My 4000th post - Creative Financing do's and dont's

[Brian Gibbons]

Every time I make a milestone BiggerPockets I do a really long post. This is my 4000 post so I thought that I would do a do's and dont's on creative financing

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Definition of creative financing is how can the seller sell on terms or some unconventional way

How can a buyer buy on terms or some unconventional way

Generally if you act as a principal buyer, seller, optionor, optionee, vendor, vendee, lessee, lessor, you don't need a license if you're not acting as a fiduciary agent

There are some states that are cracking down like Ohio Florida and California about marketing houses without a license even though you have equitable interest in an agreement

There's nothing wrong with being license and acting as a principal and disclosing that you are acting as a principal buyer

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Pretty houses little equity

I think this is where new people should start, get an attorney, get a realtor license, and learn subject to, lease options, lease purchase, wraparound mortgages and installment sales

The location of the house and the condition of the house and type is existing financing of the house of the most important things to look at. I call this  "looking at the product first" and not the seller of pretty houses.

The location meaning A quiet street, a good school district, low crime, a place where family can sink their feet for 5 to 10 years

A corner house, a busy street, these things make it difficult

The condition you want to house in really good shape so if it needs major repairs it's not a good terms deal

The existing financing meeting what is the loan against the house look like, is it fixed or adjustable rate mortgage, is there a first only or first and second, was the second mortgage used to have to pay off debt?  Is the house upside down mean the mortgage balance is more than me your market value?  All these issues come in the play

Another one of my favorite creative financing situations is a "joint venture with the seller" where there's minor repairs needed and they don't have the money to repair the house

What say you have a $200,000 house, and 20,000 in work

Wholesaling is 70% of ARV or 140,000 minus 20,000 in work minus 5000 in Wholesaling assignment fee, $115,000 to seller

For minor rehabs that's a tough offer to get accepted and owners laugh at it, or perhaps get insulted by it

When I talk to sellers of minor rehabs I show them this formula and tell them that that is only one choice, another choice is doing a joint venture with them, where are use my private lender money to fix the house, and I give them a note that will pay their equity, but  in three months time

To figure out how much to give them a note, you subtract the cost to sell minus the rehab minus the private lender money interest

In this example you would subtract 20,000 in rehab -10% to sell with commissions and closing costs or $20,000 minus a joint venture fee of $10,000 or totaling $50,000

So instead of 115,000 for the seller

You get the seller 150,000 and you make 10,000

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Next post in this thread is talking about 

how to negotiate with homesellers for creative deals, 

getting a letter of intent for the seller drafted

and then getting the contracts drawn by a talented contract  attorney

[Rick H.]

Congrats on your 4,000th BP post!

I love creative financing. For several reasons:

1) The opportunity to control real estate and trade benefits outside the envelope of traditional broker/conventional lender transactions.

2) Additional opportunities that develop later when markets have changed and poorly documented deals go sideways.

The business is about solving problems. Also, as I learned early on, attorneys do not like the term creative financing and it raises red flags. So, consider other labels that focus on benefits to the person with the problem. And, never do any transaction that you'd be uncomfortable looking a judge in the eye and keep a straight face.

Good job, my friend. See you in Glendale tonight (despite the rain)?