You may have heard of the term “creative financing”. This was a phrase that got thrown around a lot during the lead-up to the housing crisis that began a few years ago. For many, “creative financing” seems like a nice way to talk about a sketchy way to get a home loan. Many people, particularly in my industry, will be quick to dismiss anything but traditional transactions that steer clear of any options that could be considered “creative”. I think this reaction is understandable, but unnecessary. There are legitimate ways of making real estate transactions happen without traditional financing. Bottom line, real estate is about buying and selling – really knowing how to get the deal done and making it happen.
Creative financing and how it takes form doesn’t mean taking up the practices of Robert Allen’s no money down real estate investing techniques. No need to burden yourself with figuring out balloon down payments, borrowing against life insurance policies or knowing about two and three-way exchanges. Creative financing the way I’ll outline it is about teaching the lesser-known ways that buyers can buy and seller’s can sell when other options appear to be unavailable to them. These are legitimate ways to make the deal happen.
There is no doubt that the best way for a buyer to buy a home is through traditional home lending. Step 1, find a trusted mortgage company. Step 2, obtain the best rates and chose the right closing package. Step 3, done. But while this route is tried and true, it also means that you need a significant downpayment. Not everyone has that, but that doesn’t mean they don’t have the ability to make a monthly mortgage payment or that they don’t want to take advantage of the incredible rates and home-purchase deals that are going on out there right now.
In today’s economic climate, we’re looking at interest rates under 4% and refinances under 3%! But lending is tight, and short sales, bank-owned properties, and foreclosures are common. Over 90% of people who want to buy do not have the cash sitting in the bank (or under their mattresses) to put down on a home (or purchase outright) without having to borrow the money. So what are buyers and sellers to do? More options are available than you might think.
Assumable loans are out there. They can benefit both buyers and sellers. They are generally easier to obtain than a new loan. Buyers take over the seller’s current mortgage at their current rate, payment and due date. Assumable loans are all subject to lender approval. Sellers can sell at a higher price because they’re offering the assumption and often the current terms are more favorable than they would be in a new deal with new financing. If there is a deficiency between the assumable loan amount and the sales price, sellers have the option of offering a purchase-money mortgage (otherwise known as seller financing) for the remainder at a higher interest rate.
“Purchase-Money Mortgage” is the term used to describe seller financing. This is when the loan is created by the seller and provides some or all of the money necessary for the buyer to purchase the home.
Seller financing is the least understood but most effective form of financing for marginal buyers. Sellers who are fully educated about how to provide this, usually are very happy to provide it and are more likely to sell their home.
Terms of seller financing are always negotiated. This is where hiring a Realtor is important for those looking to either buy or sell in a deal structured to use this kind of financing. You want to know what’s fair, what’s appropriate, and how the negotiations should be handled. An experienced Realtor can guide you, step-by-step, through the process.
This form of financing leaves full control over the property in the hands of the original seller. Challenged buyers will pay an up front fee for the “option” to purchase the property at a later time. Buyers can move into the property before a purchase is ever made, and a lease will dictate the terms of the occupancy prior to closing. Terms of the sale and the lease are negotiated at the time of the original agreement.
This approach benefits the buyer in that they get to secure the home and move in right away. To do so, a buyer will place a deposit on the home (usually $5K-$10K which can be applied to the sale price at time of settlement). Sellers can also benefit in many ways. They receive an up front fee ($5K-$10K) and retain full ownership of the home until the buyer/renter secures financing to purchase the home. Rates are locked in at current prices for a closing at a later time.
Many Realtors won’t recommend this option, often because they’ve never heard of it. This option works for challenged buyers who have assets (a car, a boat, stock portfolios, the Hope Diamond, etc.). Buyers can obtain loans secured against their assets and the real estate to raise the money needed to purchase the home.
The old fashioned barter system also works. Of course, a buyer and seller have to come to terms that are agreeable to both, but it certainly isn’t outside the scope of possibility. The most famous example is the story of Kyle MacDonald, who started on his journey to home ownership by trading a red paperclip for a fish-shaped pen. One year and thirteen up-trades later, he move into a two story farm house that he traded a role in a movie to get. If you have something of unique value to someone who owns a property, you never know what can happen!
There are just so many ways to purchase a home and conversely just as many to sell. Motivated buyers and sellers need to understand their options and have a superstar real estate professional to help counsel and guide them through the process. Sellers without the luxury of time don’t have to give up and get stuck with a short sale or foreclosure! Buyers don’t have to settle for being told that they can’t own a home!
Where there’s a will (an a bit of creativity) there’s a way.
I’d really love to hear your thoughts. Please leave them in the comments. I truly do welcome the discussion!