Seldom-Used Creative Financing Techniques
When it comes to securing real estate financing, most investors are quite familiar with the traditional processes. However, as these methods don’t always result in the capital you’ve requested, many are left to pursue other means. In this case, creative financing might be the ideal solution.
Simply put, creative financing refers to anything that doesn’t fall in the standard financing process. We’re going to focus on two specific strategies, seller financing and subject-to financing, both of which have immense benefits for everyone involved.
Also referred to as bond-for-title or owner financing, seller financing is an activity that involves a loan, usually originating by the property seller, which calls for specific repayment terms. The benefits to the buyer are straightforward: eliminating the need for bank approval results in bigger and better options to choose from, less waiting time and greater freedom across the board. It also removes some of the expense involved, such as appraisal costs and bank-specific fees.
Removing the bank from the equation often results in quicker turnaround and less time spent on the market. Most sellers have better luck when using this method to sell a property “as is,” since they aren’t subject to the standards of third-party lenders.
If the buyer does go into default, you will ultimately keep the house as well as any payments that have been made thus far.
Many sellers offer subject-to financing as an alternative. In this case, the seller actually transfers their property to the buyer as well as their existing financing plan. Buyers are spared the hassle of obtaining their own loan or financing through a bank, as well as any extraneous fees that might be involved. Apart from negating possibility of a bank rejection, this also speeds up the entire process quite significantly.
Sellers are able to benefit a number of ways. Firstly, the responsibility of making the monthly payment immediately transfers over to the buyer. This can result in instant debt relief on behalf of the seller, who can then use their extra capital to reinvest. Because the original financing is still in the seller’s name, they’ll also have the benefit of improving their own credit score via the payments made by their buyer.
This is also a great strategy when the seller is relocating. Transferring their current property as soon as possible gives them the opportunity to move into another home right away. For current homeowners who want – or need – to get away from their current living situation, this type of financing can be a godsend.
Using the Right Strategy at the Right Time
Now that you’re familiar with two new forms of creative financing, feel free to put these strategies into your permanent repertoire. However, the key to using them successfully is in knowing what method to use and at what time.