Creative financing
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'There are many, many inaccurate and misleading statements in this article. It would be more benificial to delete this entire article and start from scratch!!' 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".
[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 established 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 transferred to the buyer and the newly created (owner-financed) mortgage is sold to a note investor for cash, simultaneously.
[edit] Subject-to
A subject-to transaction is a creative finance technique where a buyer is able to take title to property without procuring a note of his or her own. The transaction usually involves the seller of the property leaving his or her existing financing in place so that the buyer does not need to pay transaction costs associated with obtaining a traditional loan. This process is similar to assuming a loan, but differs because it usually takes place without the consent of the original lending institution and violates the terms of the loan. This technique is useful because it affords the buyer the ability to obtain financing without the need for transaction costs and does not tie up capital to procure a new note. The technique also allows the buyer to purchase property quickly without going through the arduous loan process.
Once a property is acquired subject-to there are a number of exit strategies that the buyer can use to turn a profit if the deal is sound. The new note can often be used to produce a wraparound mortgage and finance individuals that have a hard time getting a loan through a traditional lending institution. Certain states allow the buyer to enter into a lease/option agreement using the existing financing. The house can also be sold to a retail buyer or wholesaled to another investor for profit.
