Creative Financing = Over Leveraged

[Chris Seveney]

So this may stir the pot, but i am seeing a ton of posts on BP about "creative financing". While yes there are creative ways to structure financing deals. When it comes to seller financing in many of the cases the borrower is giving up either on price or terms. 

What I mean by this is I see people willing to pay well above purchase price on a property to get it owner financed.  The other option is they will pay market price but get interest rates well above todays rates. It is very rare to get a property at value and below todays rates. Now some will say they do it all the time, but I can also say that I made $1T in my life but it does not mean its true.

The bigger concern I have with this strategy is I am seeing it from investors with very little experience and are attempting to finance 100% of the deal. This is just a very bad idea. Why? Well you have closing costs on a loan when you purchase the asset and if you were to sell the asset there are also closing costs. So right off the bat you are 10% in the whole. The other concern is if the property has higher vacancy. lower NOI or OMG you have repairs to the property. How are you going to pay for those repairs.

While it may sound cool and sexy to get 100% financing, its only great if you have the money to still weather the storm.  But if you do not, do not worry because the guru you paid $5,000 to share this idea with you will gladly buy that property from you for 60 cents on the dollar while you go through a foreclosure.

Sorry just voicing my opinion and feel free to disagree. 

[Scott Trench]

I think that I mentally distinguish between "Creative Financing" and "100% financing". 

A seller-financed loan at a low interest rate is a concession from the seller. As a buyer, I should be paying more. An assumable mortgage is an asset - if I'm willing and able to assume a mortgage, a property with an assumable mortgage is worth more to me than to my competition, and I'm likely to submit a winning bid. If I'm willing to buy a property subject-to, and take on the risk of a due on sale clause or other issues, properties with sellers amenable to that structure are worth more to me than my competition. 

The market has changed, and many deals require creative financing to work. That should scare folks. It scares me. That's why I've been doing more lending and less buying in 2023. 

But, if I was buying right now, I'd be buying 100% with cash, or trying to figure out how to buy at today's prices with last year's financing rates. Absolutely. 

To your point about 100% financing. I wish that everyone would invest in real estate from a position of financial strength. I've written two books on this subject and show up twice a week to harp on the importance of a strong personal financial foundation on BiggerPockets Money, a show that exists literally to discuss the importance of a strong personal financial foundation. 

But, the great thing about BiggerPockets is that some folks want to hear about my slow, steady, boring, compounding approach to wealth building, or want to follow your approach, Chris, and others want "power tools" that come with a ton more risk, but more upside. 

I wouldn't be doing my job if I didn't allow and encourage all of these topics to be discussed. And, I wouldn't be doing my job if I hadn't, for the past 10 years, made my stance on investing from a position of financial strength clear as one of the many voices here on BiggerPockets. 

My position: Creative financing is a great tool that should be discussed and understood by investors. 100% financing from a position of financial weakness (bad credit, low/no income, low cash reserves) is a tremendously dangerous position to take, and investors should understand that bankruptcy is a likely outcome - maybe even a coin flip, on many such investments. 

I am sure that some people will get crazy deals with creative financing. And I am sure that others will find themselves in a heap of trouble. I hope that those who get into trouble have a strong enough financial foundation to make this a painful financial lesson, and not a complete reset.