Creative financing basics
By Seth Joiner
We could just talk about the many different option that are available but I will
leave that for up coming articles. What I want to focus on is to get you
thinking about the basics of creative financing and when we can use it. My hope
is that we can expand the box that most wannabe investor find themselves in.
Most people have heard about getting a bank loan and then coming with a down
payment to purchase a property. But how many of you know anything about lease
options? Wrap around mortgages? Seller financing? Hard money lenders? and many
many more. I want to take some time to briefly explain about each of these and
go into greater detail in subsequent articles.
Lease options are often confused with seller finance so let me clarify right now
that there is a big difference. First we need to realize that there are two
parts 1) Lease/Rent and the 2) the option to buy. They really are two separate
contracts and if we combined the two we can get ourselves into a world of
problems if you are the seller. If you are the buyer you don’t mind them being
one contract as it looks like seller financing. In a court of law instead of
being a renter they may consider you a buyer.
Wrap around mortgages can be complicated so I will do my best to explain it in a
way that is simple and to the point. Let’s say that the seller owes $50,000 on
their mortgage and they are making payments of $329.75 to the bank. They would
like to sell their house for $100,000 and make the difference. They find a buyer
who agrees to pay the $100,000 and are going to be making payments of $665.30
amortized over 30 years to the seller. The seller then in turn makes the
mortgage payment to the bank and keeps the difference. As a buyer you want to
make sure that the seller is making the payments so to protect yourself set up
an escrow account that will make those payments directly to the bank and then
give the rest to the seller.
Seller financing may or may not be the same as a wrap around mortgage depending
on if there is an underlining mortgage on the property. As 40-50% of property is
free and clear the chances that you can do some form of seller financing is
good. Now there are two different forms of seller financing that I would like to
focus on. 1) 100% seller financing and 2) partial seller financing. Since 100%
seller financing is similar to wrap around mortgages then I won’t talk about
this.
Partial seller financing is usually where the seller accepts to take back a
percentage of the property value in the form of a second mortgage. So let’s say
that the seller owes $50,000 to the bank and wants to sell the property for
$100,000 but they want to pay off the 1st mortgage. Now lets say that the person
buying the property only qualifies for an 80% loan to value and so the bank will
only bring $80,000 to the table. Partial seller financing could bring in up to
the 20% needed to close on the deal and whatever they bring to the table would
be held as a second mortgage on the property.
Hard money is actually the easiest money that you can get your hands on if the
property qualifies. They will give you up to 70% of ARV (after repair value) so
you can purchase the property, pay for closing costs, holding costs and repair
costs as long as you stay below the 70% mark. Obviously this is a program for
distressed properties but it is a great opportunity to gain quick equity in a
property and refinance the property with a positive cash flow.
Knowing what options are available to you is key to becoming a professional
investor. Some would say that education in the key to financial freedom and I
would agree. Keep learning and then get out there and make it happen.