We can only talk about the many different options available but I will leave it for future articles. What I want to focus on is to make you think of the basics of creative finance and when we can use it. My hope is that we can expand the box that most wannabe investors are in.
Most have heard of getting a bank loan and then making an advance payment to buy a property. But how many of you know something about leasing options? Wrap around mortgage? Merchant Funding? Hard money lender? and many many more. I want to take some time to briefly explain about each of these and go into more detail in subsequent articles.
Leasing options are often confused with the seller financing, so let me clarify right now that there is a big difference. First, we must realize that there are two parts 1 Lease / Rent and 2 option to buy. They are really two separate contracts and if we combine the two, we can get into a world of problems if you are a seller. If you are the buyer, you do not think they are a contract because it looks like seller finance. In a court instead of being a tenant, they may consider you a buyer.
Wrap around mortgage can be complicated so I will do my best to explain it in a way that is simple and to some extent. Let's say that the seller pays $ 50,000 on their mortgage and they make 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 $ 100,000 and will make payments of $ 665.30 amortized over 30 years to the seller. The seller, in turn, makes the loan to the bank and keeps the difference. As a buyer, you want to make sure that the seller makes the payments to protect yourself, creating a barring account that makes these payments directly to the bank and then give the rest to the seller.
Seller finance may or may not be the same as a mortgage cover depending on whether there is an underlying mortgage on the property. Since 40-50% of the property is free and clear, the chance that you can make any kind of seller financing is good. Now there are two different types of sales finance that I would like to focus on. 1 100% sales financing and 2 part financing. Since 100% sales finance is similar to fixing mortgages, I do not talk about this.
Partly seller financing is usually where the seller agrees to withdraw a percentage of the real estate value in the form of a second mortgage. So, we can say that the seller pays $ 50,000 to the bank and wants to sell the property to $ 100,000 but wants to pay off the first loan. Now we can say that the person who buys the property only qualifies for an 80% loan to value and then the bank will only bring $ 80,000 to the table. Partial seller finance can provide up to 20% needed to close 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 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 buy the property, pay for closing costs, keep costs and repair costs as long as you stay below the 70% mark. Obviously, this is a program of unpleasant real estate, but it is a great opportunity to quickly acquire equity in a property and refinance the property with a positive cash flow.
Knowing what options are available to you is the key to becoming a professional investor. Some would say that education in the key to economic freedom and I would agree. Keep learning and get there and make it happen.