Buy More With Creative Real Estate Financing

Creative real estate financing is a non-traditional strategy to buying and selling real estate.

Usually, buyers would qualify for financing from a lending institution through a mortgage company and pay for the full amount of the purchase price with a combination of the borrowed money from a line of credit, a friend or family member, or their own money for the down payment.

One option to buy real estate is to pay cash, but the typical buyer isn't in a position to do this and needs to arrange to finance their real estate purchase.

Buyers with no money for the down payment have to come up with their money through a line of credit, a friend or family member. If those options don't work for generating a down payment, it's time to get creative real estate financing to invest or buy real estate.

Here are a Few Options for Creative Real Estate Financing:

1. Seller financing:

A loan provided by the seller of a property to the buyer.

Normally the buyer will make a small down payment to the seller and then make monthly payments at an agreed-upon interest rate over a specified period of time until the loan is repaid.

*A seller would consider seller financing because this is an investment in which the return is fixed and guaranteed.

This is beneficial for a buyer because they may not have the money for the down payment or may not be able to obtain a loan from a bank.

Commonly the loan is secured by the property being sold. In the event the buyer does not make the payments as agreed on, the property Seller / lender would foreclose on the property exactly as it would be by a bank.

An example of seller financing is a Wrap Around Mortgage.
Read the "Wrap Around Mortgage" Article and discover how they work...

2. Creative real estate financing with "Subject To":

This is referred to when a buyer agrees to take over the title of a property which has an existing mortgage or deed of trust.

The new owner agrees to take title with the responsibility to continue making the payments on the existing promissory mortgage or deed of trust which will remain in the name of the seller.

This new owner agrees to buy the property "subject to" the secured debt.

If the new owner fails to pay the mortgage as agreed upon, the original owner will be liable for the payment or will be foreclosed.

This is different from the new buyer "assuming" the mortgage where the seller is realized of any future liability should the buyer fail to make the payment.

3. Creative real estate financing with Options:

An option gives you the right to buy a property for a specified price during a specified period of time.

The owner of a property may choose to sell an option to someone that wants to buy the property on or before a future date at a predetermined price.

The buyer of the option hopes the value of the property will go up before the expiration of his option. The seller receives a fee called "option consideration", most commonly referred to as the option fee.

The buyer may then either exercise the option by buying the property or by assigning the option to someone for a fee.

Real estate investors often do this to obtain control over a property without having the expense of buying the property.

Option premiums are typically non-refundable.

The option represents an equitable interest in the property and should be recorded at the county recorders office to make sure the property is not sold to someone else during the option period.

4. Creative real estate financing with Lease Options:

Most commonly known as “Lease With the Option to Purchase”.

It is a type of contract used in both residential and commercial real estate. A lease option is different than a lease purchase in that a lease purchase binds both parties to the sale whereas in a lease option the buyer has the option but the seller does not.

The contract is typically between two parties: the tenant (also called the lessee), and the landlord (lessor), who owns or has the right to lease or dispose of the property.

As the name lease with an option to purchase says, there are two agreements: a lease and an option.

Only one of these agreements is mandatory, one is not.

In order to have a valid option the tenant/buyer must provide valuable consideration for the option which is often referred to as the option fee and is normally nonrefundable.

The option fee gives you the right to purchase at a later date at an agreed amount of money.

Everything functions like a lease except there is a date in the future when the buyer can decide to purchase the property or walk away.

The terms of the lease are open to be negotiated.

You will have to negotiate who will have the responsibilities of maintenance, utilities, taxes, pets, how many occupants may live in the property what type of insurance, etc...

During the term of the lease option the tenant makes lease payments to the landlord for the use of the property with the terms mutually agreed.

At the end of the lease agreement the tenant has the option to purchase the property outright or walk away. The tenant would typically obtain the money to do this by getting a mortgage.

Sandwich lease option:

So you lease a property with an option to buy it and then turn around and rent it out to someone else also granting them an option to buy it before your option expires.

Their rent is higher than yours and of course their purchase price is higher as well.

5. Creative real estate investing through Hard Money Lenders:

These are lending companies offering loans backed by real estate.

Hard money lenders provide short-term loans also called a bridge loan.

They provide loans based on the value of the real estate that will be collateralized for the loan.

Hard money lenders typically have much higher interest rates than banks because they fund deals that do not conform to bank standards.

Interest rates can range from 10% to as much as 18% or more.

Hard money lenders will have a wide range of requirements to do a loan such as the loan-to-value percentage, the type of real estate and minimum loan size.

6. Private Investors:

This can be a friend, a family member or an individual that will give you money to invest in your property.

In exchange for investing their money with you they will get a percentage of ownership in the property.

This ownership will entitle your private investor to a percentage of all the income and potential profits from the deal.

Private investors are a great way to grow your real estate business if you are focusing on rental properties.

What this means is that a transfer of a partial beneficiary`s interest or the transfer of one to ninety-nine percent, can be given or assigned to a co-beneficiary without triggering a lender's alienation recourse (the due-on-sale penalty requiring immediate satisfaction in-full of the mortgage loan).

The creative real estate financing article is for informational purposes, so please do your own research, continue reading more articles from this site, and consult with a real estate attorney.

Additional creative real estate financing articles:

Wrap Around Mortgages - How do they work? and example...

Have a Question About Creative Real Estate Financing?
Click HERE to Ask!