Creative financing

From Wikipedia, the free encyclopedia

Creative Financing is a term used widely amongst real estate investors to refer to non-traditional means of real estate financing, or financing techniques not commonly used. The goal of creative financing is generally to purchase, or finance a property, with the buyer/investor using as little of his own money as possible. Otherwise known as leveraging, OPM (Other People's Money). Using these techniques an investor may be able to purchase multiple properties using little, or none, of his "own money".

Contents 1 Types of Creative Financing 1.1 Hard money loans 1.2 Private mortgages 1.3 Simultaneous Closings 1.4 Subject-to 1.5 Land trust 1.6 Short sale 1.7 Lease option, lease to purchase 1.8 Owner carry back 1.9 Seller seconds 1.10 Note buyers 1.11 Credit cards 1.12 Credit partners 1.13 Partnerships 1.14 Retirement accounts 1.15 1031 Exchanges 1.16 No and low doc loans 1.17 Loans on other property 2 The good side of creative financing 3 "Creative Financing" gone too far 3.1 Loan fraud 3.2 Legal details 4 References 5 External links

[edit] Types of Creative Financing

Here are some, but not all of the techniques commonly referred to in creative financing. Many of these are commonly used in conjunction with others, or on a temporary basis while more permanent financing is arranged.

[edit] Hard money loans

Hard money loans (abbreviated as HML) are similar to private mortgages except that they are made through a hard money lender. A hard money lender may get his financing either from his own contacts with private lenders, or financial institutions with whom he has establised his own lines of credit.

[Hard money loans] are made to real estate investors for the purpose of investing in and rehabbing real estate. Rates are a little higher than borrowing directly from a private lender, as the hard money lender may be collecting yield spread. The hard money lender will also charge points of 3% to 6% or more. These points are often paid up front, but a few lenders may roll these into the loan.

[edit] Private mortgages

A private mortgage is a loan secured by real estate that is made by a private lender, instead of a traditional lender, financial institution, or government institution. These loans are most commonly short term and last anywhere from 6 months to three years. These are asset based loans made for the purchase and rehabilitation of real estate. Because the loans are asset based, the decision to loan is based on the criteria of the property and not usually the qualifications, or credit of the borrower.

Interest rates on these loans are considerably higher than traditional loans and may range from 12% to 18%, with points sometimes being required as well. Loans are made on an LTV (loan to value) of 65% to 70%, to preserve sufficient equity in the property for the private lender in the event of default.

[edit] Simultaneous Closings

A Simultaneous closing allows a home seller to offer owner financing on a property without having to hold any mortgage. On closing day, the property title is transfered to the buyer and the newly created (owner-financed) mortgage is sold to a note investor for cash, simultaneously.

[edit] Subject-to

[edit] Land trust

[edit] Short sale

[edit] Lease option, lease to purchase

[edit] Owner carry back

[edit] Seller seconds

[edit] Note buyers

[edit] Credit cards

[edit] Credit partners

[edit] Partnerships

[edit] Retirement accounts

[edit] 1031 Exchanges

[edit] No and low doc loans

[edit] Loans on other property

[edit] The good side of creative financing

[edit] "Creative Financing" gone too far

[edit] Loan fraud

[edit] Legal details

[edit] References

• Don Konipol.

[edit] External links

• ABC News story on Creative Financing.
• Realty Times on, "Too Much 'creative financing'."