Creative financing is any type of financing other than getting a conventional loan with a standard down payment. Creative financing techniques and the benefits of each include the following:

Master Lease Technique – You master lease the property by paying the owner a set amount each month, and you manage the property as if you own it. You also negotiate an option to buy, usually at a price at or near the current market value of the property. Your goal is to increase the income and create cash flow as well as increasing the value over the leased period of time, usually a three to five year period. This method is used mostly when an owner doesn’t want to pay taxes on his gain at the present time, but is tired of owning and managing the property.

Seller Financed Firsts – The seller carries back a first loan on the property. The benefit to the seller is that they only have to pay taxes on their capital gain based on the principal amount paid back each month. A good thing about this financing is that you not only don’t have to qualify with a lender, but the interest rate is negotiable. You can often negotiate a very low interest rate for two to five years.

Seller Financed Seconds – This can work in a couple of ways: One way is that the seller carries back a second mortgage on the property. In this situation, you are usually assuming the first, so that you don’t have to go out and get a new loan.

In another scenario, you’re getting a new loan and the seller agrees to carry back part of the purchase price as a second mortgage. This method is especially viable if the seller doesn’t want all cash when he sells the property. By carrying a second, he can get his money at any time that the two of you can agree upon. This can be in the form of a balloon payment at some future date, principal only payments, interest only payments, low interest rates, etc.

Secondary Financing By Other Sources – A conventional lender or a private lender provides you with the funds for your second mortgage. In these transactions, you can expect to pay points, fees and generally a higher interest rate. This method is good if you need quick cash to close a good deal ahead of your competition. The negative on this financing is that you may over leverage yourself in the property and have a negative cash flow, a situation you always want to avoid.

Wraparound Mortgages – The seller gets one payment from you every month to pay the amount due on the first mortgage and to pay the second mortgage due him. This gives the seller assurances that the first mortgage is being paid if they are still named on the loan and gives them the right to foreclose or take back the property if you default on the payments.

Options – An agreement with a seller that gives you the right to buy the property at a set price for a certain period of time. Typically, sellers will give you this for an upfront payment, ongoing payments to cover certain expenses or as a throw in to another property that you bought from them.

Blanket Mortgages – You offer the seller or the lender the added security of the equity you have in other properties as collateral for this loan. You use this method when you don’t have a solid track record for a lender or seller to look at. Be careful when doing this, because you are putting the other property at risk.

Funding With IRAs – You can set up a self-directed IRA account from which you can invest in real estate. Note that there are strict rules regarding what you can and can’t do when using these funds.

Remember that creative financing is typically a negotiated item.  Most property owners do not typically offer this financing upfront.  Establish rapport with the broker or seller and approach them understanding their wants and needs.  Sometimes you are presenting them with a solution to a problem they didn’t realize they had or realized it, but didn’t see the solution.  Never be afraid to ask, because if you don’t ask, you don’t receive.  Life and real estate are a negotiation.  Good luck in creatively financing your deals.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.