Keys To Buying With Creative Financing

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Topics: Buying & Selling, Financing
If you buy real estate with bank financing, you have to give up a lot of personal information for the loan application, pay all kinds of junk loan fees, then wait, wait, wait for loan approval.  You are also personally liable for the loan and you will usually need a large down payment for a non-owner occupied purchase.
 
If you buy real estate using private lenders or hard money lenders, they usually control the terms and interest rates. Usually high interest rates.  Some will insist on getting 50% of your profits.
 

In both cases, you are at the mercy of someone else to say YES or NO to your request for financing.   If they say no, you will lose the deal.



A much better way to buy real estate is with creative seller financing.  It is easier to get than you think… IF you are working directly with a seller who is very motivated.



With creative seller financing, you are often able to buy with no money down and no or very low interest rates.  Sometimes, payments can even be delayed for a year or more.  You might make only one payment per year instead of monthly payments.  The financing can be creatively structured to fit the opportunity, your needs, and the seller's needs. 

In my 20 years of real estate investing, I was able to buy hundreds of properties with creative seller financing and/or subject to the mortgage.  

The secret ingredient is to be dealing directly with the seller.  They must be motivated to sell quickly for some reason.  You absolutely cannot be working with a real estate agent or any other middle person.  

“Creative Financing” is a phrase that describes terms that aren't available from institutional financing. By definition then, except for deals made between professionals, creative financing depends upon financing provided by a motivated seller.

It follows that the more a buyer knows about the needs and goals of the seller, the wider the scope of financing possibilities. In turn, the more time and effort the buyer invests in discovering the needs of the seller, and meeting these needs in the transaction, the more successful he or she will be in getting seller's to accept a creative offer.

While it's usually dangerous to impute motivation to the other party, it is safe to say that seller problems tend to follow along similar paths. These might include the need for the following:

CASH to settle pressing debts, or to pay for future foreseeable expenses such as medical expenses, balloon Notes, law suits, maintenance and repair, college, business expansion, etc.

INCOME to support life-style needs such as retirement, payments for personal or mortgage debt, transportation, insurance, health or dependent care, alimony, tax.

PROPERTY MANAGEMENT and MAINTENANCE: Burned out Managers and absentee owners are the most distressed sellers in the market. They need to protect their equities and make their payments, but lack the skills, patience, or intestinal fortitude to manage their rental properties. They desperately need to find a capable manager who can and will take over the management burden and restore lost income.

SECURITY: Many people will voluntarily opt for a lower, more secure return on their investments rather than to take a chance on future possibilities. They are those who invest in bonds, insurance annuities, interest-bearing bank and money market deposits, and guaranteed returns based upon various financial contracts.

EGO SATISFACTION: Some people would choose a transaction in which they appeared to have made a good deal in lieu of a transaction in which the bragging rights were less obvious. For example, they might accept an offer that met their asking price based upon current values, but with zero interest and low or deferred monthly payments rather than taking a low cash price.

TAX AND TIMING CONSIDERATIONS: Many times an Option can be obtained when a seller can save taxes by delaying the sale. This would be the case where ordinary income might be converted to capital gains; or a property might qualify for a tax-free Exchange or Section 121 residential sale in the near future. In other cases, principal payments might be deferred into a time when gain would be taxed at a lower rate such as from 2007 to 2008; or a transaction sped up when tax on gain is about to increase dramatically, such as happened from 1986 to 1987; and which might happen again.

AVOIDANCE AND/OR ELIMINATION OF RISK:
There is considerable variation in risk tolerance among buyers and sellers; especially when confronting the liability risk of defaulting on personally guaranteed loans; or when facing the prospect of recession, depression, deflation, or inflation. When the entrepreneur is willing to undertake more liability and risk in order to relieve the other party of perceived risk, a profitable transaction can often be made.

Real estate is often illiquid and indivisible just when an estate must pay estate taxes. Sometimes settling an estate can be simplified by having a buyer with an Option waiting in the wings to buy a property at the end of a seller's life. Alternatively, heirs, who are eager to get their hands on their bequests are happy with an offer that combines a low offer with cash and terms that will provide cash for taxes, and a windfall for them.

When structuring a creative purchase or sale, the first task is to determine the needs of the buyer or seller, as the case may be. This is done by slow, patient inquiry that takes place only after the parties are comfortable with each other. Most people are motivated, directly or indirectly, by an emotional response to fear or greed; or a combination of these.

If you've taken the time and trouble to discover true motivation, whether fear or greed, then you can channel your creative efforts to allow the other party to meet as many of his needs as possible at a cost that will enable you to meet as many of your needs as possible.

The negotiating mode that has the most potential for success is called the “cooperative mode”. To get into this mode, a buyer or seller might say, “We're too far away from an agreement as it now stands, but if we are willing to spend some time trying to work the details out, we might be able to make a deal.” One way to visualize this situation is to imagine the parties seated on the same side of the table trying to work out a deal that meets their needs rather than seated across from each other lobbing pot shots trying to score negotiating points at the others' expense.

If a seller needs cash, and is willing to accept a lower price to get it, an easy remedy is for me to sign a non-recourse note secured solely by the property in question with terms that will enable the note to be sold to an investor to get the cash he needs. If he doesn't know how to find a Note buyer, I'll help him find one. This saves me the need for borrowing, and gives the seller the cash he needs.

If you're going to be able to do this, you've got to pin down you own minimum requirements for a transaction. For example, I won't personally guarantee repayment of a promissory Note. If the property alone isn't adequate security, I might add another property to the mortgage, but I won't place myself or my assets at risk to buy it 

If I see real profit potential, I would prefer to Option it, or lease /Option it rather than to buy it with full loan liability. That way I don't jeopardize my prior successes with what could be a mistake about that the future might bring.

Hopefully, this has opened your mind a little, and helped you see how important being able to buy or sell property without cash or credit can be to your financial future.

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