Creative financing is like thinking outside the box when it comes to buying or selling a house. It's all about finding alternative ways to structure the deal that works for both the buyer and the seller.
One popular method is called "subject-to," or subto for short. Basically, it means that instead of getting a new loan, the buyer takes over the existing mortgage payments. They're still responsible for making those monthly payments, but they don't have to go through the whole process of getting a new loan. It can be super handy if someone can't qualify for a traditional mortgage or just wants to avoid all the hassle and fees.
Another cool option is seller financing. Picture this: the seller becomes the lender! Instead of going to a bank, the buyer makes payments directly to the seller. It's like cutting out the middleman. This can be a win-win situation because the buyer gets some flexibility and the seller gets regular cash flow.
You can see how our current interest rate market has made it tough to pencil out deals. So taking the creative approach can help ease the exit strategy, which (for me) is buy-n-holds. According to Google search engine, the average rates (as of 5/19/23) are 7.521%. So creative financing at a rate even 1% below the average can drastically affect your exit strategy. (FYI, an exit strategy is a fancy way of your plan for the property, like sell, rent, flip, etc)
So when I started seeing all these videos from Pace Morby about how I could buy investment property at 2020 interest rates with no credit, no experience, and no money, I got excited!! However, I’ll give you a small spoiler alert, it didn’t pan out as I defined it in the beginning.
How things started:
- 30 day close
- $6,000-$9,000 in expected closing costs
- $50,000 rehab costs
- Interest rate: 3.125%
When we started this process, it was early December. In fact, it was 3 days prior to me having my shoulder reconstructed, which might be part of why this deal was stressful. The lender was Carrington Mortgage Services. One of the first things, I did was talk to the lender prior to signing the contract. Over the phone, I received approval to access the seller’s mortgage information (ie rates, loan term, etc) by the verbal approval of the seller. We asked several questions about how seamless the experience would be. They assured us that it would take more steps than normal but would result in about 30 days close.
Once the seller and I talked a bit, we set out to close in 35 days…
First rule: be more conservative if you can. Try to get better margins on your risks. Worried about losing money? Find reasons to ask the seller for a price decrease. Worried about not closing on time? Create a buffer.
Well, anyways, as soon as we were assigned our loan officer. He laughed and said that there’d be no way we could close in 30 days but expected it to be worst case 60 days. So the seller agreed to the extension, because of limited options. So we proceeded on. As we approached 60 days, the bank very slowly asked for more paperwork after claiming several times that we were set. So it was clear to me, 60 days wasn’t going to happen.
So we marched on. We were supposed to close on January 5th, but we extended it to late February. When late February wasn’t going to happen, we extended it to March 15th. The bank had a forbearance agreement with the seller, so we figured if we could close before the agreement expired (March), we’d successfully close this deal. Now, in case you don’t know, forbearance is basically a pause on mortgage payments. The bank allows you some time to catch up. This has become increasingly popular since COVID.
As we entered March, the bank continued to fumble over what paperwork we needed. Between mid-February and mid-March, I emailed or called nearly once a day to our assigned loan processor/officer for updates. They would respond rarely but I could tell we were progressing but not at a rapid rate.
Another lesson: I quickly learned that the banks had very little motivation in the assumption process. They clearly were not profiting off this transaction, which unfortunately gave me very little ability or leverage to make demands since they did NOT care at all. It’s clear to me that banks do not make much money in the maintenance of loans or buying loans in the secondary market (as Carrington Mortgage Services does), which leads me to question why anyone would want to run a business like that. But one of the three of YOU still reading this may be able to answer that. Regardless, let’s continue.
When we were exiting the first week of March, I was hammering the lender, telling them that they were at risk of losing the transaction (an empty threat). I hammered on saying, “You need to produce the TRID CD.” For those interested, traditional lenders have to produce CD or closing disclosures 3 days before closing to allow buyers to review them for error. Trust me they are needed. I caught a ton of errors in their CD!
Well, finally, we got a CD, which allowed us to close as soon as they sent the closing package to title. Well, they couldn’t produce that package until the day of closing, which wasn’t till 3/22. So yes, you guessed it!! We had to get the seller to sign another extension. So finally we reach the settlement day, title sent us the ALTA, and my jaw drops.
The ALTA settlement sheet says the seller has to pay money. A lot of money. Like $1,200. So I talked to my title company, PR Title Group. (Btw, I highly recommend them. Whet and Tamra are fantastic. ) PR title says they inputted the closing numbers from the bank. Then, the bank claims that title is wrong. Well, surprise, surprise, the bank messed up yet again! The closing numbers were way higher than expected though! We had to bring her mortgage current. We also had to file a quit claim deed due to the way the deal had to be structured per VA assumption, according to the bank.
But guess what we closed!!
How things ended:
- 30 day close
- $23,000 in closing costs
- $50,000 rehab costs
- Interest rate: 3.125%
Why would we want to close if the closing costs double? Can’t you see why not everyone would want to do this? It may sound easy but it’s not. It takes a lot of problem-solving. It takes immense faith in the process and your own ability.
It’s not easy but it’s worth it. Here’s why we are okay with the new cost:
- Purchase price: $246,000
- Mortgage: $1450/mo (PITI included)
- ARV: $380,000
- Rehab costs: $50,000
- All-in costs: $73,000
- Gross rent: $2600/month
- Gross cashflow: $1150/month
- ROI: 18.90%
Not bad in my opinion. Some of the value in this property is my experience. I learned so much about how these things worked. I stayed up late researching. I fought hard to make a deal work for the seller. We provided a great solution to a seller in need. Now, you may be asking, “Would you do it again?” And I would answer, “Heck yeah.”
Expectations would be set and the deal would be a lot easier. Last lesson: In life, raising the bar for yourself starts with lowering the bar for everyone else. Be accountable, take ownership, and don’t expect it all to happen overnight.
Your real estate friend,
Zack McDonough
