Real Estate Investing: Creative Financing
September 6, 2013
If you have ever met a real estate investor, you know they are from a different breed. When you talk to them, they look as if they know something you don’t. The truth of the matter is they do. They have taken the leap into this world and have found that the hard work truly pays off.
For those that are not involved in the business, the biggest question they have about it is, “How can I do this if I don’t have any cash to put down?” There are many ways to answer that question, but here are a few to get you started.
Seller Carry Back
This is a form of “owner financing” where the seller acts as your bank or mortgage company. They agree to carry the note on the property you are purchasing. The owner/seller owns the property free and clear. This arrangement works for both parties as the income is taxed differently than rental income. They don’t want the property, but they don’t mind receiving a monthly payment on it. Generally, there will be a time limit for when the note must be paid in full – typically, between one and five years.
This subject-to method comes from the phrase “subject to existing financing.” In this situation, the buyer gets the property on the condition that the existing financing stays in place. The buyer will have the title transferred in their name, but the loan stays in the seller’s name. The buyer basically takes over the payments on the existing mortgage. Knowledgeable investors use this method so they do not have to use their cash flow to get into the property. They will than flip out of the property at a gain or refinance the loan into their name at a favorable rate. This is a well-known method of investors that focus on buying pre-foreclosure properties. The seller is usually willing in this situation, because they have to get rid of the property immediately.
This is another option that is used quite often in real estate investing. The term “seller second” means that the seller of the property will provide a second mortgage to complete the deal. Typically, this second note is used to cover the required down payment. For example, the investor finances 80% of the property, but does not have or want to lay out the 20% down payment. They get into the property without using any of their cash, while the seller gets the majority of their equity in the deal. You must make sure that your loan allows a second mortgage. For the majority of companies, this is not a problem, but you will find some that do not allow it.
This is basically a “rent-to-own” option. It allows the buyer to get into the house for little to no money down, as well as the right to buy the property down the road. In an agreement like this, the future price of the property is fixed at the time the lease option is signed. Generally there is a payment made up front to purchase the option. In some cases, the monthly payment will be larger than normal, with the excess used to purchase the option. Occasionally, the option money can be applied toward the down payment for the later purchase of the property.
Just four ways, but very important ones to get the beginning real estate investor out there and on the hunt. So get out there, because the market is ripe for the picking. This your opportunity to take of the rest of your life.
What methods sound best to you? Leave a comment!
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