As profitable as traditional real estate financing can be re. the acquisition of investment real estate, one should never overlook the real benefits of so-called “creative financing” and the myriad ways by which so many otherwise hidden doors to wealth and prosperity can be opened to you…’and to thousands of others who may have been penniless and “credit-less” in the beginning.
The average real estate investor today is not unlike a person who takes an average job with an average company and expects to reap the financial rewards that are typically reserved only for those who take risk and put their very lives on the line every minute of every hour in order to create cutting-edge, innovative products and services, that they, themselves, acquire and administer…’without bosses, time clocks and domination by others whose company stature depends upon standing on the shoulders of those who keep them in their loftier job descriptions by diligently doing as they are told.
While it is theoretically possible, it is none-the-less unlikely–if you’re interested in breaking the mold of mediocrity that is barring the achievement of your highest financial dreams–‘that you ever will do so while being someone else’s employee.
‘If you agree, let’s talk!
In this article I’d like to go in to some explanation of how creative real estate financing works, and how it can help virtually anyone to achieve real financial rewards by employing some simple strategies and some new ideas that lie well outside of the proverbial “box” for most folks.
It’s often said that there is nothing new under the Sun; however, a closer look at that old and tired adage will prompt a revision thusly: “There is nothing that can ever be needed to create something new, which is not already under the Sun and immediately available to anyone capable of converting thier wishes, wants and unspoken desires to honest Needs.
When you and I rely only on institutional financing sources – primarily banks, credit unions, etc. – we are, by definition, limiting our options due to Fannie Mae and Freddie Mac having strict rules in place regarding the amount of money and credit you must have, and how many mortgage loans they can authorize for you. With this realization, one has to stop and wonder why the acquisition of income producing real estate (‘or one’s own home) should necessarily have to conform to such institutionally imposed limitations.
The big question: ‘Why must you and I conform to what everyone else does…because everyone else does?
Who should dictate that someone can’t give me a free and clear house if they so desire? Why can’t someone give me a house that FNMA FHLMC is not interested in financing? Why does a government backed or insured lending institution get to dictate what I can buy, inherit, trade-for, take-over or steal? [Well, OK maybe not steal…the government does enough of that]
Although, the government is there, in theory at least, to protect you and me and our fragile fiat economy: their stringent home-buying and selling rules, ‘no matter how much needed for the sake of free-enterprise, can seriously obscure real investment opportunities for those of us who make some of our own rules and who don’t mind marching to a different drummer from time-to-time..
This is where creative (i.e. “innovative”) financing comes in. I.e., instead of going to your local lender for financing, you can instead exercise one of the many creative investing options that are openly available to you twenty-four hours a day and seven days a week: ‘thus allowing you to sidestep many of the “ordinary” impediments that are designed to “protect” most of us; but which also penalize many of us (i.e., Options, Wraps, AITD’s, Contracts for Deed, Bond for Deed, Equity Sharing, Flips, Assignments, fractional ownership timeshares, multiple owner trusts, etc..
“Some Methods of Business Financing Lying Outside the “NORM”
The beauty of creative financing is that just about anything goes...’assuming it’s functional, legal and doesn’t harm anyone. For example let’s say Oprah Winfrey decides to offer a tenant in one of her properties the contractual right to take the property’s title without concern for credit or standard qualifying parameters, ‘that would technically qualify as creative real estate financing, especially if Oprah were unconcerned about a loan-to-value ratio or any particular employment history,
The number and types of creative real estate financing devices are limited only by the imagination of the parties in the transaction, and one’s own ability to clearly and persuasively impart your own knowledge intent and need relative to the acceptability or advisability of the transaction at hand.
Consider this one “extreme” example (‘just one of dozens):
Mr. and Mrs. Jones haves beautiful home with a mortgage balance that is greater than the value of the property, and they no longer wish to own and continue paying on the property. ‘You happen to know of a friend of yours who can afford the large payments, but has faulty credit and not enough money for a 20% down payment. ‘Is there any chance of making any money here by solving the problems of the homeowner and your friend…’and your own bank account?
Well then, ‘what if you were to agree to take-over the property and those payments; and then make your friend a partner with you, who for half of any future profits, agrees that he and his family will live in and care for the property at his own expenses, and who is far more concerned with the affordability of payments and the amount of cash necessary for the move-in , ‘rather than about short-term appreciation potential and the property’s resale value in, say, 5, 6 or 7 years?
In this scenario, let’s say the property is worth $300,000 with a loan balance of $350,000 and the payments are $2,800 per-month (‘with, say, 25 years left on the underlying financing). Instead of a $75-$85,000 down payment and closing costs of $20,000, you put your friend in the property for $10-15,000 (‘which becomes the acquiring party’s refundable contribution, but which goes into your pocket until the sale or re-finance of the property at some point in the future). You establish a monthly payment amount of, $3,200 per-month, along with an agreement to sell or refinance in 5-6 years, ‘at which time, from the proceeds of the disposition. he receives a refund of his original contribution, and you and he share in the remainder of any profit having been derived from any net appreciation, loan principal reduction, your upt front money and your positive cash-flow over the term of the agreement.
Thank about it: ‘In this scenario, how much did you spend up front? (Hint: rhymes with “bluthing”); how much did you pay per-month? (Hint: rhymes with “cluthing”); how much did upkeep, insurance and property tax costs you? (Hint: rhymes with “smuthing”); and how much credit risk did you assume when taking over the property and the payment stream? (Hint: rhymes with– “nun”)
Payments too high for this type of home? Might the seller prefer paying for, say, the tax-deductible insurance and property tax for a while, in order to avoid the $800 to $1,000 per-month continuing negative cash-flow and maintenance and management costs and responsibilities?
The loan is non-transferable? One avoids compromise of the lender’s the due-on-sale clause in any loan by placing the property in an inter vivo trust and instead of selling the property, ‘selling beneficiary interest in the trust (i.e., rather than the property’s title interest. (12USC1701-j-3)
Owner financing is prohibited (re. the Dodd-Frank Act): When the property is in the trustee, the only “sale” having taken place is that of personalty and not realty, ‘and not of concern in the Dodd-Frank Wall St. Consumer Financial Protection Act).
What about foreclosing on an errant tenant buyer: When the Equity Holding Trust transfer™ is employed versus a title transfer to a buyer, the tenant beneficiary is never on title and has no basis for claiming possession of “Equity” in the property for purposes of forestalling eviction and forcing a drawn-out and costly judicial foreclosure and ejectment processes. There is never a need for foreclosure: ‘merely a simple eviction process (‘paid for by the mandatory Contingency Fun having been posted by the resident beneficiary at inception).
What if I and my partner, or either of us, and the seller have disagreements: Not unlike an escrow process, the trust property’s title is legally and equitably held by a third-party (trustee) who can only respond to mutual direction by all parties acting in concert, whereby intentional failure to comply could bring about a civil or criminal action.
Creative Financing Is Innovative Financing
One should know well that creative financing strategies aren’t simply ways of avoiding down payments. Creative real estate financing is, in essence, an all-encompassing way of looking at the funding of real estate transactions without needing to rely on the socially-accepted tradition of getting a bank loan with a 20% down payment (‘which system is designed for purposes of ameliorating any risk that the bank might be taking) and making payments for 30 years or more.
Creative financing can entail no more than pledging small amounts of equity in multiple properties that you own, in lieu of making a down payment on a property you wish to acquire. While it may seem unusual, ‘this process – cross-collateralization – is a creative financing technique that has been used for decades in commercial real estate, and by forward-thinking residential real estate investors.
Cross-collateralization is less common than, say, lease optioning, subject-to financing or even putting government charitable programs to work for you in funding real estate transactions. These strategies can all be used to finance real estate acquisition, disposition and management; and can certainly help to grow your investing portfolio at lightning speed.
Probably the most common form of creative financing today involves the seller’s accepting all or part of the risk associated with real estate transfer, by agreeing to carry the mortgage personally along with a promissory note secured by the property. This, again, can allows for purchase or sale without restrictive credit or down payment concerns.
You might think that the average motivated seller wouldn’t want to consider a creative real estate offer when they could just as easily get all of their cash up-front from another buyer. You’re partially right: the average seller might not be inclined to accept a creative financing offer (‘but you might be shocked to learn how many marginally motivated sellers there are who would indeed consider carrying paper via creative seller-financing).
ost creative real estate transactions don’t involve “average” sellers. ‘Instead, they involve highly motivated sellers with special needs, whose circumstances simply cannot be addressed by selling their property traditionally to an ordinary, run-of-the-mill investor with access to a line of credit or an unlimited supply of cash.
Want another example? Read on…
What if you had a property that you absolutely had to sell because you’ve chosen to live nearer to a family member who is receiving radiation treatments due a rare form of cancer? Then, what if the property you wanted out of had a bedroom “decorated” with a large tree branch having crashed through the roof during a windstorm –i.e., ‘during a period when the property was uninsured due to a memory lapse on your part?
What if you had a a large house with marginal or no equity and not enough family left to fill it, say, during a time of recession in the real estate market? Might you consider some seller-carry options in order to avoid losing thousands of dollars? Here you can see how such a circumstance would motivate you to at least consider creative financing if it meant being able to get rid of a burden that you no longer had any use for.
One of the most invigorating aspects of creative real estate finance is that it sometimes involves asking the owner of the property to participate in financing, as in the case of a Contract for Deed, a Lease Option, or a subject-to mortgage take-over.
The world of creative financing is much larger than can be explored here, and can also include putting government programs to work for you by letting Uncle Sam pay all or part of the costs of acquisition, financing, refurbishment or finding and/or retaining tenants.
Creative real estate financing includes bringing like-minded investors into your real estate projects by using private-money lenders. These private lenders – typically busy executives or others with a desire to earn an above-average returns on their investments – are often willing to lend money for real estate on a short-term wholly asset-based risk.
Yet still another creative financing strategy might be using a self-directed IRA to fund real estate or to accept cash from other investors who wish to use their self-directed IRA for investment opportunities.
Hard money (asset-based) lenders: I would be remiss if I were to ignore one final creative financing method: hard money lenders. While hard money lenders won’t necessarily be your first choice in generating real estate investing cash, they are a source that can provide capital when all other options have failed.
You do want to be careful though, when using hard money because rates and terms can be somewhat exorbitant; but in certain cases, they can make perfect sense and can be the difference between having a deal that gets done and one that remains an unfulfilled dream – ‘teasing your consciousness with the promise of untold profits – only to snatch them back at the last second.
Hard money lenders can allow you to seize real estate opportunities that you might otherwise have to let pass: ‘so for that reason alone, they are easily worth the cost and typically easy to work with
Example: House worth $100,000 wherein the seller will let you have it, but wants some cash up front. You tell the seller you can give him/her $50,000 in cash if he/she’ll carry the rest for you on monthly payments. You then borrow out $60,000; give $50,000 to the seller and put $10,000 in your pocket, whereupon you bring in an Equity Holding Trust™ tenant-buyer, or a maybe just a lease Optionee, to make the payments for you.
Your financial security in this business is wholly dependent upon on your ability to bend and sway with the times and the opportunities with which you are confronted. “One-trick Ponies” don’t last long in this business. Motivated sellers come in a variety of colors, shapes, body configurations and intelligence levels; but the one constant that you can always count on is that every single one of them has a piece of property that want you to take them out from under. In our business we don’t ever need to look for properties: ‘we look only for motivated sellers (…and strangely enough, each of them has a property they don’t need!).
There quite obviously are many challenges before you as you immerse yourself in the creative real property financing business…’and there are some excellent teachers out there who would love nothing more than to tutor and mentor you (‘and one of the best coaches of them all is yours truly, the beloved personal author of this here doggone article.
While there are indeed some challenges associated with learning these varied strategies and techniques, the biggest one before you now is that of accumulating the knowledge you need to make all of it a reality for you…in the shortest amount of time and having someone you can rely on to help you through it all.
Call me @ 800 409 3444 for superior tutelage and professional mollycoddling.
‘Hey, I’m not saying that I’m singularly THE best in the business: ‘but, seriously: ‘How can I argue with everyone who’s ever known me? ;o)