Private Money & Creative Financing

It wasn't that long ago that creative seller financing techniques ruled the day. You could buy a property 'subject-to' (the existing mortgage), use sandwich leases, land contracts and more. When the real estate market was booming, there wasn't much you couldn't do when pursuing a target investment property. Then something happened...

The sub prime crisis and foreclosure tidal wave hit and most of the equity needed to make creative seller financed deals work disappeared.  Bank financing went out the window.

What rules the day now? You guessed it: private money.

Private money is the brute force to the finesse of creative seller financing. But, which one is better?

It depends on what the situation calls for - but private money generally trumps every other approach out there. Think about this: put yourself in a situation you may have been in a few years ago.

Perhaps you were marketing for motivated sellers- you know, people who were in immediate need of unloading their property and you, as the real estate investor,  were there to help them out. You proposed a creative seller financed deal with the property owner and because of this you have the deal at a discounted price.You may have been able to turn it around and make a nice profit, but what if you could have offered that same property owner 'all cash?' In this case, you may have been able to nail this deal down for an even bigger discount and turned an even bigger profit.

There's a reason they say: "cash is king."

That being said, there's no reason to throw the baby out with the bath water. You can still retain your seller-financing techniques and even use them in select opportunities you get in this market. Private money comes into the picture for these deals where you need to come up with a little bit of cash for a rehab, down payment on a land contract and closing costs.

It's important to keep in mind that most creative financing strategies are still predicated on acquiring an investment property below market value. There's no sense in grabbing a deal for the sake of a few bucks in cash flow when it's underwater by $50,000 or $100,000. Carefully evaluate the underlying financing on any creative deals you do.

If you're bringing private money in on a seller-financed deal, structuring that private money transaction correctly and making the proper disclosures to the investor are very important. Full diligence is a MUST.

Since the bulk of the lowest hanging fruit is in foreclosures, short sales and other distressed assets, cash will continue to be the currency of choice. Use all the tools in your arsenal to build wealth.