In some markets, as I experienced in the late 1970s and again in the late 1980s, creative financing may be the only way to get transactions done. There comes a time when conventional and institutional financing can be overly expensive or not available. This situation may be caused by general economic conditions or your personal financial position. Once you have a number of properties, institutional lenders may place limits on what they will lend you as an investor. You may have to wait until you have the equity in or positive cash flow
from your properties that they require in order to lend you more. Finally, sometimes sellers have specific situations that may require or allow creative financing. This presents a unique opportunity to construct a creative transaction that meets the seller's goals and
still works for you.
Creative financing is the way around these binds, it also can help you get into properties with less of your own money used as a down payment and lower your monthly debt service. Thus, you will want to master such concepts as:
1. Owner financing - where the seller carries the mortgage for you,
2. Assumptions - the responsibility for the seller's mortgage when this is allowed by the
seller's mortgage lender.
3. Wraps - where the owner offers you a new loan while keeping and paying down their original loan (the new loan "wraps" the original).
4. Lease options - Leasing the property from the seller until you have the equity or cash to buy it.
5. Private seconds - where you obtain a second loan lo cover your down payment on a primary mortgage loan.
6. Syndications - where you involve other investors and partners in your acquisitions.
Millionaire investors use all the tools in their toolbox to get the deal done. The chart on the facing page illustrates how the numbers might work in a scenario where the investor attempts to take ownership of a $100,000 property through creative financing. You'll note that conventional financing [column 1) is included as a point of reference for these creative variations.
In all four of the ownership scenarios, it is important you understand that a private second loan can come also come from the seller. Just know that secondary liens in general cany less favorable terms for the buyer—it's about collateral. First hens are generally secured against the property and first in line if the deal goes sour and the property must be liquidated to pay back the loan.
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