Creative financing is a way for property developers, flippers and entrepreneurs to realize their dreams and build wealth when traditional avenues are blocked or stalled.
If well executed, it carries minimal risk to both borrower and lender.
Everyone knows how difficult it can be to get a loan from a bank – the forms, the red tape, the proof of assets, income and expenditure.
One hiccup and you will be red flagged and shown the door.
But it doesn’t have to be that way.
Creative financing strategies provide serious property developers with numerous ways to achieve their goals without the need for banks.
They are perfect for people who have trouble securing traditional financing or may want to maximize leverage in their projects.
They often involve negotiating directly with sellers, leveraging existing assets or structuring deals in ways that minimize or defer payments.
And often, they don’t require any money down!
Here are some prime examples of how creative financing can work for you.
Seller carrybacks
Also known as seller financing, this is when the seller acts as the lender, financing part or all of the loan.
Instead of receiving the full payment up front, the buyer makes monthly payments to the seller over an agreed period of time.
Terms are negotiable but the buyer would be expected to pay a higher interest rate than charged by a bank.
The seller receives the mortgage as security and has the benefit of a steady income.
This is a particular effective strategy for houses difficult to sell, especially if the price is non-negotiable.
It guarantees the seller their price and allows the buyer to meet it.
With the banks by-passed, it offers a big win-win for both parties.
Cross-collateralization
This is when the buyer uses the equity in their current property to finance the acquisition of a new property.
The caveat is that the lender has a lien on both the buyer’s current and newly acquired properties until the debt is repaid.
It allows the buyer to make a new acquisition without a downpayment or obtaining an additional loan.
Finding undervalued properties
Developing undervalued properties is another shrewd way to unlock the power of creative financing.
Properties may be bought cheaply for a variety of reasons.
They may not have sold for a period of time, the seller may need a quick sale or there may be misconceptions about the land’s true worth.
If the ARV (after repair value) of the property is significantly higher than the purchase price, buyers can use the loan-to-value (LTV) ratio based on the property’s future market value rather than its current one.
Wraparound mortgages
These occurs when a buyer takes over the mortgage of the seller.
It usually applies when the seller is compelled to sell for whatever reason, for instance if they are in foreclosure.
It includes a negotiated selling price, interest rate, terms and downpayment.
Importantly, the loan stays in the seller’s name and remains their liability, even though the buyer assumes ownership of the property.
The buyer’s mortgage essentially “wraps around” the existing amount owed.
The buyer makes monthly payments to the seller who in turn uses some of those instalments to meet their own mortgage payments.
Subject-to financing
Also known as an “assumption purchase” or “exact wrap”, this is similar to a wraparound except the buyer makes mortgage payments directly to the original lender.
Essentially, they take over the payments of the seller’s loan as it stands.
The seller does not receive any ongoing payments from the buyer.
It often allows the buyer to access cheaper rates.
But it relies on the original mortgage allowing the arrangement.
The buyer also carries the risk of the loan being called in by the lender.
Lease option
This is your basic rent to buy strategy.
The buyer leases the property with an option to purchase at a later date and an agreed price.
It gives them time to improve their credit rating or accumulate a downpayment to secure the property.
The only risk to the buyer is that if they change their mind or fail to secure that credit, they forfeit monies already paid.
Master lease with option to buy
This is an extremely powerful technique used to acquire property from landlords or commercial real estate.
Critically, it offers the seller an attractive way out of their investment and the buyer an enticing way into it.
Landlords who have underestimated the work required to maintain properties or people who have acquired or inherited property are good targets for this strategy.
The seller receives monthly lease payments without the burden of property management.
The buyer can sublease the property and complete the purchase at a fixed price within an agreed time frame.
Master lease with credit partner
Similar to above but a great tool for when the buyer cannot afford the purchase price of the property.
To solve the problem, they find a credit partner who can and then lease to buy the property off them.
The scenario provides a win for everyone.
Equity sharing
The buyer partners with an investor who provides part or all of the downoayment in exchange for a share of the property’s equity or profits upon sale.
It allows buyers with limited funds to acquire, develop and capitalise from property investment.
However, equity sharing agreements need to be clearly defined to avoid disputes down the track.
Private money loans
These are loans sourced from private individuals rather than traditional financial institutions.
They are often short-term loans and usually attract higher interest rates.
They offer a fast approval process and more flexible terms than banks offer.
The assets are held by custodians or middle men who also process transactions and keep IRS records.
Self-directed IRA (Individual retirement account)
Similar to a private money loan but where the lender is a self-directed IRA.
It gives retirees the option to use their savings to invest in real estate or alternative assets.
Critically, borrowers are prohibited from using their own IRA.
Get advice and finance today
Real estate offers both the canny investor and developer so many possibilities.
But sometimes, supercharging your investment goals or financing your property developer dreams seem out of reach.
Creative financing strategies can help crystallise your vision when traditional borrowing methods are unavailable.
They do however carry greater financial risks.
That’s where Equidy can help.
At Equidy, our founders have a deep and personal history in property, covering all aspects of real estate and property development in California over more than 40 years.
We believe anything is possible.
And our goal is to find a way with finance, backing you to build your property empire.
But we don’t just help you secure the money.
We will work creatively with you every step of the way to finance your property development faster, without tying you up in all the red tape that comes with a traditional lender.
We enjoy long and established relationships with investors, entrepreneurs and real estate professionals while leveraging our reputation and trust and using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
