When Banks Are Closed, Use Creative Financing

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Topics: Financing

The essence of creative financing is to be able to transfer equity between buyer and seller without the need for much cash.  This requires at least two highly motivated parties who are willing to work together, and knowledgeable enough to make a deal.  When a third party “deal-maker” is added to the mix, part of the profit can be carved out without any investment at all.  Learning how to become that third party is a major key to being able to earn profits on every buy/sell/lease/Option transaction.  To jog your imagination, here are ten ways that a deal can be made using creative financing with very little cash; but you’ve got to propose it.

Buy Low, Sell High:  We all know how this makes money, but a way must be found to get cash to a seller.  When a homeowner needs cash, get him to put a HELOC on the house, then buy and sell it using contracts, AITDs, or wrap-around mortgages.

Buy High and Sell Low:  Buy with seller financing that incorporates a high price with easy stretched out payments and a “substitution of collateral” clause; then re-sell by wrapping both price and terms so that your buyer will pay a much lower price, but with higher payments combined with a balloon Note that will mature over a shorter period.  Take your profit in the form of high principal payments and cash.

Buy and Sell on “Paper”, Sell the Paper:  When buying, structure two separate loans: one with high payments that you can sell for a high cash price that gives the seller cash, and one at zero interest with no payments until the first loan is paid off.

Pay With Discounted Bonds:  When interest rates rise, good corporate and US Zero coupon bonds can be bought at deep discount to face value, then used to buy houses at face value from homeowners who rather trust them than your promissory Note.

Horse-Trade:  Trade something the seller wants more than his leveraged house; such as a nice free and clear lot, Mobile Home, Vacation Hide-a-Way, or toys like RVs and boats.  The key is to be able to obtain what you trade for less than its trade value using any of the creative financing techniques listed here.

Don’t Buy, Lend:  Offer payment assistance in the form of a stream of interest-only payments that can be converted to equity when the owner sells.

Equity-Share With the Owner: When an owner simply can’t afford his home, buy half of the equity with a zero payment, zero interest Note that pays less than half of the payment.  He’ll get to keep his lifestyle, and you’ll get management free equity.

Take Over Car/Truck/Boat Payments:  Many people value their toys more than their homes.  Often, payments for these are less than house payments.  When you see that keeping their toys is a high priority, help them keep them for an equity share.

Don’t Buy, Don’t Sell:  Lease an ugly fixer-upper long term for only marginal rents.  Fix it up and sub-lease it at market rents.  Keep the cash flow.

Don’t Buy, Sell:  The easiest, safest, and least expensive way to make a profit on a house is to sign up a good deal and to record a contract that contains a few contingencies that can be resolved over time.  This will buy you time.  The next step is to find another buyer who will pay you a profit, and sell your contract to him; or take your profit in the form of a share of the equity.

           If you can learn how to structure, negotiate, and document any or all of the foregoing concepts, you’ll be able to remain active in this market without any help from the government, loan sharks, or institutional lenders.  As new and complicated as the world of creative financing might seem at first look, once you become comfortable with the concept of transferring equity from seller to buyer and back again using debt instruments that you help draft, you’ll never again be held hostage by lenders who dictate all the terms, timing, and ultimately, your profits.

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