29 Oct Creative Financing: How it Works
Creative financing is sometimes an unconventional method used by real estate investors who buy land or property. Such creative financing strategies are aimed at making it easier for an investor to buy property or real estate with less money. An investor can buy more properties using little, or even no, of his own money.
Creative financing is less risky
Most of our creative financing deals have no personal liability (the property is the only collateral). While some lenders will not count a personal guarantee as one of the conditions to get a loan, others do. This means that your other assets, such as your home, cars, business assets, and investment accounts are all at risk if you default on your debt.
Types of Creative Financing
Investors are sure to encounter a lot of creative financing strategies in their careers. When the bottom line is examined, most of the funding sources will have a few similarities. However, the cash you spend does not need to be significant to make money. Great investors have long known to tap into other people’s money and now everyone else should be doing the same thing.
Hard Money Loans
A hard money lender could get his funding from either from his own connections with private lenders or from banks that he has a line of credit with. Hard money loans are made to real estate investors to assist them with real estate investments. The hard money lender will have a margin between their cost of funds and their revenue. Hard money lenders charge 3 percent to 6 percent in addition to the cost of the mortgage itself. Many cash advance lenders allow you to repay the charges at the end of the loan term. When a borrower has poor credit and no loan history, it’s possible that they may be able to qualify for a home loan through hard money lending. Hard money lenders are interested in their own financial security, as well as the stability of their clients. Hard money loans are taken in very desperate situations when borrowers have problems meeting lender’s lending standards, for example, high debt ratios or poor credit rating.
Private Mortgages
A private mortgage is a loan for which the borrower borrows money to purchase an asset rather than an actual person or entity. In other words, it’s a mortgage secured by real estate. Most business or personal loans last up to 3 years. Short-term business and personal loans are generally used for investments in real estate. Typically a mortgage application isn’t made in just because you have poor credit, but because you think you can sell the house for a higher amount than what you owe.
Subject-to
A subject-to agreement can be used by a seller to let the buyer acquire title to their house without having to give the loan. Typically, the seller would keep their current mortgage during the sale. This process is similar to when one takes out a loan, but this is different since the lender knows nothing about it. This technique is helpful because it allows buyers to get loans with no transaction costs, and also allows them to save their capital by not having to pay fees to transfer the money from one account to another. The buyer can buy a home fast without having to undergo the lengthy process of obtaining a mortgage.
Land Trusts
A land trust is a legal contract that is made by the person who owns a piece of real estate and who pledges it as security to the people (the beneficiaries) that will be taking advantage of it. Land trusts can be used by nonprofits to preserve farmland. Also used by corporations to protect large tracts of land, or even entire states, they can help ensure the continued existence of a property’s natural environment. Land trusts are also used by real estate owners who wish to save their private land and avoid probate. There are many different ways to creatively finance your land. You might need to hold your land in a trust and then keep the identity of the land’s title holder secret. The debt buyer is entitled to the same protection as any other creditor and so is not prevented from invoking the defaulted seller’s right of redemption, however the lender may find it more difficult to detect the use of creative financing.
Short sale
A short sale is a business method in which a seller becomes behind on his or her loan payments for an extended period of time and is therefore close to defaulting on the mortgage. This is a common occurrence if the seller is struggling to make their monthly payment and has stopped paying for a while. The seller may give the short sale investor a contract to purchase the house, a deed that will likely be placed in escrow, power of attorney and other documents that would grant full control of the property to the investor. The investor presents the bank with a claim stating that the seller is now unable to make the mortgage payments due to financial hardship, that he is surrendering the property because of health issues or other reasons and that the bank can accept an offer to reduce the principal balance on the mortgage so the investor can acquire the property. It is a misnomer for the phrase “short sale”. In the economic sense, a short sale is merely selling a property that’s not yours, or making a sale of a foreclosed property at a discount. Short sales can take a long time, so they aren’t called “short sales” for that reason either. However, this process was shorter than the typical foreclosure and sale by auction, which often takes months. Sell your home for the best possible price using this quick and efficient process. You immediately pass control of your home to the short sale investor, so you can spend more time focusing on other matters. The owner of the home can decide whether or not to sell it without being subject to any problems that may arise in the process.
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