Creative Financing

Creative Financing

Seller Carried financing allows you the most flexibility. The creativity is a matter of the contract clauses, and terms that you agree to. A lot of owners (sellers) will let you provide the paper work, and that gives you the most control. Let's go over some of the finance contract clauses to give you some ideas of what can be done. As you read about the real estate deals I have presented in this book you can see how some of these suggestions were used in actual practice.

Important Information: With owner (seller) financing, property appraisals are not mandatory (I do them anyway, unless it is an obvious good deal), neither are the other common inspections required such as termite inspection. Without a property appraisal the seller can sell the property for any price the buyers are willing to pay. This last statement can make the more knowledgeable party in a transaction some money.

If you sell a property and the buyer gets a new loan the appraisal sets a limit on the price you can get. If you carry the note you can set the price at anything the buyers will pay, same is true for terms and interest rates.

Payments: The amount of payment can be for any amount you both agree to. You could have a loan that pays out the principle and interest over a 10 year, 15 year, 30 year term, or any number of years. You can do a 20-year amortization with a 5-year balloon payment, or any combination of those. You can do interest only, with no payment towards the principle. Or a small payment in the beginning, increasing at set intervals (may create a negative amortization. You can include or exclude taxes and insurance payments. You can also set the first payment to start on any day, or month you agree to.

Interest Rate: You can set the interest rate at whatever the two parties can agree to. If rates on bank savings accounts are low, you can get the seller to carry the note because they can make more from you than from alternative investments. You might get a lower rate than you could get on a conventional loan.

Closing Cost: Either party can pay the closing cost, or they can be split any way you can agree to. There is less paper work, and the closing cost are lower. The closing is faster.

Title Insurance: I always get title insurance even if I have to pay for it even though it is not required on owner-financed deals.

Down Payment: Any amount that the seller will take - even zero down.

Repairs: Again, any repairs needed can be deducted from the price, with you doing them later. Or you can buy as-is.

Surveys: I always get a survey, not always before closing. If the deal is a really good one, and if I do not care exactly where the property lines are, I might wait rather than delay closing. As a rule, it is best to survey the property even if the seller will not pay for it. It is cheap insurance.

Prepayment: You always want a no pre-payment penalty clause. You want to be able to pay off the mortgage without paying a penalty. I have agreed to prepayment clauses when I was sure I would be holding the property long term.

Due on sale: You DO NOT want a "due on sale" clause if you are the buyer. Without this clause you can sell the property and do a wraparound mortgage. You can trade the property, with the new buyer assuming the old loan. Avoiding "due on sale clauses" gives you maximum flexibility. As a seller you DO want the clause.

Points: None, you can almost always get around paying points on owner carry notes.

Variable interest Rates: Fixed term loans at a low interest rate are best for you and the buyer. If you firmly believe interest rates will drop, a variable rate tied to a national indicator (like the prime rate plus 1%) can work to your advantage.

Late Fees: Never, unless you are the seller, then always.

Tax and Insurance reserves: Most owners will let you the buyer, pay the taxes and insurance yearly. This lets you to avoid tying up your money in an escrow account, interest free.

Rent To Own with right to sub-let

When an owner wants you to put up more down payment than you have, try a rent to own with right to sub-let. Have a part of each payment apply to a set future purchase price. If you find a house that you can rent for more than your rent payments, then this will work. I know people who started their whole real estate investment career with this one.

The owner gets the steady income of your leasing the house, and you get to build up money applied to the down payment. Just be sure the numbers work before agreeing to the deal, and put everything in writing. There is an more indepth article on this technique on this site.

Contract For Deed

My favorite way to sell. With a contract for deed, you, as the seller, finance the buyers purchase with a contract that spells out the terms of the loan. The C.F.D. contractually obligates the seller to deliver the deed or title free of liens and unencumbered, to the buyer after the buyer has met the terms of the contract. Those terms can be anything the two parties agree on, subject to state law. State law governs contract for deeds, so check your states' rules before using a contract for deed.

Lets say you want to sell a property to a buyer and take a low down payment. You decide to use a contract for deed because you can do any of the following with this type of contract.

• Delay the closing cost.
• Sell with no appraisals or inspections at any price you can get.
• Charge a higher interest on the loan.
• Foreclose easier if your buyer does not pay.
• Avoid most of the normal closing cost.
• Wrap the new loan over your loan, (You may not have to pay off any balance you owe on the property).
• Sell the property as-is.
• Sell to a non qualifying buyer.
• Pay your income taxes on an installment sale bases.

You can do anything the parties involved agree to, as long as you do not violate the state usury laws (as to the interest rate) and execute a valid contract. The contract for deed is recorded at the county court house, not the deed, The title remains in the sellers name.

Wrap Around Mortgage

This type of loan can be used when there is no "due on sale" clause contained in the underlying mortgage, and the seller wishes to control the underlying mortgage. The buyer makes payments to the new lender, (or seller if owner financed) and the new lender (or seller) makes the payment on the old loan. The total amount of the new wrap around loan includes the existing loans balance, and the additional money owed to the seller.

Example: You have a house for sale with an existing mortgage note at 6% interest, with no "due on sale" clause. You sell the house for more than you owe, with the buyer giving you a wraparound mortgage at 8% interest with a "due on sale" clause. You collect on the new loan and keep making your existing payments. Some of the benefits to you of using a wraparound mortgage in this example are: Your buyer is paying you at a higher interest rate, allowing you to make money on the interest rate spread. You can report your taxes on the sale's profits to the IRS using the installment sale method. Your buyer cannot resell without paying you off, (the due on sale clause), so that you can pay off your loan.

This works well when the buyer wants to make a low down payment and cannot qualify for a regular mortgage. For the buyer, it can solve a finance problem. For the seller, this type of loan can create extra profits because of the interest rate spread.

If you buy a property with a wraparound mortgage have your attorney check the contract. You will want a clause that allows you to make the payments directly to the existing loan holder if the seller fails to keep the payments up to date.

Assumption

If you find a house with a existing mortgage at a low interest rate that is assumable, you should take over that note and get a new loan for the difference. This works best when interest rates are high.

Trade

A Like kind trade delays any income tax due on a sale. Always check with your CPA before doing a trade to protect your tax position.

Example: Lets say you are in a 22% tax bracket, of every dollar you make on a sale, 20% goes to Uncle Sam. You want to sell a property for $100,000 that has an 80% building to land ratio. You have taken all the depreciation on the building, and if you sell, you will owe taxes on the $80,000 at 20% - or $16,000 in taxes. That money will no longer be out there making you money. Solution? You trade the property for a higher priced property to keep the money all working for you.

In a two-way trade you find a property you want and trade with the seller. They take over your property and mortgage, and you take over their property and mortgage, and give them a note for the difference. Trades do not have to be between one buyer and one seller. You could do a three-way trade.

For example: say you find a buyer for your property but you need a trade to keep all your money working. You get the buyer to buy the property you want, and then make the trade with them. This is a very simple explanation, and trades are not simple.

When you are doing trades, work with experienced people such as your CPA and/or attorney. Trades must be handled by a third party. Discuss this with your CPA, and your real estate agent. If you do the trade wrong, or miss the time constraints, the IRS will want the taxes paid. More info at the IRS web site. More info on this site.

Trade For Non-Real Estate Items

You can take anything in trade when selling, or give any thing in trade when buying. Keep in mind, the IRS will consider the receiver as having got BOOT and will consider a trade as a taxable event.

Creativity Examples

There are many creative financing scenarios that can be done with real estate deals. Here are a couple of examples. The main thing is to find out what all the parties need out of the deal, and work a deal that gives everyone what they want. When you deal directly with the sellers you can be creative. When a Real estate sales agent is involved they tend to get in the way as they will always want to protect their sales commission.

Example: You find a property you want and the owner wants to be cashed out. You have very little money for a down payment and can not get the bank to go along. Try to get the buyer to borrow the cash they need with a new loan on the property. They then sell the property to you on an owner carry basis. Your payments to them covers their note payment. You can sell this idea by reminding the sellers that they will postpone part of the taxes they would owe on an out right sale.

Example: You find a property where the owner is tired of being a landlord. The purchase would require a new loan to give the seller his equity, and to pay off the sellers mortgage. You propose a lease/purchase with very little down. You will refinance after you build up enough equity to cover the required down payment. Or, you propose a wraparound mortgage with the seller collecting from you, and they continue to pay the existing mortgage. If they did not wish to deal with making the payments, their bank could do that chore for them each month, and you pay enough to cover the extra bank service fees.

The possibilities are as varied as the properties you have to choose from, and the people you will deal with. Each party involved in a deal has wants and needs. Find out what they are then, find a way to give them what they want in a manner that accomplishes your goals. Every problem that comes along is only an obstacle to be overcome.

Zero Down

Zero down deals can be done. I recommend them only for experienced property investors. After you are confident of your ability to evaluate the investment potential of a property, and know with reasonable certainty what you plan to do in order to carry the debt with out defaulting. By all means use maximum leverage. I only caution that you not risk the success of your overall plan. If you are not comfortable with a deal, don't do it. I use this question as my acid test

"Will I lose sleep over this deal, or worry if I did the right thing?"

My advice about the zero down deal is - think twice.

Ways to do zero down deals are as varied as the people involved and the circumstances. As you read through the actual real estate deals presented in this book, you will see some of the zero down or almost zero down deals that I have done.

• Use a credit card for the down payment.
• Get the seller to carry the full price.
• Use equity in another property to get the money for the down payment.
• Get an investor to put up the money.
• Look for people who want someone to just take over the payments.
• Look at the foreclosure list at the county court house and talk to the lenders, before the Sheriffs sales, about taking over the note.
• Think! be creative, a motivated seller and a motivated buyer is all that is needed.

IRA: You can use individual retirement account savings to finance your real estate investing. Visit with your CPA on the rules and procedures to do this. You must follow the IRS rules to avoid penalties and taxes. In can be done using a self directed IRA.