short term, (6 months to a year) or longer, simple interest for 5 or 10 years.
These private lenders are people that have the funds, but they don’t traditionally want to own property. The just want to lend on them and collect a better interest rate than they can get from their money just sitting idle.
Money sitting in an IRA or that is invested in CD’s usually only gains less than 4%. Over the years we have paid different lenders anywhere from 3% to 10%, in interest payments. With different lenders comes different forms of re-payment.
Just like every purchase is different, the lenders themselves are different to match them.
While one may want a higher rate than another, the terms of the lending are what really counts. Some want monthly, some want quarterly payments and others will lend on a one year balloon payment with no payments during that time.
One investor we met a while back, uses private investors that lend for long terms, as the money they lend comes from oil reserves, so they structure it to lend so that the money that the investor pays them each month is their spending money, never touching the original investment.
If an estate has heirs that are in agreement, the inherited property can be sold for long term income.
Many sellers that have a property that needs a major update have carried back financing to someone that wants to purchase it to fix, holding financing for a specified amount of time.
Creative financing can also be used to purchase vacant land, duplexes, triplexes, commercial property, and rental property.
This way of financing has recently gained popularity, and has become widely used as the real estate market turns from a sellers market slowly to a buyers market.
With high interest rates that are locking people out of obtaining a traditional mortgage, sellers have either been taking their home off the market or lowering their prices just to sell. Being creative, many properties could be sold to more buyers, and many times better prices.
When a home is listed with an agent, the agents themselves will usually be reluctant to mention this to the seller about seller financing, as it could later have legal complications for both the seller and the agent if the deal goes wrong. Plus, most agents are working on a commission basis, and if the terms of a sale doesn’t have enough money down to cover the commission, agents most of the time wouldn’t know how to structure it.
Any type or form of alternative financing needs to be looked at by an attorney or the attorney of a title company to make sure it is legal to structure it the way it is written.
You might be interested, just who is a private lender? Well, you can’t usually tell by looking at them, as they don’t look any different than the next person. Usually it comes from out of nowhere. In one conversation you might get asked what you do for a living, and it rolls around that they ask how do we afford them all, an we mention that we have private lenders that we work with. In one situation I was explaining to someone that we had a payment coming due to a lender, and then the whole conversation turned into this person wanting to know more, because she was looking for an investment that paid more than her money market was.
Sometimes you get referred to someone that is looking for investing in something by lending money. They don’t want to own houses, they just want interest income. You wont always get to reach acceptable loan terms, but it could also be the best thing that happens for a long time.
Creative financing can be simple or it can be complicated, keeping it simple seems to work better for everyone.
I have another post coming soon that explains what these investors get for their money and what they expect of you to perform with their money also.