Creative Finance To Finance Real Estate Deals

Theres an old saying in the real estate industry no matter how much money you may have, its never going to be enough. Anyone involved in real estate who limits his investments to only what direct resources are available to him is an investor who has little or no future in real estate investing. Real estate requires investment and there is no way to make a profit without that. You could invent a better mousetrap in your garage and make millions out of it. But you cannot invent or create real estate and it exists and its nature cannot be modified. The only way you can acquire it and hopefully profit from your acquisition is by investing money in it.

Hard money financing of real estate investments is expensive because of the high interest rates and the fact that the lender usually protects himself by lending only an amount that he is sure of getting back, if the borrower defaults.

Banks, especially under the current circumstances, are reluctant to finance real estate investments and when they do not only are the interest rates high but the loans often have so many conditions attached to them that the borrowers operational flexibility is often severely restricted.

Private investments are usually friendlier, and offer better interest rates and fewer conditions but are not always available at the right time.

Creative financing is the best way to have the resources for real estate investing. From the time commerce began, financing business using OPM resources has been accepted as the best way to work. And what are OPM resources? Well, OPM stands for Other Peoples Money. The shrewd and creative real estate investor knows how to leverage resources around him for his benefit.

Among the most common forms of creative financing in real estate is a method called Seller Financing. Under this system, the investor or buyer gives the seller back a mortgage for his equity in the property. This is a de facto second mortgage and the intention is to pay off both the first mortgage and the second (Sellers) mortgage at the time of closing. By using this technique of getting a second mortgage for the sellers equity, the investor is able to complete the purchase for little or no down payment. In fact often his only expense is the purchase of document stamps.

Another attractive creative financing option for the real estate investor is to persuade the seller to allow the investor to take over the sellers mortgage. There will be no financing or recording costs involved and the capital investment that the investor has to make is kept very low. However, the investor accepts the responsibility of paying off the mortgage on schedule or, in case of his default for any reason, returning the property deed to the seller.

A common short term financing option is the subject to method. Simply put this means that the property is bought subject to the existing financing remain operative. In this case the title is transferred, but the loan remains in the sellers name and he continues to make the payments. This suits the buyer who will be able to avoid down payments and will be able to arrange refinancing in a few months. But there is really nothing in this to attract the seller. This type of creative financing is most common when buying pre-foreclosure properties because the seller is in a position where the property must be disposed of immediately and since the buyer does not need to make a down payment, the transaction can be concluded extremely rapidly.

The lease option also remains popular. This is a traditional form of creative financing for real estate investing. Under a lease arrangement the investor gets the property for little or no down payment and then has enough time, while he has control over the property, to arrange financing to enable him to purchase it. Often a part, if not all, of the monthly lease payment can be adjusted against the future purchase of the property, if it takes place.

Although not as common today as some years ago, opportunities in real estate investing may present a property with no mortgage or other encumbrance. In these cases the investor and seller are free to reach whatever financial settlement is acceptable to both of them. In such cases it is common for the seller to take back owner financing for the purchase price. Since this is a one to one negotiation, everything can be adjusted to suit the needs of both parties interest rate charged by the seller, duration of the loan.

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