As of today, there are two main methods to finance your property purchase – traditional and creative. The first is what most of us are familiar with. You go to a bank, apply for a loan,put wait to get approved and make your purchase once it’s through. Creative financing on the other hand includes unconventional methods such as seller financing, subject to, land trusts, short sales, lease options and hard loans from private money lenders.
Mentors also often state that creative financing can give you an edge in real estate investing. What’s all the hype about this method of financing? What makes it better than the traditional methods?
Creative financing has benefits to both buyers and sellers.
Bypass the Lengthy Loan Qualification Process
One of the major hurdles in getting a loan from a bank or other institution is the red tape of qualifying for it. As an institution, it has to follow a step-by-step procedure which starts with the appraisal process. To add, it requires one to submit a lot of documentation. This is followed by the investigation into one’s credit history and the requirement of a personal guarantee.
Creative financing does away with most of these steps and allows for the process to be completed quickly. Also, there is no need for a personal guarantee as the loan is advanced against the same property.
Better Control and Reduced Risk
In traditional financing, the bank controls the terms of the loan. They decide the interest rate, the amount of the monthly mortgage payment and the pay-back period.
Creative financing gives you an opportunity to handcraft the terms of the loan. Sitting face-to-face with a private lender, you can present all the possibilities and negotiate to create a win-win situation for both. This will help reduce your risk and develop a partnership mentality where you can build a valuable network.
Little or No Money
The bank does not give you the entire required amount as a loan. It might give you only 80% to 75% of the loan and rest has to be paid by the debtor in the form of down payment. It does not make sense applying for a loan if you do not have the money for the down payment.
In case of creative financing, the down payment amount is reduced significantly. In many cases, there is no need for a down payment as a few private lenders agree to lend the entire amount for a higher rate of interest.
Adjust to Cyclical Nature of the Realty Market
The real estate market is cyclic in nature. A deal is profitable when you buy low and sell high. However, when the prices of property are low, the price situation is also generally low in the economy. The banks are not very keen on loaning money during this time. If you borrow from a private lender, you can get money when it is most needed and capitalize on the situation.
Making a Sale Possible
In addition to this, the method of creative financing makes a sale possible, particularly one that has been stalled because of the inability to obtain finance from a traditional source. Also, it offers sellers tax benefits and enables them to spread their tax liability across years.