There are many ways to finance a real estate purchase. You can get a loan from a bank, use your own money, or get funding from an investor. However, there are also many creative financing options available that can help you buy property even if you don’t have the money upfront.
Getting a loan through a bank may not be ideal or feasible for every real estate investor. Luckily, there are creative financing options available for those who prefer not to go the traditional route. Creative financing options include owner financing, subject-to agreements, self-directed IRA, private lenders, and crowdfunding, to name a few. In all of these options, buyers circumvent the typical bank loan process and finance their real estate deal a different way.
Not everyone is always qualified for a mortgage loan. When people apply for a loan, lenders and underwriters look for a few qualifications. Depending on the conditions of the market, it may be more difficult to get approval. That’s where creative financing comes in.
Owner financing is one of the old school ways of creative financing. Owner financing is when a seller loans the buyer money to purchase their property. Before mortgage loans, this was the conventional way that sellers would sell their properties to buyers. Now it’s become one of the creative financing tools. In the owner financing agreement, the seller acts as the lender and makes payments directly to the buyer. This type of creative financing is beneficial for buyers who cannot qualify for a traditional loan but have good credit. Creative financing usually opens the doors for borrowers with below-average income, below-average credit, or inconsistencies. However, when working with owner financing, the seller still has to do his or her due diligence on the borrower. Any type of creative financing has certain contracts in place to protect or shield the collateral holder.
Let’s say in this type of creative financing the borrower is unable to pay the loan back, then the property would be returned to the seller and the borrower would also be charging additional fee’s to the borrower/buyer.
Subject to Agreements
Subject-to agreements are also creative financing options that can be used by buyers who don’t qualify for traditional loans or do not have enough money upfront to purchase a property outright. With subject to agreements, buyers take over an existing mortgage with all its obligations and pay it off in installments according to the terms of the agreement. This option does come with some risks; however, if done correctly, it can help investors acquire real estate without taking on too much debt.
The main risk to of being subject to agreements is the buyers making payments for the seller’s loan. The buyer has to make sure they have a separate agreement in place. This can, however, be a great creative financing technique given the current market conditions. We all know interest rates have gone up substantially. If a buyer finds a seller that has a fixed rate below 3%, they can work out a deal with a ‘Subject to Agreement. Wouldn’t that be a win-win for both parties and a great utilization of Creative Financing?
Another creative financing option is to use a self-directed IRA. This allows investors to purchase real estate using funds in their retirement account. It can be a beneficial way to increase your portfolio with minimal risk, since the investor is not taking on any additional debt or loans. Self-directed IRAs also offer tax advantages that are not available with traditional financing options.
A lot of workers have their retirement plan holders do not know they have this method of creative financing at their disposal. It’s a great way to avoid getting a mortgage while simultaneously being able to finance the deal.
Private lenders who are also known as hard money lenders are another creative financing option for real estate investors. Private lenders provide financing for deals that may not qualify for traditional bank loans due to their higher associated risk levels. Typically, private lenders have less stringent requirements than banks and are more willing to work with creative financing solutions such as owner carryback/seller financing and subject-to agreements.
Private lenders are always the escape route of creative financing whenever a mortgage lender is unable to provide financing to borrowers and they really want the property. Private lenders usually provide a six-month or one-year note with interest-only payments. During that timeframe, the borrower can refinance the note with a mortgage lender.
Finally, crowdfunding is a creative financing option for real estate investors who do not have access to large amounts of capital. Through crowdfunding platforms, many people can make small investments in a property, which can add up to the total cost of the project. This type of financing may come with more paperwork and stricter requirements than traditional loans; however, it offers investors an opportunity to access creative financing without having access to large sums of money. This type of creative financing is more for someone who is well prepared.
Creative financing is an opportunity for creative minds to find creative solutions. With creative financing, you can use creative methods of structuring loans or other forms of financing that are outside the box and not normally used. Creative financing gives buyers access to new opportunities when it comes to real estate purchases and can help sellers get out of difficult situations.