The Ultimate Guide to Creative Financing

Want to learn more about creative financing for real estate investors? Are you curious about owner financing, seller financing, contracts for deeds, all inclusive deeds of trust (AIDT), wrap around mortgages, subject to, installment land contracts? Learn about these and more in The Ultimate Guide to Creative Financing.

Creative Financing
Creative Financing

Class Recording:
Creative Financing 101

Interested in learning about all the different types of creative financing? Then check out this special real estate seminar I gave on the six types of creative financing.

Also, considering checking out additional creative financing classes.

Warning

I strongly recommend that you always get the advice of and use an attorney on creative transactions.

These can be complex, nuanced transactions that—if done incorrectly—can get you in expensive trouble.

Win-Win or No Deal

“With great power comes great responsibility.” – Spider-Man

Yes, you could probably structure transactions that are not win-win where you take advantage of people… don’t do it!

If I hear about it… you’ll be banned from our investor meetings and removed as a member and from this website.

You should only do deals that are win-win for all involved… win-win or no deal.

Benefits of Creative Financing

…and why you might want to consider doing these types of deals.

  • Little or no down payment required
    • Same benefit as Nomad™ (except you don’t need to move in)
    • Traditional down payment – usually 20%-25%
      • Can do it with less in some circumstances
  • Possible to buy without bank qualifying
    • Can buy with credit blemishes (bankruptcy, foreclosure, short sale)
    • Can buy without income qualification
    • Always disclose material fact
  • Buy in an LLC or other entity up front
  • Amplified (some would say improved) Return on Investment
  • Walk away – see my presentations on Warning: The Dangers and Risks of Real Estate Investing and Reducing Risk While Nomading™
  • Self Directed IRA/Self Directed 401K without 30-35% down or partners
  • Partnerships (without a credit partner)
  • Could allow you to buy a property while waiting to qualify for more traditional purchase
    • Increase income, save down payment, job history
  • Less likely to have Capital Expense challenges because model strongly suggests inventory turn-over

Downsides of Creative Financing

…and why you might want to consider NOT doing these types of deals.

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  • Limited selection of properties
    • Buying traditionally allow you to pick the best properties from the largest selection
  • More labor intensive to buy this way
  • Lower ROI for time invested
  • It is possible to structure them in ways that make them questionable
    • Don’t do that!

Jargon Versus General Discussion

  • For this class—because it is YOU—I’ll be using jargon
    • Subject to, ARV, LTV, even down payment, return on investment, etc
  • When talking to Sellers and presenting… use more general terms and explanations
    • I’ll buy it “subject to” and give you $5K for your equity
    • I’ll buy it and I’ll take care of your mortgage payments and maintenance and I’ll give you $5K at closing
    • See my class on Seller Presentations for more information.
  • General discussions over describe more than one technical strategy
    • “What if I covered the monthly payments on your loan and the maintenance on the property so you wouldn’t have to worry about that? Is that something that would work for you?”
    • Discuss: Which type of creative financing am I referring to here?

You Are Not Your Sellers

Remember, you're not your sellers. Whether or not you would do something is not a reflection of what others would do.

Why Would Sellers Do Creative Financing?

  • To solve a problem they have
  • Can’t afford house anymore
  • Stop making two mortgage payments
  • Negative emotions associated with house like a divorce or death
  • Access equity quickly and/or easily
  • Don’t want to manage it and/or maintain it
  • Want an income stream from their equity
  • What would friends, family, neighbors think
  • To get their price (even if it means being flexible on terms)

Why Wouldn’t Sellers Do Creative Financing?

  • Not a good solution for them
  • Fear
    • Tenant trashing the place, not paying, calling with repairs in the middle of the night
    • What would friends, family, neighbors think
  • Unrealistic expectations
    • I am going to get a cash offer for full price any day now
    • My home is nicer than all the others on the block
    • My agent is just not marketing it well enough so I’ll find another agent
    • I bought it for $X, so if I were to sell it, I’d need to get $X plus $Y
    • I’d want 20% (or more down)
  • They need or are willing to wait for more traditional loan or cash transactions

Creative Buying Process

Creative Buying Process
Creative Buying Process

This is an example of the creative buying process. Many folks will close the transaction BEFORE occupying the property with a tenant or tenant-buyer but it is ideal if you can line that up before closing. The ideal is represented in the process above.

Creative Financing FAQs Matrix

Creative Financing FAQs Matrix
Creative Financing FAQs Matrix
Creative Financing FAQs Matrix Legend

  • Y = Yes
  • N = No
  • U = Usually, but not always
  • S = Sometimes, but not usuaully

These are intended to be general guidelines.

There are exceptions and unusual situations for every case… including this statement

Think of this like a puzzle: You’re trying to minimize and mitigate your risk, maximize profit but make a win-win deal. How could you structure it to accomplish that?

You need to understand how the different pieces fit together to accomplish that.

Fees Collected From Your Tenant Buyer

Some people like to look at that as money to cover the costs of acquiring the deal: marketing, down payment, closing costs, attorneys fees, loan costs, etc.

Some people like to look at as improved cash flow: $6,000 down from your tenant buyer for a year long lease purchase is really $500 extra per month cash flow.

This is like selling your home for $6,000 less if you applied this amount toward purchase (which is negotiable, but recommended).

Some people look at it like an security deposit on steroids to protect your from possible tenant challenges.

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